0001679688 us-gaap:FairValueInputsLevel2Member us-gaap:FairValueMeasurementsRecurringMember clny:NStarCDOBondsMember 2019-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20172020
ORor
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¨
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-37980
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| COLONY NORTHSTAR,CAPITAL, INC. |
(Exact Name of Registrant as Specified in Its Charter) | |
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| Maryland | | 46-4591526 | |
| (State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) | |
515 South Flower Street, 44th Floor
Los Angeles, California90071
(Address of Principal Executive Offices, Including Zip Code)
(310) (310) 282-8820
(Registrant’s Telephone Number, Including Area Code)
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Securities registered pursuant to Section 12(b) of the Act: |
Title of Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Class A Common Stock, $0.01 par value | | CLNY | | New York Stock Exchange |
Preferred Stock, 7.50% Series G Cumulative Redeemable, $0.01 par value | | CLNY.PRG | | New York Stock Exchange |
Preferred Stock, 7.125% Series H Cumulative Redeemable, $0.01 par value | | CLNY.PRH | | New York Stock Exchange |
Preferred Stock, 7.15% Series I Cumulative Redeemable, $0.01 par value | | CLNY.PRI | | New York Stock Exchange |
Preferred Stock, 7.125% Series J Cumulative Redeemable, $0.01 par value | | CLNY.PRJ | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesý☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesý☒No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer | ý | ☒ | | Accelerated Filer | | ¨ |
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Non-Accelerated Filer | ¨ | (Do not check if a smaller reporting company)☐ | | Smaller Reporting Company | | ¨☐ |
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| | | | Emerging Growth Company | | ¨☐ |
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. Yes ¨☐ No ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨☐No ý☒
As of November 3, 2017, 545,526,393August 4, 2020, 481,444,705 shares of the Registrant's class A common stock and 741,874733,931 shares of class B common stock were outstanding.
EXPLANATORY NOTE
Colony NorthStar, Inc. ("Colony NorthStar" or the “Company”) was formed through a tri-party merger (the "Merger") among:
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▪ | NorthStar Asset Management Group Inc. ("NSAM"), a real estate focused asset management firm which commenced operations in July 2014 upon the spin-off by NorthStar Realty Finance Corp. ("NRF") of its asset management business; |
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▪ | Colony Capital, Inc. ("Colony"), an internally managed REIT with investment management capabilities, established in June 2009; and |
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▪ | NRF, a diversified REIT with investments in multiple classes of commercial real estate, established in October 2004, which was externally managed by NSAM subsequent to the spin-off, |
which closed on January 10, 2017 (the "Closing Date").
The transaction is accounted for as a reverse acquisition, with NSAM as the legal acquirer for certain legal and regulatory matters, and Colony as the accounting acquirer for purposes
As used throughout this document, the terms "Colony NorthStar," the "Company," "we," "our" and "us" mean:
Colony NorthStar, Inc. beginning January 11, 2017, following the closing of the Merger; and
Colony for all periods on or prior to the closing of the Merger on January 10, 2017.
Accordingly, comparisons of the period to period financial information of Colony NorthStar as set forth herein may not be meaningful.
In addition to the financial statements included herein, you should read and consider the audited financial statements and notes thereto of NSAM for the year ended December 31, 2016 included in our Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2017 and the audited financial statements and notes thereto of Colony and NRF for the year ended December 31, 2016 included as Exhibits 99.11 and 99.12, respectively, to our Form 10-K filed with the SEC on February 28, 2017.
COLONY NORTHSTAR,CAPITAL, INC.
FORM 10-Q
TABLE OF CONTENTS
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Item 2. | | |
Item 3. | | |
Item 4. | | |
| PART II. OTHER INFORMATION | |
Item 1. | | |
Item 4.1A. | | |
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Item 1. | | |
Item 1A. | | |
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Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I—I—FINANCIAL INFORMATION
ITEMItem 1. Financial Statements.
COLONY NORTHSTAR,CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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| | | | | | | | |
| | June 30, 2020 (Unaudited) | | December 31, 2019 |
Assets | | | | |
Cash and cash equivalents | | $ | 1,099,467 |
| | $ | 1,205,190 |
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Restricted cash | | 145,229 |
| | 203,923 |
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Real estate, net | | 8,987,902 |
| | 10,860,518 |
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Loans receivable (at fair value at June 30, 2020) | | 1,398,087 |
| | 1,566,328 |
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Equity and debt investments ($402,167 and $457,693 at fair value, respectively) | | 1,825,448 |
| | 2,313,805 |
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Goodwill | | 851,757 |
| | 1,452,891 |
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Deferred leasing costs and intangible assets, net | | 565,221 |
| | 638,853 |
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Assets held for sale | | 705,217 |
| | 870,052 |
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Other assets ($4,933 and $21,386 at fair value, respectively) | | 527,309 |
| | 669,144 |
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Due from affiliates | | 77,897 |
| | 51,480 |
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Total assets | | $ | 16,183,534 |
| | $ | 19,832,184 |
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Liabilities | | | | |
Debt, net | | $ | 9,211,114 |
| | $ | 8,983,908 |
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Accrued and other liabilities ($103,825 and $136,861 at fair value, respectively) | | 869,947 |
| | 1,015,898 |
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Intangible liabilities, net | | 87,195 |
| | 111,484 |
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Liabilities related to assets held for sale | | 261,791 |
| | 268,152 |
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Due to affiliates | | 1,336 |
| | 34,064 |
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Dividends and distributions payable | | 18,516 |
| | 83,301 |
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Preferred stock redemptions payable | | — |
| | 402,855 |
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Total liabilities | | 10,449,899 |
| | 10,899,662 |
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Commitments and contingencies (Note 21) | |
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Redeemable noncontrolling interests | | 29,066 |
| | 6,107 |
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Equity | | | | |
Stockholders’ equity: | | | | |
Preferred stock, $0.01 par value per share; $1,033,750 liquidation preference; 250,000 shares authorized; 41,350 shares issued and outstanding | | 999,490 |
| | 999,490 |
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Common stock, $0.01 par value per share | | | | |
Class A, 949,000 shares authorized; 481,391 and 487,044 shares issued and outstanding, respectively | | 4,814 |
| | 4,871 |
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Class B, 1,000 shares authorized; 734 shares issued and outstanding | | 7 |
| | 7 |
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Additional paid-in capital | | 7,540,197 |
| | 7,553,599 |
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Accumulated deficit | | (5,849,098 | ) | | (3,389,592 | ) |
Accumulated other comprehensive income | | 44,367 |
| | 47,668 |
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Total stockholders’ equity | | 2,739,777 |
| | 5,216,043 |
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Noncontrolling interests in investment entities | | 2,776,604 |
| | 3,254,188 |
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Noncontrolling interests in Operating Company | | 188,188 |
| | 456,184 |
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Total equity | | 5,704,569 |
| | 8,926,415 |
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Total liabilities, redeemable noncontrolling interests and equity | | $ | 16,183,534 |
| | $ | 19,832,184 |
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| | September 30, 2017 (Unaudited) | | December 31, 2016 |
Assets | | | | |
Cash and cash equivalents | | $ | 877,928 |
| | $ | 376,005 |
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Restricted cash | | 394,052 |
| | 111,959 |
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Real estate, net | | 14,354,541 |
| | 3,243,631 |
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Loans receivable, net | | 3,455,902 |
| | 3,430,608 |
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Investments in unconsolidated ventures ($314,274 and $0 at fair value, respectively) | | 1,572,592 |
| | 1,052,995 |
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Securities, at fair value | | 408,663 |
| | 23,446 |
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Goodwill | | 1,828,816 |
| | 680,127 |
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Deferred leasing costs and intangible assets, net | | 932,498 |
| | 278,741 |
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Assets held for sale ($70,455 and $67,033 at fair value, respectively) | | 1,603,933 |
| | 292,924 |
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Other assets ($10,829 and $36,101 at fair value, respectively) | | 470,600 |
| | 260,585 |
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Due from affiliates | | 91,239 |
| | 9,971 |
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Total assets | | $ | 25,990,764 |
| | $ | 9,760,992 |
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Liabilities | | | | |
Debt, net | | $ | 10,791,975 |
| | $ | 3,715,618 |
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Accrued and other liabilities ($216,921 and $5,448 at fair value, respectively) | | 1,019,816 |
| | 286,952 |
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Intangible liabilities, net | | 206,484 |
| | 19,977 |
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Liabilities related to assets held for sale | | 328,809 |
| | 14,296 |
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Due to affiliates ($26,910 and $41,250 at fair value, respectively) | | 32,384 |
| | 41,250 |
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Dividends and distributions payable | | 187,145 |
| | 65,972 |
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Preferred stock redemptions payable | | 322,118 |
| | — |
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Total liabilities | | 12,888,731 |
| | 4,144,065 |
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Commitments and contingencies (Note 22) | |
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Redeemable noncontrolling interests | | 108,990 |
| | — |
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Equity | | | | |
Stockholders’ equity: | | | | |
Preferred stock, $0.01 par value per share; $1,636,605 and $625,750 liquidation preference, respectively; 250,000 and 50,000 shares authorized, respectively; 65,464 and 25,030 shares issued and outstanding, respectively | | 1,606,996 |
| | 607,200 |
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Common stock, $0.01 par value per share | | | | |
Class A, 949,000 and 658,369 shares authorized, respectively; 547,844 and 166,440 shares issued and outstanding, respectively | | 5,479 |
| | 1,664 |
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Class B, 1,000 shares authorized; 742 and 770 shares issued and outstanding, respectively | | 7 |
| | 8 |
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Additional paid-in capital | | 7,947,994 |
| | 2,443,100 |
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Distributions in excess of earnings | | (650,135 | ) | | (246,064 | ) |
Accumulated other comprehensive income (loss) | | 25,831 |
| | (32,109 | ) |
Total stockholders’ equity | | 8,936,172 |
| | 2,773,799 |
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Noncontrolling interests in investment entities | | 3,627,353 |
| | 2,453,938 |
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Noncontrolling interests in Operating Company | | 429,518 |
| | 389,190 |
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Total equity | | 12,993,043 |
| | 5,616,927 |
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Total liabilities, redeemable noncontrolling interests and equity | | $ | 25,990,764 |
| | $ | 9,760,992 |
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The accompanying notes are an integral part of the consolidated financial statements.
COLONY NORTHSTAR, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
The following table presents the assets and liabilities of securitization vehicles and an investment fund consolidated as variable interest entities for which the Company is determined to be the primary beneficiary:
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| | September 30, 2017 (Unaudited) | | December 31, 2016 |
Assets | | | | |
Cash | | $ | 28,792 |
| | $ | 4,320 |
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Loans receivable, net | | 623,375 |
| | 885,374 |
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Securities | | 258,948 |
| | — |
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Real estate, net | | 8,139 |
| | 8,873 |
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Other assets | | 71,966 |
| | 66,306 |
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Total assets | | $ | 991,220 |
| | $ | 964,873 |
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Liabilities | | | | |
Debt, net | | $ | 443,872 |
| | $ | 494,495 |
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Other liabilities | | 35,532 |
| | 63,381 |
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Total liabilities | | $ | 479,404 |
| | $ | 557,876 |
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The accompanying notes are an integral part of the consolidated financial statements.
COLONY NORTHSTAR,CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Revenues | | | | | | | | |
Property operating income | | $ | 613,665 |
| | $ | 92,505 |
| | $ | 1,541,050 |
| | $ | 279,470 |
|
Interest income | | 106,479 |
| | 98,275 |
| | 333,286 |
| | 291,496 |
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Fee income | | 59,693 |
| | 17,233 |
| | 167,262 |
| | 49,347 |
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Other income ($5,966, $1,441, $19,642 and $3,502 from affiliates, respectively) | | 10,016 |
| | 4,054 |
| | 34,792 |
| | 10,071 |
|
Total revenues | | 789,853 |
| | 212,067 |
| | 2,076,390 |
| | 630,384 |
|
Expenses | | | | | | | | |
Property operating expense | | 332,006 |
| | 28,903 |
| | 802,072 |
| | 89,469 |
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Interest expense | | 152,054 |
| | 42,196 |
| | 418,592 |
| | 126,635 |
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Investment, servicing and commission expense | | 18,421 |
| | 5,115 |
| | 43,968 |
| | 17,448 |
|
Transaction costs | | 4,636 |
| | 6,190 |
| | 94,416 |
| | 18,638 |
|
Depreciation and amortization | | 162,694 |
| | 43,593 |
| | 453,225 |
| | 129,276 |
|
Provision for loan loss | | 5,116 |
| | 6,569 |
| | 12,907 |
| | 17,412 |
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Impairment loss | | 24,073 |
| | 941 |
| | 45,353 |
| | 5,461 |
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Compensation expense (including $38,184, $3,484, $107,173 and $10,326 of equity-based compensation, respectively) | | 85,022 |
| | 29,582 |
| | 257,599 |
| | 80,689 |
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Administrative expenses | | 26,502 |
| | 12,891 |
| | 82,561 |
| | 38,760 |
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Total expenses | | 810,524 |
| | 175,980 |
| | 2,210,693 |
| | 523,788 |
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Other income | | | | | | | | |
Gain on sale of real estate | | 72,541 |
| | 11,151 |
| | 96,701 |
| | 68,114 |
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Other gain (loss), net | | (8,822 | ) | | 4,573 |
| | (7,291 | ) | | 18,270 |
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Earnings from investments in unconsolidated ventures | | 17,447 |
| | 16,684 |
| | 253,833 |
| | 72,226 |
|
Income before income taxes | | 60,495 |
| | 68,495 |
| | 208,940 |
| | 265,206 |
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Income tax benefit | | 10,613 |
| | 3,409 |
| | 6,990 |
| | 865 |
|
Net income from continuing operations | | 71,108 |
| | 71,904 |
| | 215,930 |
| | 266,071 |
|
Income from discontinued operations | | 1,481 |
| | — |
| | 14,041 |
| | — |
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Net income | | 72,589 |
| | 71,904 |
| | 229,971 |
| | 266,071 |
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Net income attributable to noncontrolling interests: | | | | | | | | |
Redeemable noncontrolling interests | | 1,678 |
| | — |
| | 3,015 |
| | — |
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Investment entities | | 36,906 |
| | 32,744 |
| | 87,765 |
| | 130,508 |
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Operating Company | | 97 |
| | 4,189 |
| | 1,344 |
| | 15,528 |
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Net income attributable to Colony NorthStar, Inc. | | 33,908 |
| | 34,971 |
| | 137,847 |
| | 120,035 |
|
Preferred stock redemption (Note 15) | | (918 | ) | | — |
| | 4,530 |
| | — |
|
Preferred stock dividends | | 33,176 |
| | 12,093 |
| | 98,328 |
| | 36,066 |
|
Net income attributable to common stockholders | | $ | 1,650 |
| | $ | 22,878 |
| | $ | 34,989 |
| | $ | 83,969 |
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Basic earnings per share | | | | | | | | |
Net income from continuing operations per basic common share | | $ | 0.00 |
| | $ | 0.14 |
| | $ | 0.03 |
| | $ | 0.50 |
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Net income per basic common share | | $ | 0.00 |
| | $ | 0.14 |
| | $ | 0.05 |
| | $ | 0.50 |
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Diluted earnings per share | | | | | | | | |
Net income from continuing operations per diluted common share | | $ | 0.00 |
| | $ | 0.14 |
| | $ | 0.03 |
| | $ | 0.50 |
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Net income per diluted common share | | $ | 0.00 |
| | $ | 0.14 |
| | $ | 0.05 |
| | $ | 0.50 |
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Weighted average number of shares | | | | | | | | |
Basic | | 542,855 |
| | 164,846 |
| | 531,251 |
| | 164,420 |
|
Diluted | | 542,855 |
| | 164,846 |
| | 531,251 |
| | 164,420 |
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Dividends declared per common share (Note 15) | | $ | 0.27 |
| | $ | 0.27 |
| | $ | 0.81 |
| | $ | 0.81 |
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 |
| 2019 | | 2020 |
| 2019 |
Revenues | | | | | | | | |
Property operating income | | $ | 293,816 |
| | $ | 488,788 |
| | $ | 719,232 |
| | $ | 947,686 |
|
Interest income | | 22,376 |
| | 35,055 |
| | 55,244 |
| | 81,125 |
|
Fee income ($43,138, $33,267, $86,238 and $64,118 from affiliates, respectively) | | 43,540 |
| | 35,433 |
| | 87,045 |
| | 66,461 |
|
Other income ($8,523, $11,339, $11,009 and $21,184 from affiliates, respectively) | | 12,634 |
| | 14,163 |
| | 18,358 |
| | 26,226 |
|
Total revenues | | 372,366 |
| | 573,439 |
| | 879,879 |
| | 1,121,498 |
|
Expenses | | | | | | | | |
Property operating expense | | 193,643 |
| | 279,240 |
| | 457,276 |
| | 549,982 |
|
Interest expense | | 106,786 |
| | 141,738 |
| | 230,199 |
| | 276,627 |
|
Investment and servicing expense | | 11,394 |
| | 20,017 |
| | 23,572 |
| | 38,466 |
|
Transaction costs | | 75 |
| | 318 |
| | 496 |
| | 2,822 |
|
Depreciation and amortization | | 134,905 |
| | 109,382 |
| | 271,763 |
| | 220,734 |
|
Provision for loan loss | | — |
| | 15,003 |
| | — |
| | 18,614 |
|
Impairment loss | | 2,001,557 |
| | 84,695 |
| | 2,388,825 |
| | 110,317 |
|
Compensation expense—cash and equity-based | | 64,513 |
| | 42,430 |
| | 117,547 |
| | 73,947 |
|
Compensation expense—carried interest and incentive fee | | (1,162 | ) | | 1,146 |
| | (10,343 | ) | | 2,418 |
|
Administrative expenses | | 20,405 |
| | 20,146 |
| | 53,163 |
| | 42,840 |
|
Settlement loss | | — |
| | — |
| | 5,090 |
| | — |
|
Total expenses | | 2,532,116 |
| | 714,115 |
| | 3,537,588 |
| | 1,336,767 |
|
Other income (loss) | | | | | | | | |
Gain on sale of real estate | | 2,868 |
| | 6,077 |
| | 10,800 |
| | 35,530 |
|
Other loss, net | | (173,030 | ) | | (89,506 | ) | | (176,501 | ) | | (138,575 | ) |
Equity method losses | | (372,535 | ) | | (259,288 | ) | | (256,833 | ) | | (225,225 | ) |
Equity method earnings (losses)—carried interest | | (2,324 | ) | | 1,836 |
| | (20,735 | ) | | 6,732 |
|
Loss from continuing operations before income taxes | | (2,704,771 | ) | | (481,557 | ) | | (3,100,978 | ) | | (536,807 | ) |
Income tax expense | | (7,720 | ) | | (2,585 | ) | | (16,044 | ) | | (3,783 | ) |
Loss from continuing operations | | (2,712,491 | ) | | (484,142 | ) | | (3,117,022 | ) | | (540,590 | ) |
Income (loss) from discontinued operations | | (6,502 | ) | | (504 | ) | | (6,028 | ) | | 25,789 |
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Net loss | | (2,718,993 | ) | | (484,646 | ) | | (3,123,050 | ) | | (514,801 | ) |
Net income (loss) attributable to noncontrolling interests: | | | | | | | | |
Redeemable noncontrolling interests | | 390 |
| | 509 |
| | (158 | ) | | 1,953 |
|
Investment entities | | (470,052 | ) | | (13,414 | ) | | (491,801 | ) | | 36,574 |
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Operating Company | | (225,057 | ) | | (29,989 | ) | | (264,658 | ) | | (36,600 | ) |
Net loss attributable to Colony Capital, Inc. | | (2,024,274 | ) | | (441,752 | ) | | (2,366,433 | ) | | (516,728 | ) |
Preferred stock dividends | | 18,516 |
| | 27,138 |
| | 37,990 |
| | 54,275 |
|
Net loss attributable to common stockholders | | $ | (2,042,790 | ) | | $ | (468,890 | ) | | $ | (2,404,423 | ) | | $ | (571,003 | ) |
Basic loss per share | | | | | | | | |
Loss from continuing operations per basic common share | | $ | (4.33 | ) | | $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.21 | ) |
Net loss per basic common share | | $ | (4.33 | ) | | $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.19 | ) |
Diluted loss per share | | | | | | | | |
Loss from continuing operations per diluted common share | | $ | (4.33 | ) | | $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.21 | ) |
Net loss per diluted common share | | $ | (4.33 | ) | | $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.19 | ) |
Weighted average number of shares | | | | | | | | |
Basic | | 471,253 |
| | 479,228 |
| | 475,187 |
| | 479,577 |
|
Diluted | | 471,253 |
| | 479,228 |
| | 475,187 |
| | 479,577 |
|
Dividends declared per common share | | $ | — |
| | $ | 0.11 |
| | $ | 0.11 |
| | $ | 0.22 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COLONY NORTHSTAR,CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 72,589 |
| | $ | 71,904 |
| | $ | 229,971 |
| | $ | 266,071 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | |
Other comprehensive income from investments in unconsolidated ventures, net | | 3,283 |
| | 287 |
| | 3,888 |
| | 393 |
|
Net change in fair value of available-for-sale securities | | (4,357 | ) | | — |
| | (699 | ) | | — |
|
Net change in fair value of cash flow hedges | | — |
| | (114 | ) | | — |
| | (227 | ) |
Foreign currency translation adjustments: | | | | | | | | |
Foreign currency translation gain (loss) | | 61,306 |
| | 4,827 |
| | 196,379 |
| | (13,107 | ) |
Change in fair value of net investment hedges | | (19,822 | ) | | (4,795 | ) | | (64,916 | ) | | 2,248 |
|
Net foreign currency translation adjustments | | 41,484 |
| | 32 |
| | 131,463 |
| | (10,859 | ) |
Other comprehensive income (loss) | | 40,410 |
| | 205 |
| | 134,652 |
| | (10,693 | ) |
Comprehensive income | | 112,999 |
| | 72,109 |
| | 364,623 |
| | 255,378 |
|
Comprehensive income attributable to noncontrolling interests: | | | | | | | | |
Redeemable noncontrolling interests | | 1,678 |
| | — |
| | 3,015 |
| | — |
|
Investment entities | | 57,286 |
| | 35,331 |
| | 165,827 |
| | 126,283 |
|
Operating Company | | 1,014 |
| | 3,820 |
| | 4,555 |
| | 14,535 |
|
Comprehensive income attributable to stockholders | | $ | 53,021 |
| | $ | 32,958 |
| | $ | 191,226 |
| | $ | 114,560 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Net loss | | $ | (2,718,993 | ) | | $ | (484,646 | ) | | $ | (3,123,050 | ) | | $ | (514,801 | ) |
Changes in accumulated other comprehensive income (loss) related to: | | | | | | | | |
Investments in unconsolidated ventures, net | | 25,489 |
| | 4,409 |
| | (988 | ) | | 9,319 |
|
Available-for-sale debt securities | | (2,578 | ) | | (766 | ) | | (1,089 | ) | | 1,298 |
|
Cash flow hedges | | (42 | ) | | (6,187 | ) | | (1 | ) | | (6,850 | ) |
Foreign currency translation | | 30,165 |
| | 7,574 |
| | (30,209 | ) | | (20,672 | ) |
Net investment hedges | | (193 | ) | | 3,606 |
| | 21,415 |
| | 16,470 |
|
Other comprehensive income (loss) | | 52,841 |
| | 8,636 |
| | (10,872 | ) | | (435 | ) |
Comprehensive loss | | (2,666,152 | ) | | (476,010 | ) | | (3,133,922 | ) | | (515,236 | ) |
Comprehensive income (loss) attributable to noncontrolling interests: | | | | | | | | |
Redeemable noncontrolling interests | | 390 |
| | 509 |
| | (158 | ) | | 1,953 |
|
Investment entities | | (448,443 | ) | | (9,906 | ) | | (499,051 | ) | | 22,453 |
|
Operating Company | | (221,958 | ) | | (29,680 | ) | | (264,999 | ) | | (35,778 | ) |
Comprehensive loss attributable to stockholders | | $ | (1,996,141 | ) | | $ | (436,933 | ) | | $ | (2,369,714 | ) | | $ | (503,864 | ) |
The accompanying notes are an integral part of the consolidated financial statements.
COLONY NORTHSTAR,CAPITAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Distributions in Excess of Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | | Noncontrolling Interests in Investment Entities | | Noncontrolling Interests in Operating Company | | Total Equity |
| | | |
Balance at December 31, 2015 | | $ | 607,200 |
| | $ | 1,646 |
| | $ | 2,387,770 |
| | $ | (131,278 | ) | | $ | (18,422 | ) | | $ | 2,846,916 |
| | $ | 2,138,925 |
| | $ | 430,399 |
| | $ | 5,416,240 |
|
Net income | | — |
| | — |
| | — |
| | 120,035 |
| | — |
| | 120,035 |
| | 130,508 |
| | 15,528 |
| | 266,071 |
|
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (5,475 | ) | | (5,475 | ) | | (4,225 | ) | | (993 | ) | | (10,693 | ) |
Repurchase of preferred stock | | (19,998 | ) | | — |
| | — |
| | — |
| | — |
| | (19,998 | ) | | — |
| | — |
| | (19,998 | ) |
Contribution of preferred stock to an affiliate | | 19,998 |
| | — |
| | — |
| | — |
| | — |
| | 19,998 |
| | — |
| | — |
| | 19,998 |
|
Equity-based compensation | | — |
| | 15 |
| | 10,311 |
| | — |
| | — |
| | 10,326 |
| | — |
| | — |
| | 10,326 |
|
Redemption of units in Operating Company for cash Class A common stock | | — |
| | 12 |
| | 16,122 |
| | — |
| | — |
| | 16,134 |
| | — |
| | (18,691 | ) | | (2,557 | ) |
Shares canceled for tax withholding on vested stock awards | | — |
| | (3 | ) | | (2,859 | ) | | — |
| | — |
| | (2,862 | ) | | — |
| | — |
| | (2,862 | ) |
Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 596,427 |
| | — |
| | 596,427 |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (428,394 | ) | | (25,384 | ) | | (453,778 | ) |
Acquisition of noncontrolling interests | | — |
| | — |
| | 725 |
| | — |
| | — |
| | 725 |
| | (4,688 | ) | | — |
| | (3,963 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | (36,066 | ) | | — |
| | (36,066 | ) | | — |
| | — |
| | (36,066 | ) |
Common stock dividends declared ($0.81 per share) | | — |
| | — |
| | — |
| | (136,276 | ) | | — |
| | (136,276 | ) | | — |
| | — |
| | (136,276 | ) |
Reallocation of equity (Note 2 and 16) | | — |
| | — |
| | 19,866 |
| | — |
| | — |
| | 19,866 |
| | (21,800 | ) | | 1,934 |
| | — |
|
Balance at September 30, 2016 | | $ | 607,200 |
| | $ | 1,670 |
| | $ | 2,431,935 |
| | $ | (183,585 | ) | | $ | (23,897 | ) | | $ | 2,833,323 |
| | $ | 2,406,753 |
| | $ | 402,793 |
| | $ | 5,642,869 |
|
| | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | Noncontrolling Interests in Investment Entities | | Noncontrolling Interests in Operating Company | | Total Equity |
| |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | $ | 1,407,495 |
| | $ | 4,841 |
| | $ | 7,598,019 |
| | $ | (2,018,302 | ) | | $ | 13,999 |
| | $ | 7,006,052 |
| | $ | 3,779,728 |
| | $ | 360,590 |
| | $ | 11,146,370 |
|
Cumulative effect of adoption of new accounting pronouncement | | — |
| | — |
| | — |
| | (2,905 | ) | | — |
| | (2,905 | ) | | (1,378 | ) | | (185 | ) | | (4,468 | ) |
Net income (loss) | | — |
| | — |
| | — |
| | (74,976 | ) | | — |
| | (74,976 | ) | | 49,988 |
| | (6,611 | ) | | (31,599 | ) |
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | 8,045 |
| | 8,045 |
| | (17,629 | ) | | 513 |
| | (9,071 | ) |
Common stock repurchases | | — |
| | (7 | ) | | (3,160 | ) | | — |
| | — |
| | (3,167 | ) | | — |
| | — |
| | (3,167 | ) |
Redemption of OP Units for class A common stock | | — |
| | — |
| | 33 |
| | — |
| | — |
| | 33 |
| | — |
| | (33 | ) | | — |
|
Equity-based compensation | | — |
| | 27 |
| | 6,323 |
| | — |
| | — |
| | 6,350 |
| | 191 |
| | — |
| | 6,541 |
|
Shares canceled for tax withholdings on vested stock awards | | — |
| | (6 | ) | | (3,001 | ) | | — |
| | — |
| | (3,007 | ) | | — |
| | — |
| | (3,007 | ) |
Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 305,216 |
| | — |
| | 305,216 |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (107,377 | ) | | (3,450 | ) | | (110,827 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | (27,137 | ) | | — |
| | (27,137 | ) | | — |
| | — |
| | (27,137 | ) |
Common stock dividends declared ($0.11 per share) | | — |
| | — |
| | — |
| | (53,410 | ) | | — |
| | (53,410 | ) | | — |
| | — |
| | (53,410 | ) |
Reallocation of equity (Notes 2 and 15) | | — |
| | — |
| | 12,733 |
| | — |
| | 94 |
| | 12,827 |
| | (12,533 | ) | | (294 | ) | | — |
|
Balance at March 31, 2019 | | 1,407,495 |
| | 4,855 |
| | 7,610,947 |
| | (2,176,730 | ) | | 22,138 |
| | 6,868,705 |
| | 3,996,206 |
| | 350,530 |
| | 11,215,441 |
|
Net loss | | — |
| | — |
| | — |
| | (441,752 | ) | | — |
| | (441,752 | ) | | (13,414 | ) | | (29,989 | ) | | (485,155 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 4,819 |
| | 4,819 |
| | 3,508 |
| | 309 |
| | 8,636 |
|
Redemption of OP Units for class A common stock | | — |
| | 2 |
| | 2,061 |
| | — |
| | — |
| | 2,063 |
| | — |
| | (2,063 | ) | | — |
|
Equity-based compensation | | — |
| | 20 |
| | 7,720 |
| | — |
| | — |
| | 7,740 |
| | 197 |
| | — |
| | 7,937 |
|
Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 87,304 |
| | — |
| | 87,304 |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (212,842 | ) | | (3,429 | ) | | (216,271 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | (27,138 | ) | | — |
| | (27,138 | ) | | — |
| | — |
| | (27,138 | ) |
Common stock dividends declared ($0.11 per share) | | — |
| | — |
| | — |
| | (53,656 | ) | | — |
| | (53,656 | ) | | — |
| | — |
| | (53,656 | ) |
Reallocation of equity (Notes 2 and 15) | | — |
| | — |
| | 927 |
| | — |
| | 10 |
| | 937 |
| | 88 |
| | (1,025 | ) | | — |
|
Balance at June 30, 2019 | | $ | 1,407,495 |
| | $ | 4,877 |
| | $ | 7,621,655 |
| | $ | (2,699,276 | ) | | $ | 26,967 |
| | $ | 6,361,718 |
| | $ | 3,861,047 |
| | $ | 314,333 |
| | $ | 10,537,098 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COLONY NORTHSTAR,CAPITAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(In thousands)thousands, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Distributions in Excess of Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | | Noncontrolling Interests in Investment Entities | | Noncontrolling Interests in Operating Company | | Total Equity |
| | | |
Balance at December 31, 2016 | | $ | 607,200 |
| | $ | 1,672 |
| | $ | 2,443,100 |
| | $ | (246,064 | ) | | $ | (32,109 | ) | | $ | 2,773,799 |
| | $ | 2,453,938 |
| | $ | 389,190 |
| | $ | 5,616,927 |
|
Net income | | — |
| | — |
| | — |
| | 137,847 |
| | — |
| | 137,847 |
| | 87,765 |
| | 1,344 |
| | 226,956 |
|
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 53,379 |
| | 53,379 |
| | 78,062 |
| | 3,211 |
| | 134,652 |
|
Merger consideration (Note 3) | | 1,010,320 |
| | 3,891 |
| | 5,706,243 |
| | — |
| | — |
| | 6,720,454 |
| | — |
| | — |
| | 6,720,454 |
|
Payment of accrued dividends on preferred stock assumed in Merger | | (12,869 | ) | | — |
| | — |
| | — |
| | — |
| | (12,869 | ) | | — |
| | — |
| | (12,869 | ) |
Fair value of noncontrolling interests assumed in Merger | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 505,685 |
| | 8,162 |
| | 513,847 |
|
Issuance of Cumulative Redeemable Perpetual Preferred Stock (Note 15) | | 660,000 |
| | — |
| | — |
| | — |
| | — |
| | 660,000 |
| | — |
| | — |
| | 660,000 |
|
Offering costs | | (21,870 | ) | | — |
| | — |
| | — |
| | — |
| | (21,870 | ) | | — |
| | — |
| | (21,870 | ) |
Redemption of preferred stock (Note 15) | | (635,785 | ) | | — |
| | — |
| | — |
| | — |
| | (635,785 | ) | | — |
| | — |
| | (635,785 | ) |
Common stock repurchases | | — |
| | (173 | ) | | (224,439 | ) | | — |
| | — |
| | (224,612 | ) | | — |
| | — |
| | (224,612 | ) |
Redemption of units in Operating Company for cash and Class A common stock | | — |
| | 17 |
| | 22,771 |
| | — |
| | — |
| | 22,788 |
| | — |
| | (27,873 | ) | | (5,085 | ) |
Exchange of notes for Class A common stock | | — |
| | 2 |
| | 2,966 |
| | — |
| | — |
| | 2,968 |
| | — |
| | — |
| | 2,968 |
|
Equity-based compensation | | — |
| | 81 |
| | 74,655 |
| | — |
| | — |
| | 74,736 |
| | — |
| | 37,045 |
| | 111,781 |
|
Shares canceled for tax withholding on vested stock awards | | — |
| | (4 | ) | | (5,664 | ) | | — |
| | — |
| | (5,668 | ) | | — |
| | — |
| | (5,668 | ) |
Deconsolidation of investment entity | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,000 | ) | | — |
| | (4,000 | ) |
Settlement of call spread option | | — |
| | — |
| | 6,900 |
| | — |
| | — |
| | 6,900 |
| | — |
| | — |
| | 6,900 |
|
Costs of noncontrolling equity | | — |
| | — |
| | (9,209 | ) | | — |
| | — |
| | (9,209 | ) | | — |
| | — |
| | (9,209 | ) |
Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1,087,717 |
| | — |
| | 1,087,717 |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (601,476 | ) | | (26,667 | ) | | (628,143 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | (105,375 | ) | | — |
| | (105,375 | ) | | — |
| | — |
| | (105,375 | ) |
Common stock dividends declared ($0.81 per share; Note 15) | | — |
| | — |
| | — |
| | (436,543 | ) | | — |
| | (436,543 | ) | | — |
| | — |
| | (436,543 | ) |
Reallocation of equity (Notes 2 and 16) | | — |
| | — |
| | (69,329 | ) | | — |
| | 4,561 |
| | (64,768 | ) | | 19,662 |
| | 45,106 |
| | — |
|
Balance at September 30, 2017 | | $ | 1,606,996 |
| | $ | 5,486 |
| | $ | 7,947,994 |
| | $ | (650,135 | ) | | $ | 25,831 |
| | $ | 8,936,172 |
| | $ | 3,627,353 |
| | $ | 429,518 |
| | $ | 12,993,043 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | | Noncontrolling Interests in Investment Entities | | Noncontrolling Interests in Operating Company | | Total Equity |
| |
| | | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | $ | 999,490 |
| | $ | 4,878 |
| | $ | 7,553,599 |
| | $ | (3,389,592 | ) | | $ | 47,668 |
| | $ | 5,216,043 |
| | $ | 3,254,188 |
| | $ | 456,184 |
| | $ | 8,926,415 |
|
Cumulative effect of adoption of new accounting pronouncement (Note 2) | | — |
| | — |
| | — |
| | (3,187 | ) | | — |
| | (3,187 | ) | | (1,577 | ) | | (349 | ) | | (5,113 | ) |
Net loss | | — |
| | — |
| | — |
| | (342,159 | ) | | — |
| | (342,159 | ) | | (21,749 | ) | | (39,601 | ) | | (403,509 | ) |
Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (31,414 | ) | | (31,414 | ) | | (28,859 | ) | | (3,440 | ) | | (63,713 | ) |
Common stock repurchases | | — |
| | (127 | ) | | (24,622 | ) | | — |
| | — |
| | (24,749 | ) | | — |
| | — |
| | (24,749 | ) |
Equity-based compensation | | — |
| | 76 |
| | 12,114 |
| | — |
| | — |
| | 12,190 |
| | — |
| | 584 |
| | 12,774 |
|
Shares canceled for tax withholdings on vested stock awards | | — |
| | (18 | ) | | (5,051 | ) | | — |
| | — |
| | (5,069 | ) | | — |
| | — |
| | (5,069 | ) |
Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 87,736 |
| | — |
| | 87,736 |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (55,829 | ) | | (5,857 | ) | | (61,686 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | (18,516 | ) | | — |
| | (18,516 | ) | | — |
| | — |
| | (18,516 | ) |
Common stock dividends declared ($0.11 per share) | | — |
| | — |
| | — |
| | (52,854 | ) | | — |
| | (52,854 | ) | | — |
| | — |
| | (52,854 | ) |
Reallocation of equity (Note 2) | | — |
| | — |
| | (3,827 | ) | | — |
| | (32 | ) | | (3,859 | ) | | — |
| | 3,859 |
| | — |
|
Balance at March 31, 2020 | | 999,490 |
| | 4,809 |
| | 7,532,213 |
| | (3,806,308 | ) | | 16,222 |
| | 4,746,426 |
| | 3,233,910 |
| | 411,380 |
| | 8,391,716 |
|
Net loss | | — |
| | — |
| | — |
| | (2,024,274 | ) | | — |
| | (2,024,274 | ) | | (470,052 | ) | | (225,057 | ) | | (2,719,383 | ) |
Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 28,133 |
| | 28,133 |
| | 21,609 |
| | 3,099 |
| | 52,841 |
|
Redemption of OP Units for class A common stock | | — |
| | 2 |
| | 1,421 |
| | — |
| | — |
| | 1,423 |
| | — |
| | (1,423 | ) | | — |
|
Equity-based compensation | | — |
| | 16 |
| | 8,946 |
| | — |
| | — |
| | 8,962 |
| | 296 |
| | 584 |
| | 9,842 |
|
Shares canceled for tax withholdings on vested stock awards | | — |
| | (6 | ) | | (1,151 | ) | | — |
| | — |
| | (1,157 | ) | | — |
| | — |
| | (1,157 | ) |
Contributions from noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 112,721 |
| | — |
| | 112,721 |
|
Distributions to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (123,495 | ) | | — |
| | (123,495 | ) |
Preferred stock dividends | | — |
| | — |
| | — |
| | (18,516 | ) | | — |
| | (18,516 | ) | | — |
| | — |
| | (18,516 | ) |
Reallocation of equity (Note 2) | | — |
| | — |
| | (1,232 | ) | | — |
| | 12 |
| | (1,220 | ) | | 1,615 |
| | (395 | ) | | — |
|
Balance at June 30, 2020 | | $ | 999,490 |
| | $ | 4,821 |
| | $ | 7,540,197 |
| | $ | (5,849,098 | ) | | $ | 44,367 |
| | $ | 2,739,777 |
| | $ | 2,776,604 |
| | $ | 188,188 |
| | $ | 5,704,569 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COLONY NORTHSTAR,CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash Flows from Operating Activities | | | | |
Net income | | $ | 229,971 |
| | $ | 266,071 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Amortization of discount and net origination fees on purchased and originated loans | | (50,542 | ) | | (19,081 | ) |
Accretion in excess of cash receipts on purchased credit impaired loan | | — |
| | (8,515 | ) |
Paid-in-kind interest added to loan principal | | (26,492 | ) | | (34,889 | ) |
Straight-line rents | | (25,633 | ) | | (9,665 | ) |
Amortization of above- and below-market lease values, net | | (6,976 | ) | | 1,693 |
|
Amortization of deferred financing costs and debt discount and premium | | 59,774 |
| | 19,306 |
|
Earnings from investments in unconsolidated ventures | | (253,833 | ) | | (72,226 | ) |
Distributions of income from equity method investments | | 50,523 |
| | 62,761 |
|
Provision for loan losses | | 12,907 |
| | 17,412 |
|
Impairment loss | | 45,353 |
| | 5,461 |
|
Depreciation and amortization | | 453,225 |
| | 129,276 |
|
Equity-based compensation | | 111,304 |
| | 10,326 |
|
Change in fair value of contingent consideration—Internalization | | (14,340 | ) | | (13,640 | ) |
Gain on sales of real estate, net | | (94,593 | ) | | (68,114 | ) |
Other loss, net | | 21,631 |
| | — |
|
Payment on cash collateral on derivative | | (5,415 | ) | | — |
|
Changes in operating assets and liabilities: | | | | |
(Increase) decrease in restricted cash related to operating activities | | (23,971 | ) | | — |
|
(Increase) decrease in due from affiliates | | (24,719 | ) | | (4,268 | ) |
(Increase) decrease in other assets | | (39,078 | ) | | 7,236 |
|
Increase (decrease) in accrued and other liabilities | | (44,350 | ) | | 16,171 |
|
Increase (decrease) in due to affiliates | | 5,474 |
| | — |
|
Other adjustments, net | | 5,273 |
| | (4,596 | ) |
Net cash provided by operating activities | | 385,493 |
| | 300,719 |
|
Cash Flows from Investing Activities | | | | |
Contributions to investments in unconsolidated ventures | | (364,820 | ) | | (150,168 | ) |
Distributions from investments in unconsolidated ventures | | 166,173 |
| | 79,028 |
|
Acquisition of loans receivable | | (538,136 | ) | | (101,606 | ) |
Payment of Merger-related liabilities, net of cash acquired (Note 3) | | (44,437 | ) | | — |
|
Net disbursements on originated loans | | (283,696 | ) | | (328,835 | ) |
Repayments of loans receivable | | 520,253 |
| | 461,335 |
|
Proceeds from sales of loans receivable | | 114,836 |
| | 188,551 |
|
Cash receipts in excess of accretion on purchased credit impaired loans | | 150,877 |
| | 81,414 |
|
Acquisition of real estate, related intangibles and leasing commission, and improvements of real estate | | (1,194,244 | ) | | (373,005 | ) |
Proceeds from sales of real estate, net of debt assumed by buyers | | 1,340,059 |
| | 344,271 |
|
Acquisition of securities | | (21,199 | ) | | (23,324 | ) |
Proceeds from sales of securities | | 26,737 |
| | — |
|
Proceeds from paydown and maturity of securities | | 91,780 |
| | — |
|
Proceeds from sale of investments in unconsolidated venture | | 553,327 |
| | — |
|
Proceeds from syndication of investment, net of cash deconsolidated (Note 4) | | 138,420 |
| | — |
|
Cash assumed from consolidation of sponsored fund (Note 14) | | 6,685 |
| | — |
|
Acquisition of CPI, net of cash acquired (Note 3) | | (35,711 | ) | | — |
|
Acquisition of THL Hotel Portfolio, net of cash acquired (Note 3) | | (27,455 | ) | | — |
|
Investment deposits | | (2,934 | ) | | — |
|
Increase in restricted cash related to investing activities | | 18,617 |
| | — |
|
Net payments on settlement of derivative instruments | | (3,065 | ) | | 7,840 |
|
Other investing activities, net | | (4,357 | ) | | (2,023 | ) |
Net cash provided by investing activities | | 607,710 |
| | 183,478 |
|
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2020 | | 2019 |
Cash Flows from Operating Activities | | | | |
Net loss | | $ | (3,123,050 | ) | | $ | (514,801 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Amortization of discount and net origination fees on loans receivable and debt securities | | (3,959 | ) | | (9,749 | ) |
Paid-in-kind interest added to loan principal, net of interest received | | (30,834 | ) | | (25,028 | ) |
Straight-line rents | | (7,381 | ) | | (12,502 | ) |
Amortization of above- and below-market lease values, net | | (4,064 | ) | | (6,731 | ) |
Amortization of deferred financing costs and debt discount and premium | | 25,627 |
| | 45,578 |
|
Equity method losses | | 277,732 |
| | 219,137 |
|
Distributions of income from equity method investments | | 88,753 |
| | 54,744 |
|
Provision for loan losses | | — |
| | 18,614 |
|
Allowance for doubtful accounts | | 3,880 |
| | 4,419 |
|
Impairment of real estate and related intangibles and right-of-use assets | | 1,794,825 |
| | 110,317 |
|
Goodwill impairment | | 594,000 |
| | — |
|
Depreciation and amortization | | 273,038 |
| | 305,539 |
|
Equity-based compensation | | 18,671 |
| | 14,929 |
|
Unrealized settlement loss | | 3,890 |
| | — |
|
Gain on sales of real estate, net | | (3,013 | ) | | (58,925 | ) |
Payment of cash collateral on derivative | | (2,771 | ) | | (106,399 | ) |
Deferred income tax expense | | 577 |
| | 247 |
|
Other loss, net | | 182,711 |
| | 137,300 |
|
Decrease (increase) in other assets and due from affiliates | | 11,381 |
| | (16,351 | ) |
Decrease in accrued and other liabilities and due to affiliates | | (54,187 | ) | | (16,978 | ) |
Other adjustments, net | | (3,514 | ) | | (4,209 | ) |
Net cash provided by operating activities | | 42,312 |
| | 139,151 |
|
Cash Flows from Investing Activities | | | | |
Contributions to and acquisition of equity investments | | (159,925 | ) | | (116,520 | ) |
Return of capital from equity method investments | | 122,112 |
| | 118,548 |
|
Acquisition of loans receivable and debt securities | | — |
| | (771 | ) |
Net disbursements on originated loans | | (177,994 | ) | | (40,415 | ) |
Repayments of loans receivable | | 57,991 |
| | 226,888 |
|
Proceeds from sales of loans receivable and debt securities | | — |
| | 28,920 |
|
Cash receipts in excess of accretion on purchased credit-impaired loans | | — |
| | 10,145 |
|
Acquisition of and additions to real estate, related intangibles and leasing commissions | | (131,967 | ) | | (1,590,459 | ) |
Proceeds from sales of real estate | | 170,017 |
| | 442,657 |
|
Proceeds from paydown and maturity of debt securities | | 3,172 |
| | 6,038 |
|
Proceeds from sale of equity investments | | 241,508 |
| | 28,163 |
|
Investment deposits | | (6,627 | ) | | (20,253 | ) |
Net receipts on settlement of derivatives | | 27,097 |
| | 29,793 |
|
Payment of deferred purchase price on DBH Acquisition (Note 3) | | (32,500 | ) | | — |
|
Other investing activities, net | | 1,681 |
| | 19,076 |
|
Net cash provided by (used in) investing activities | | 114,565 |
| | (858,190 | ) |
COLONY NORTHSTAR,CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash Flows from Financing Activities | | | | |
Proceeds from issuance of preferred stock, net | | $ | 638,130 |
| | $ | — |
|
Dividends paid to preferred stockholders | | (99,954 | ) | | (36,279 | ) |
Dividends paid to common stockholders | | (333,896 | ) | | (135,656 | ) |
Repurchase of common stock | | (224,612 | ) | | — |
|
Borrowings from corporate credit facility | | 780,000 |
| | 505,000 |
|
Repayment of borrowings from corporate credit facility | | (1,202,600 | ) | | (459,900 | ) |
Borrowings from secured debt | | 3,196,554 |
| | 735,280 |
|
Repayments of secured debt | | (3,301,110 | ) | | (895,067 | ) |
Increase in escrow deposits related to financing arrangements | | 16,216 |
| | 12,724 |
|
Settlement of call spread option | | 6,900 |
| | — |
|
Payment of deferred financing costs | | (64,439 | ) | | (17,346 | ) |
Contributions from noncontrolling interests | | 1,087,119 |
| | 517,927 |
|
Distributions to noncontrolling interests | | (629,876 | ) | | (447,599 | ) |
Redemption of preferred stock | | (313,667 | ) | | (19,998 | ) |
Reissuance of preferred stock to an equity method investee | | — |
| | 19,998 |
|
Redemption of units in Operating Company | | (5,085 | ) | | — |
|
Acquisition of noncontrolling interests | | — |
| | (3,963 | ) |
Repurchase of exchangeable senior notes | | (15,455 | ) | | — |
|
Other financing activities, net | | (12,602 | ) | | (5,417 | ) |
Net cash used in financing activities | | (478,377 | ) | | (230,296 | ) |
Effect of exchange rates on cash and cash equivalents | | 10,447 |
| | 418 |
|
Net increase in cash and cash equivalents | | 525,273 |
| | 254,319 |
|
Total cash and cash equivalents, beginning of period | | 376,005 |
| | 185,854 |
|
Cash and cash equivalents included in assets held for sale | | (23,350 | ) | | — |
|
Cash and cash equivalents, end of period | | $ | 877,928 |
| | $ | 440,173 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | |
Cash paid for interest | | $ | 334,749 |
| | $ | 99,562 |
|
Cash paid for income taxes | | $ | 36,747 |
| | $ | 4,451 |
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | | | | |
Dividends and distributions payable | | $ | 187,145 |
| | $ | 65,924 |
|
Assets acquired in Merger (Note 3) | | $ | 17,214,515 |
| | $ | — |
|
Liabilities assumed in Merger (Note 3) | | $ | 11,299,855 |
| | $ | — |
|
Noncontrolling interests assumed in Merger (Note 3) | | $ | 592,690 |
| | $ | — |
|
Common stock issued for acquisition of NSAM and NRF (Note 3) | | $ | 5,710,134 |
| | $ | — |
|
Preferred stock issued for acquisition of NRF (Note 3) | | $ | 1,010,320 |
| | $ | — |
|
Debt assumed by buyer of real estate reported as discontinued operations | | $ | 1,258,558 |
| | $ | — |
|
Net assets acquired in CPI restructuring (Note 3) | | $ | 232,181 |
| | $ | — |
|
Net assets acquired in THL Hotel Portfolio (Note 3) | | $ | 361,346 |
| | $ | — |
|
Preferred stock redemption payable | | $ | 322,118 |
| | $ | — |
|
Investment deposits applied to acquisition of loans receivable, real estate and CPI Group | | $ | 66,020 |
| | $ | — |
|
Share repurchase payable (Note 10) | | $ | 6,588 |
| | $ | — |
|
Loan payoff and real estate sale proceeds held in escrow (Note 10) | | $ | 21,263 |
| | $ | 11,550 |
|
Net settlement of redemption and investment in equity method investee | | $ | — |
| | $ | 117,241 |
|
Redemption of OP Units for common stock | | $ | 22,788 |
| | $ | — |
|
Proceeds from secured financing in other assets | | $ | 22,856 |
| | $ | — |
|
Foreclosure of collateral assets underlying loans receivable | | $ | 14,576 |
| | $ | 121,694 |
|
Amounts payable relating to improvements in operating real estate | | $ | 5,033 |
| | $ | — |
|
Contributions receivable from noncontrolling interests | | $ | 4,734 |
| | $ | 78,500 |
|
Exchange of note for class A common shares | | $ | 2,968 |
| | $ | — |
|
Net assets of investment entity deconsolidated (Note 4) | | $ | 156,491 |
| | $ | — |
|
Net assets of sponsored fund consolidated, net of cash assumed (Note 14) | | $ | 13,370 |
| | $ | — |
|
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2020 | | 2019 |
Cash Flows from Financing Activities | | | | |
Dividends paid to preferred stockholders | | $ | (42,301 | ) | | $ | (54,274 | ) |
Dividends paid to common stockholders | | (106,510 | ) | | (106,836 | ) |
Repurchase of common stock | | (24,749 | ) | | (10,734 | ) |
Borrowings from corporate credit facility | | 600,000 |
| | 218,000 |
|
Repayment of borrowings from corporate credit facility | | (200,000 | ) | | (133,000 | ) |
Borrowings from secured debt | | 8,922 |
| | 3,026,410 |
|
Repayments of secured debt | | (181,708 | ) | | (2,396,309 | ) |
Payment of deferred financing costs | | (2,451 | ) | | (54,785 | ) |
Contributions from noncontrolling interests | | 226,179 |
| | 446,936 |
|
Distributions to and redemptions of noncontrolling interests | | (197,791 | ) | | (349,811 | ) |
Redemption of preferred stock | | (402,855 | ) | | — |
|
Shares canceled for tax withholdings on vested stock awards | | (6,226 | ) | | (3,007 | ) |
Other financing activities, net | | — |
| | (2,855 | ) |
Net cash (used in) provided by financing activities | | (329,490 | ) | | 579,735 |
|
Effect of exchange rates on cash, cash equivalents and restricted cash | | (2,468 | ) | | 365 |
|
Net decrease in cash, cash equivalents and restricted cash | | (175,081 | ) | | (138,939 | ) |
Cash, cash equivalents and restricted cash, beginning of period | | 1,424,698 |
| | 832,730 |
|
Cash, cash equivalents and restricted cash, end of period | | $ | 1,249,617 |
| | $ | 693,791 |
|
Reconciliation of cash, cash equivalents and restricted cash to consolidated balance sheets
|
| | | | | | | | |
| | Six Months Ended June 30, |
| | 2020 | | 2019 |
Beginning of the period | | | | |
Cash and cash equivalents | | $ | 1,205,190 |
| | $ | 461,912 |
|
Restricted cash | | 203,923 |
| | 364,605 |
|
Restricted cash included in assets held for sale | | 15,585 |
| | 6,213 |
|
Total cash, cash equivalents and restricted cash, beginning of period | | $ | 1,424,698 |
| | $ | 832,730 |
|
| | | | |
End of the period | | | | |
Cash and cash equivalents | | $ | 1,099,467 |
| | $ | 353,984 |
|
Restricted cash | | 145,229 |
| | 336,491 |
|
Restricted cash included in assets held for sale | | 4,921 |
| | 3,316 |
|
Total cash, cash equivalents and restricted cash, end of period | | $ | 1,249,617 |
| | $ | 693,791 |
|
The accompanying notes are an integral part of the consolidated financial statements.
COLONY NORTHSTAR,CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SeptemberJune 30, 20172020
(Unaudited)
1. Business and Organization
Colony NorthStarCapital, Inc. (together with its consolidated subsidiaries, the "Company") is a global investment firm with a focus on becoming the leading globaldigital real estate provider and funding source for the occupancy, infrastructure, equity and credit needs of the world’s mobile communications and data-driven companies.
Following the acquisition in July 2019 of Digital Bridge Holdings, LLC (“DBH”), an investment manager dedicated to digital real estate and investment management firm. Theinfrastructure, the Company is currently the only global REIT that owns, manages, and/or operates across all major infrastructure components of the digital ecosystem including data centers, cell towers, fiber networks and small cells. As previously disclosed, Marc C. Ganzi, who co-founded DBH, became the Chief Executive Officer ("CEO") of the Company effective July 1, 2020. In connection with Mr. Ganzi’s appointment as the Company’s CEO, on June 30, 2020, the Board of Directors of the Company (the "Board") appointed Mr. Ganzi to the Board and to serve as President of the Company (in addition to his role as CEO), also effective as of July 1, 2020. Thomas J. Barrack, Jr., who, prior to July 1, 2020, served as the Company’s CEO and President, continues to serve in his role as Executive Chairman of the Company and the Board. In addition, Jacky Wu was appointed as the Company’s Chief Financial Officer and Treasurer, effective July 1, 2020. Mark M. Hedstrom, who prior to July 1, 2020 served as the Company’s Chief Financial Officer and Treasurer, continues to serve in his role as Executive Vice President and Chief Operating Officer of the Company.
At June 30, 2020, the Company has significant property holdingsapproximately $46 billion of assets under management, of which $36 billion is capital managed on behalf of third-party investors and the remainder represents investment interests on the Company's own balance sheet managed on behalf of its stockholders. With respect to investment interests, the Company owns (a) a 20% controlling interest in theData Bridge Holdings, LLC and its wholly-owned subsidiary, DataBank Holdings, Ltd. (collectively, "DataBank"), a leading provider of enterprise-class data center, cloud, and connectivity services, (b) a portfolio of healthcare industrialproperties, (c) a portfolio of hospitality properties, (d) a 36.4% interest in Colony Credit Real Estate, Inc. (NYSE: CLNC) and hospitality sectors,(e) interests in various other equity and debt investments, as well as an embedded institutional and retail investment management business. Theincluding general partner (“GP”) interests in funds sponsored by the Company, manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and tradedcommercial real estate investment trusts ("REITs")equity and registered investment companies. Thedebt investments and other real estate related securities. The Company also owns NorthStar Securities, LLC ("NorthStar Securities"), a captive broker-dealer platform which raises capitaland operates an investment management business with $16.3 billion of fee earning equity under management, including $7.8 billion in digital real estate investments and the retail market.remainder in traditional commercial real estate debt and equity investments.
Organization
The Company was organized in May 2016 as a Maryland corporation and intends to electwas formed through a tri-party merger (the "Merger") among Colony Capital, Inc. ("Colony"), NorthStar Asset Management Group Inc. ("NSAM") and NorthStar Realty Finance Corp. ("NRF"). The Company elected to be taxed as a REIT under the Internal Revenue Code for U.S. federal income tax purposes beginningcommencing with its initial taxable year endingended December 31, 2017.
The Company conducts all of its activities and holds substantially all of its assets and liabilities through its operating subsidiary, Colony Capital Operating Company, LLC (the "Operating Company" or the “OP”"OP"), which was previously the operating subsidiary of Colony and survived the Merger. At SeptemberJune 30, 2017,2020, the Company owned approximately 94.4%90% of the OP, as its sole managing member. The remaining 5.6%10% is owned primarily by certain current and former employees of the Company as noncontrolling interests.
MergerAcceleration of Digital Transformation and COVID-19 Considerations
The Merger among Colony, NSAMworld continues to face significant healthcare and NRFeconomic challenges arising from the coronavirus disease 2019, or COVID-19, global pandemic. Efforts to address the pandemic, such as social distancing, closures or reduced capacity of retail and service outlets, hotels, factories and public venues, often mandated by governments, are having a significant impact on the global economy and financial markets across major industries, including many sectors of real estate. In particular, the Company's real estate investments in the hospitality, healthcare and retail sectors have experienced a myriad of challenges, including, but not limited to: significant declines in operating cash flows at the Company's hotel and healthcare properties, which in turn, affect their ability to meet debt service and covenant requirements on investment-level debt (non-recourse to the Company) and ability to refinance or extend upcoming maturities (Note 10); flexible lease payment terms sought by tenants; incremental property operating costs such as labor and supplies in response to COVID-19; potential payment defaults on the Company's loans receivable; and a distressed market affecting real estate values in general. Such adverse impact may continue well beyond the containment of the COVID-19 pandemic. Furthermore, the COVID-19 crisis may also lead to heightened risk of litigation at the investment and corporate level, with an ensuing increase in litigation and related costs.
The sharp decline and volatility in equity and debt markets, and the economic recession due to COVID-19 have adversely affected the valuation of certain of the Company's financial assets carried at fair value, and also resulted in impairment on certain non-financial assets. Such effects include the determination that the Company's equity method investment in CLNC was completedother-than-temporarily impaired at June 30, 2020 (Note 6), decreases in an all-stock exchangefair value of debt securities (Note 6) and loans receivable (Note 12), and impairment of real estate assets in the Company's healthcare, hospitality and other equity and debt segments (Note 4).
Additionally, the COVID-19 crisis has reinforced the critical role and the resilience of the digital real estate and infrastructure sector in a global economy that is increasingly reliant on January 10, 2017.digital infrastructure. Accordingly, in the second quarter of 2020, the Company determined that it would accelerate its shift to a digitally-focused strategy in order to better position the Company for growth. This digital transformation would require a rotation of the Company's non-digital assets into digital-focused investments. As a result, the Company shortened its assumptions of holding periods on its non-digital assets, in particular its hotel and healthcare assets, which significantly reduced the undiscounted future net cash flows to be generated by these assets below their carrying values at June 30, 2020. The shortfall in estimated future net cash flows from these assets was further exacerbated by the negative effects of COVID-19 on property operations and market values, as noted above. As a result, significant impairment was recognized in the second quarter of 2020 on the Company's hotel and healthcare assets. The acceleration of the Company's digital transformation and the overall reduction in value of the Company's non-digital balance sheet also caused a shortfall in the fair value of the Company's other investment management reporting unit over its carrying value, resulting in significant impairment to the other investment management goodwill in the second quarter of 2020 (Note 7).
The Merger isvarious impairment and fair value decreases collectively accounted for as a reverse acquisition, with NSAM as$2.6 billion of charges in the legal acquirer for certain legalsecond quarter of 2020, in addition to an approximately $0.4 billion charge in the first quarter of 2020, of which $2.1 billion and regulatory matters,$0.3 billion, respectively, were attributable to the OP. These amounts are reflected within impairment loss, other loss and Colony asequity method losses on the accounting acquirer for purposesstatement of financial reporting. Consequently, the historical financial information included hereinoperations.
The Company believes that it has materially addressed overall recoverability in value across all of its non-digital assets as of anyJune 30, 2020, applying the Company's best estimates and assumptions at this time based upon external factors known to date or for any periods on or prior toand the Closing Date representsCompany's expected digital transformation timeline. If the pre-Merger financial information of Colony. Accordingly, comparisonsextent and duration of the periodeconomic effects of COVID-19 negatively affect the Company's financial condition and results of operations beyond the Company's current projections, the estimates and assumptions currently applied by the Company may change, which may lead to period financial information of Colony NorthStar as set forth herein may notfurther impairment and fair value decreases in its non-digital assets that could be meaningful.material in the future.
Details of the Merger are described more fully in Note 3 and the accounting treatment thereof in Note 2.Cooperation Agreement with Blackwells Capital
Commercial Real Estate Credit REIT
On August 25, 2017, certain subsidiaries ofIn March 2020, the Company entered into a combinationcooperation agreement with NorthStar Real Estate Income Trust, Inc. (“NorthStar Income I”Blackwells Capital LLC ("Blackwells"), NorthStar Real Estate Income II, Inc. (“NorthStar Income II”), publicly registered non-traded real estate investment trusts sponsored and managed by a subsidiarystockholder of the Company. Pursuant to the cooperation agreement, Blackwells agreed to a standstill in its proxy contest with the Company, and to abide by certain other subsidiariesvoting commitments, including a standstill with respect to the Company until the expiration of the foregoing. Pursuant to the combination agreement certain subsidiariesin March 2030 and voting in favor of the Company will contribute their ownership interests ranging from 38% to 100% in certain investment entities (which interests representBoard of Director’s recommendations until the “CLNS Contributed Portfolio”) to Colony NorthStar Credit Real Estate, Inc. ("Colony NorthStar Credit") and its operating company, and NorthStar Income I and NorthStar Income II will merge in all-stock mergers into Colony NorthStar Credit (collectively, the “Combination”). The closingthird anniversary of the Combination is conditioned upon a listing of Colony NorthStar Credit's class A common stock on a national securities exchange (through an initial public offering or otherwise), which may be effected up to nine months following the later of the approval of the transaction by the stockholders of NorthStar Income I and NorthStar Income II.agreement.
The CLNS Contributed Portfolio comprises the Company's interests in certain of its commercial real estate loans, net lease properties and limited partnership interests in third party sponsored funds, which represent a select portfolio of U.S. investments within the Company’s Other Equity and Debt segment that are transferable assets consistent with Colony NorthStar Credit's strategy.
Certain subsidiaries of the Company will receive a fixed number of shares of Colony NorthStar Credit's class A common stock (or, in the event of a listing without an initial public offering of Colony NorthStar Credit’s class A common stock, the Company will receive shares of Colony NorthStar Credit’s class B common stock) and membership units in Colony NorthStar Credit's operating company in exchange for their contribution of the CLNS Contributed Portfolio. The subsidiaries of the Company that receive common stock of Colony NorthStar Credit in the Combination or upon redemption of membership units in Colony NorthStar Credit's operating company on a one-for-one basis will be subject to limitations on their ability to sell their shares of common stock of Colony NorthStar Credit for a one year period from the closing date of the Combination. NorthStar Income I stockholders and NorthStar Income II stockholders will receive
shares of Colony NorthStar Credit's class B common stock based on pre-determined exchange ratios, and such shares of class B common stock will convert to Colony NorthStar Credit's class A common stock on a one-for-one basis over a one-year period from the closing date of the Combination. Upon completion of the Combination,Contemporaneously, the Company and its affiliates, NorthStar Income I stockholdersBlackwells entered into a joint venture arrangement for the purpose of acquiring, holding and NorthStar Income II stockholders will each own approximately 37%, 32% and 31%, respectively,disposing of Colony NorthStar Credit onCLNY common stock. Distributions to be made through the joint venture arrangement effectively represent a fully diluted basis, subject to certain adjustments as set forth in the combination agreement.
The Combination has been approved by the board of directorssettlement of the Company,proxy contest with Blackwells. At the inception of the arrangement, the fair value of future distributions to Blackwells was estimated at $3.9 million, included in other liabilities on the consolidated balance sheet, and as well asa settlement loss on the special committees and boardsconsolidated statement of directorsoperations, along with $1.2 million reimbursement of NorthStar Income I and NorthStar Income II.
legal costs to Blackwells in March 2020. The Combinationsettlement liability is expectedremeasured at fair value each quarter until such time final distributions are made to close inBlackwells. Refer to Note 12 for further description of the first quarter of 2018, conditioned upon, among other things, approval by NorthStar Income I and NorthStar Income II stockholders, and an initial public offering of Colony NorthStar Credit's class A common stock or a listing without an initial public offering of Colony NorthStar Credit's class A common stock on a national securities exchange.settlement liability.
2. Summary of Significant Accounting Policies
The significant accounting policies of the Company are described below. The accounting policies of the Company's unconsolidated ventures are substantially similar to those of the Company.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of operations for the interim period presented are not necessarily indicative of the results that may be
expected for the year ending December 31, 2017,2020, or any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements of NSAM, Colony and NRF and notes thereto included in, or presented as exhibits to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. The portions of the equity, net income and other comprehensive income of consolidated subsidiaries that are not attributable to the parent are presented separately as amounts attributable to noncontrolling interests in the consolidated financial statements. A substantial portion of noncontrolling interests represents interests held by private investment funds or other investment vehicles managed by the Company and which invest alongside the Company and membership interests in OP primarily held by certain employees of the Company.
To the extent the Company consolidates a subsidiary that is subject to industry-specific guidance, the Company retains the industry-specific guidance applied by that subsidiary in its consolidated financial statements.
Merger
The Merger is accounted for under the acquisition method for a business combination as a reverse acquisition. NSAM is the legal acquirer in the Merger for certain legal and regulatory matters, however, Colony was determined to be the accounting acquirer in the Merger for financial reporting purposes. While NSAM is the legal entity which initiated the transaction and issued its shares to consummate the Merger, the fact that the senior management of Colony NorthStar primarily consists of Colony senior executives, along with other qualitative considerations, resulted in Colony being designated the accounting acquirer.
The financial statements of Colony NorthStar, as set forth herein, represent a continuation of the financial information of Colony as the accounting acquirer, except that the equity structure of Colony NorthStar is adjusted to reflect the equity structure of the legal acquirer, including for comparative periods, by applying the Colony share exchange ratio of 1.4663. The historical financial information included herein as of any date or for any periods on or prior to the Closing Date represents the pre-Merger financial information of Colony. The assets and liabilities of Colony are reflected by Colony NorthStar at their pre-Merger carrying values while the assets and liabilities of NSAM and NRF are accounted for at their acquisition date fair value. The results of operations of NSAM and NRF are incorporated into Colony NorthStar effective from January 11, 2017. Accordingly, comparison of period to period results of operations and financial positions may not be meaningful.
Principles of Consolidation
The Company consolidates entities in which it has a controlling financial interest by first considering if an entity meets the definition of a variable interest entity ("VIE") for which the Company is deemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of voting interest or through other arrangements.
Variable Interest Entities—A VIE is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company also considers interests held by its related parties, including de facto agents. The Company assesses whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In performing this analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to the related party; the Company’s and the related party's ability to control or significantly influence key decisions of the VIE including consideration of involvement by de facto agents; the obligation or likelihood for the Company or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of the Company and the related party. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE.
Voting Interest Entities—Unlike VIEs, voting interest entities have sufficient equity to finance their activities and equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company consolidates such entities when it has the power to control these entities through ownership of a majority of the entities' voting interests or through other arrangements.
At each reporting period, the Company reassesses whether changes in facts and circumstances cause a change in the status of an entity as a VIE or voting interest entity, and/or a change in the Company's consolidation assessment. Changes in consolidation status are applied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the assets, liabilities and noncontrolling interest in the entity are recorded at fair value upon initial consolidation. Any existing equity interest held by the Company in the entity prior to the Company obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, the Company's existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. The Company may also deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any interests retained.
Noncontrolling Interests
Redeemable Noncontrolling Interests—This represents noncontrolling interests in (i) an investment management subsidiary, Townsend Holdings, LLC ("Townsend"); and (ii) a consolidated open-end fund sponsored by the Company.
The Townsend noncontrolling interests have the ability to require the Company to redeem a certain percentage of their interests through December 31, 2020 or upon the occurrence of certain triggering events. Redemptions by the Townsend noncontrolling interests may be settled in cash, the Company’s common stock, or a combination thereof, at the Company's option, subject to certain conditions, and payable by the end of the fiscal quarter following the exercise of the redemption.
The limited partners in the consolidated open-end fund who represent noncontrolling interests generally have the ability to withdraw all or a portion of their interests in cash with 30 days' notice.
Redeemable noncontrolling interests is presented outside of permanent equity. Allocation of net income or loss to redeemable noncontrolling interests is based upon their ownership percentage during the period. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in additional paid-in capital.
Noncontrolling Interests in Investment Entities—This represents interests in consolidated investment entities held by private investment funds or retail companies managed by the Company or held by third party joint venture partners. Allocation of net income or loss is generally based upon relative ownership interests held by equity owners in each investment entity, or based upon contractual arrangements that may provide for disproportionate allocation of economic
returns among equity interests, including using a hypothetical liquidation at book value basis, where applicable and substantive.
Noncontrolling Interests in Operating Company—This represents membership interests in OP held primarily by certain employees of the Company. Noncontrolling interests in OP are allocated a share of net income or loss in OP based on their weighted average ownership interest in OP during the period. Noncontrolling interests in OP have the right to require OP to redeem part or all of such member’s membership units in OP ("OP Units") for cash based on the market value of an equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a one-for-one basis. At the end of each reporting period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP, as applicable.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Foreign CurrencyPrinciples of Consolidation
Assets and liabilities denominatedThe Company consolidates entities in which it has a foreign currencycontrolling financial interest by first considering if an entity meets the definition of a variable interest entity ("VIE") for which the functional currencyCompany is deemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of voting interest or through other arrangements.
Variable Interest Entities—A VIE is an entity that either (i) lacks sufficient equity to finance its activities without additional subordinated financial support from other parties; (ii) whose equity holders lack the characteristics of a controlling financial interest; or (iii) is established with non-substantive voting rights. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company also considers interests held by its related parties, including de facto agents. The Company assesses whether it is a foreign currency are translated usingmember of a related party group that collectively meets the exchange rate in effect at balance sheet datepower and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In performing the related party analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to the related party; the Company’s and the corresponding resultsrelated party's ability to control or significantly influence key decisions of operationsthe VIE including consideration of involvement by de facto agents; the obligation or likelihood for the Company or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of the Company and the related party. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE.
Voting Interest Entities—Unlike VIEs, voting interest entities have sufficient equity to finance their activities and equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company consolidates such entities when it has the power to control these entities through ownership of a majority of the entities' voting interests or through other arrangements.
At each reporting period, the Company reassesses whether changes in facts and circumstances cause a change in the status of an entity as a VIE or voting interest entity, and/or a change in the Company's consolidation assessment. Changes in consolidation status are translated usingapplied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the average exchange rateassets, liabilities and noncontrolling interest in effectthe entity are recorded at fair value upon initial consolidation. Any existing equity interest held by the Company in the entity prior to the Company obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, the Company's existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. The Company may also deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any interests retained.
Noncontrolling Interests
Redeemable Noncontrolling Interests—This represents noncontrolling interests in a consolidated open-end fund sponsored by the Company. The limited partners in the consolidated open-end fund who represent noncontrolling interests generally have the ability to withdraw all or a portion of their interests in cash with 30 days' notice.
Redeemable noncontrolling interests is presented outside of permanent equity. Allocation of net income or loss to redeemable noncontrolling interests is based upon their ownership percentage during the period. The resulting foreign currency translationcarrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period to an amount not less than its initial carrying value, with such adjustments recognized in additional paid-in capital.
Noncontrolling Interests in Investment Entities—This represents predominantly interests in consolidated investment entities held by private investment funds or retail companies managed by the Company or held by third party joint venture partners. Allocation of net income or loss is generally based upon relative ownership interests held by equity owners in each investment entity, or based upon contractual arrangements that may provide for disproportionate allocation of economic returns among equity interests, including using a hypothetical liquidation at book value basis, where applicable and substantive.
Noncontrolling Interests in Operating Company—This represents membership interests in OP held primarily by certain employees of the Company. Noncontrolling interests in OP are recorded asallocated a componentshare of accumulated other comprehensivenet income or loss in stockholders’ equity. Upon sale, complete or substantially complete liquidation of a foreign subsidiary, or upon partial sale of a foreign equity method investment, the translation adjustment associated with the investment, or a proportionate share related to the portion of equity method investment sold,is reclassified from accumulated other comprehensive income or loss into earnings.
Assets and liabilities denominatedOP based on their weighted average ownership interest in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the exchange rate in effect at balance sheet date and the corresponding results of operations for such entities are remeasured using the average exchange rate in effectOP during the period. The resulting foreign currency remeasurement adjustments are recordedNoncontrolling interests in other gain (loss) onOP have the statementsright to require OP to redeem part or all of operations.
Disclosures of non-US dollar amounts to be recordedsuch member’s membership units in the future are translated using exchange rates in effect at the balance sheet date.
Fair Value Measurement
Fair value is based on an exit price, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Where appropriate, the Company makes adjustments to estimated fair values to appropriately reflect counterparty credit risk as well as the Company's own credit-worthiness.
The estimated fair value of financial assets and financial liabilities are categorized into a three-tier hierarchy, prioritizedOP ("OP Units") for cash based on the levelmarket value of transparencyan equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a 1-for-one basis. At the end of each reporting period, noncontrolling interests in inputs usedOP is adjusted to reflect their ownership percentage in OP at the valuation techniques, as follows:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full termend of the financial instrument.
Level 3—At least one assumption or input is unobservableperiod, through a reallocation between controlling and it is significant to the fair value measurement, requiring significant management judgment or estimate.
Where the inputs used to measure the fair value of a financial instrument falls into different levels of the fair value hierarchy, the financial instrument is categorized within the hierarchy based on the lowest level of input that is significant to its fair value measurement.
Fair Value Option
The fair value option provides an option to elect fair value as an alternative measurement for selected financial instruments. The fair value option may be elected only upon the occurrence of certain specified events, including when the Company enters into an eligible firm commitment, at initial recognition of the financial instrument, as well as upon a
business combination or consolidation of a subsidiary. The election is irrevocable unless a new election event occurs. The Company has elected to account for certain cost method investments, specifically limited partnershipnoncontrolling interests in third party sponsored funds, at fair value.OP, as applicable.
Business Combinations
Definition of a Business—The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. If substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of transferred assets and activities is not a business. If not, for an acquisition to be considered a business, it would have to include an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., there is a continuation of revenue before and after the transaction). A substantive process is not ancillary or minor, cannot be replaced without significant cost,costs, effort or delay or is otherwise considered unique or scarce. To qualify as a business without outputs, the acquired assets would require an organized workforce with the necessary skills, knowledge and experience that performs a substantive process.
PriorAsset Acquisitions—For acquisitions that are not deemed to be businesses, the assets acquired are recognized based on their cost to the Company's adoptionCompany as the acquirer and no gain or loss is recognized. The cost of assets acquired in a group is allocated to individual assets within the group based on their relative fair values and does not give rise to goodwill. Transaction costs related to acquisition of assets are included in the cost basis of the new definition of a business effective October 1, 2016, the concentration of acquired fair values in a single or group of similar identifiable assets did not preclude the acquisition of such assets from meeting the definition of a business. As a result, acquisition of real estate assets with existing in place leases, other than sale leaseback transactions, were generally recognized as business combinations.acquired.
Net cash paid to acquire a business or assets is classified as investing activities on the accompanying statements of cash flows.
Business Combinations—The Company accounts for acquisitions that qualify as business combinations by applying the acquisition method. Transaction costs related to acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and noncontrolling interests in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and noncontrolling interests in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions.
For acquisitions that are not deemed to be businesses, the assets acquired are recognized based on their cost to the Company as the acquirer and no gain or loss is recognized unless the fair value of non-cash assets given as consideration differs from the carrying amount of the assets acquired. The cost of assets acquired in a group is allocated to individual assets within the group based on their relative fair values and does not give rise to goodwill. Transaction costs related to acquisition of assets are included in the cost basis of the assets acquired.
Contingent Consideration—Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business is measured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value included in net income. For contingentContingent consideration in connection with the acquisition of assets subsequent changes tois generally recognized only when the recorded amount are adjusted against the costcontingency is resolved, as part of the acquisition.basis of the acquired assets.
Discontinued Operations
If the disposition of a component, being an operating or reportable segment, business unit, subsidiary or asset group, represents a strategic shift that has or will have a major effect on the Company’s operations and financial results, the operating profits or losses of the component when classified as held for sale, and the gain or loss upon disposition of the component, are presented as discontinued operations in the statements of operations.
A business or asset group acquired in connection with a purchase business combination that meets the criteria to be accounted for as held for sale at the date of acquisition areis reported as discontinued operations, regardless of whether it meets the strategic shift criteria.
CashThe sale of the industrial business in December 2019, including its related management platform, represented a strategic shift that had a major effect on the Company’s operations and Cash Equivalentsfinancial results, and had met the criteria as held for sale and discontinued operations in June 2019. Accordingly, for all prior periods presented, the related assets and liabilities are presented as assets and liabilities held for sale on the consolidated balance sheets (Note 8) and the related operating results are presented as income from discontinued operations on the consolidated statement of operations (Note 16).
Short-term, highly liquid investments with original maturitiesReclassifications
Interest receivable, which was included in other assets as of three months or less are consideredDecember 31, 2019, has been reclassified to be cash equivalents. The Company's cash and cash equivalents are held with major financial institutions and may at times exceed federally insured limits.
Restricted Cash
Restricted cash consists primarilypresented as part of amounts related to operating real estate and loans receivable to conform to current period presentation. The reclassification did not affect the Company's financial position, results of operations or cash flows.
Accounting Standards Adopted in 2020
Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments—Credit Losses, followed by subsequent amendments, which modifies the credit impairment model for financial instruments, and codified as Accounting Standards Codification ("ASC") Topic 326. The multiple existing incurred loss models are replaced with a lifetime current expected credit loss ("CECL") model for off-balance sheet credit exposures that are not unconditionally cancellable by the lender and financial instruments carried at amortized cost, such as loans, loan commitments, held-to-maturity ("HTM") debt securities, financial guarantees, net investment in sales-type and direct financing leases, reinsurance and trade receivables. Targeted changes are also made to the impairment model of available-for-sale ("AFS") debt securities which are not within the scope of CECL.
The CECL model, in estimating expected credit losses over the life of a financial instrument at the time of origination or acquisition, considers historical loss experience, current conditions and the effects of a reasonable and supportable expectation of changes in future macroeconomic conditions. Recognition of allowance for credit losses under the CECL model will generally be accelerated as it encompasses credit losses over the full remaining expected life of the affected financial instruments. For collateralized financial assets, measurement of credit losses under CECL is based on fair value of the collateral if foreclosure is probable or if the collateral-dependent practical expedient is elected for financial assets expected to be repaid substantially through operation or sale of the collateral when the borrower is experiencing financial difficulty. The accounting model for purchased credit-impaired loans and debt securities will be simplified to be consistent with the CECL model for originated and purchased non-credit-impaired assets. For AFS debt securities, unrealized credit losses will be recognized as allowances rather than reductions in amortized cost basis and elimination of the other-than-temporary impairment ("OTTI") concept will result in more frequent estimation of credit losses. ASC 326 also requires expanded disclosures on credit risk, including credit quality indicators by vintage of financing receivables.
Transitional relief is provided through the ability, upon adoption of the new standard, to elect the fair value option for eligible financial instruments within the scope of the new standard, except for HTM and AFS debt securities. Transition will generally be on a modified retrospective basis, including the election of the fair value option, with a cumulative effect adjustment to beginning retained earnings, except for prospective application of the CECL model for other than temporarily impaired debt securities and purchased credit-impaired assets.
The Company adopted the new standard on January 1, 2020. The Company elected the fair value option for all of its outstanding loans receivable, with a cumulative effect adjustment to increase beginning retained earnings by $3.3 million. Under the fair value option, the loans receivable are measured at each reporting period based upon their exit values in an orderly transaction and unrealized gains or losses from changes in fair value are recorded in other gain (loss) on the consolidated statement of operations. The loans are no longer subject to evaluation for impairment through an allowance for loan loss as such losses are captured through fair value changes. Additionally, there is no longer an amortization of loan origination fees or discounts on purchased loans as additional interest income.
The Company had 0 debt securities with unrealized loss in accumulated other comprehensive income ("AOCI") at December 31, 2019 and accordingly, there was no impact upon adoption of the new standard. As it relates to the Company's other accounts receivable that are subject to CECL, the effect of adoption was immaterial.
The Company reflected the effect of adoption of CECL by its equity method investee, CLNC, through an adjustment to decrease beginning retained earnings by approximately $8.5 million on January 1, 2020, representing the Company's share of CLNC's cumulative effect adjustment.
Fair Value Disclosures
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurements. The ASU requires new disclosures of changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements of instruments held at balance sheet date, as well as cashthe range and weighted average or other quantitative information, if more relevant, of significant unobservable inputs for recurring and nonrecurring Level 3 fair values. Certain previously required disclosures are eliminated, specifically around the valuation process required for Level 3 fair values, policy for timing of transfers between levels of the fair value hierarchy, as well as amounts and reason for transfers between Levels 1 and 2. Additionally, the new guidance clarifies or modifies certain existing disclosures, including clarifying that information about measurement uncertainty of Level 3 fair values should be as of reporting date and requiring disclosures of the timing of liquidity events for investments measured under the net asset value ("NAV") practical expedient, but only if the investee has communicated this information or has announced it publicly. The provisions on new disclosures and modification to disclosure of Level 3 measurement uncertainty are to be applied prospectively, while all other provisions are to be applied retrospectively. The Company adopted ASU No. 2018-13 on January 1, 2020.
Related Party Guidance for VIEs
In November 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. The ASU amends the VIE guidance to align, throughout the VIE model, the evaluation of a decision maker's or service provider's fee held by a related party, whether or not they are under common control, in both the assessment of whether a fee qualifies as a variable interest and the determination of a primary beneficiary. Specifically, a decision maker or service provider considers interests in a VIE held by a related party under common control only if it has a direct interest in that related party under common control and considers such indirect interest in the VIE held by the related party under common control on a proportionate basis, rather than in its entirety. Transition is generally on a modified retrospective basis, with the cumulative effect adjusted to retained earnings at the beginning of the earliest period presented. The Company adopted ASU No. 2018-17 on January 1, 2020, with no transitional impact upon adoption.
Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848):Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance in Topic 848 is optional, the election of which provides temporary relief for the accounting effects on contracts, hedging relationships and other transactions affected by the transition from interbank offered rates (such as the London Interbank Offered Rate ("LIBOR")) that are expected to be discontinued by the end of 2021 to alternative reference rates (such as the Secured Overnight Financing Rate ("SOFR")). Modification of contractual terms to effect the reference rate reform transition on debt, leases, derivatives and other contracts is eligible for relief from modification accounting and accounted for as a continuation of the existing contract. Topic 848 is effective upon issuance through December 31, 2022, and may be applied retrospectively to January 1, 2020. The Company has elected to apply the hedge accounting expedients related to probability and assessment of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives, which preserves existing derivative treatment and presentation. The Company may elect other practical expedients or exceptions as applicable over time as reference rate reform activities occur.
Future Application of Accounting Standards
Income Tax Accounting
In December 2019, the FASB issued ASU No. 2019-12, Simplifying Accounting for Income Taxes. The ASU simplifies accounting for income taxes by eliminating certain exceptions to the general approach in ASC 740, Income Taxes, and clarifies certain aspects of the guidance for more consistent application. The simplifications relate to intraperiod tax allocations when there is a loss in continuing operations and a gain outside of continuing operations, accounting for tax law or tax rate changes and year-to-date losses in interim periods, recognition of deferred tax liability for outside basis
difference when investment ownership changes, and accounting for franchise taxes that are partially based on income. The ASU also provides new guidance that clarifies the accounting for transactions resulting in a step-up in tax basis of goodwill, among other changes. Transition is generally prospective, other than the provision related to outside basis difference which is on a modified retrospective basis with cumulative effect adjusted to retained earnings at the beginning of the period adopted, and franchise tax provision which is on either full or modified retrospective. ASU No. 2019-12 is effective January 1, 2021, with early adoption permitted in an interim period, to be applied to all provisions. The Company is currently evaluating the impact of this new guidance.
Accounting for Certain Equity Investments
In January 2020, the FASB issued ASU No. 2020-01, Clarifying the Interactions between Topic 321 Investments—Equity Securities, Topic 323—Investments Equity Method and Joint Ventures, and Topic 815—Derivatives and Hedging. The ASU clarifies that if as a result of an observable transaction, an equity investment under the measurement alternative is transitioned into equity method and vice versa, an equity method investment is transitioned into measurement alternative, the investment is to be remeasured immediately before and after the transaction, respectively. The ASU also clarifies that certain forward contracts or purchased options to acquire equity securities that are not deemed to be derivatives or in-substance common stock will generally be measured using the fair value principles of ASC 321 before settlement or exercise, and that an entity should not be considering how it will account for the resulting investments upon eventual settlement or exercise. ASU No. 2020-01 is to be applied prospectively, effective January 1, 2021, with early adoption permitted in an interim period. The Company is currently evaluating the impact of this new guidance.
Accounting for Convertible Instruments and Contracts on Entity's Own Equity
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.
With respect to convertible instruments, under the new guidance, a convertible debt instrument will be accounted for wholly as debt, and convertible preferred stock wholly as preferred stock, that is, as a single unit of account, except for (1) a convertible instrument that contains features requiring bifurcation as a derivative under Topic 815 or (2) a convertible debt instrument that was issued at a substantial premium. Expanded disclosures are required, including, but not limited to, the terms and features of convertible instruments, and information about events, conditions, and circumstances that could affect assessment of the amount or timing of future cash flows related to those instruments.
With respect to contracts on an entity's own equity, one of the requirements prescribed by the new guidance is to account for freestanding contracts on an entity’s own equity that do not qualify as equity under Subtopic ASC 815-40 at fair value, with changes in fair value recognized in earnings, irrespective of whether such contracts meet the definition of a derivative in Topic 815.
The ASU also amends certain guidance on the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. In calculating diluted earnings per share, the new guidance (1) requires the if-converted method to be applied for all convertible instruments (the treasury stock method is no longer available), and (2) removes the ability to rebut the presumption of share settlement for contracts that may be settled in cash or stock.
Upon adoption, a one-time election may be made to apply the fair value option for any liability-classified financial instrument that is a convertible security. In the period of adoption, disclosure is required of (1) the nature of and reason for the change in accounting principle in both the interim and annual period of change, and (2) earnings per share transition information about the effect of the change on affected per-share amounts.
Adoption of the new standard may be made either on a full or modified retrospective approach, with cumulative effect adjustment recorded to beginning retained earnings under the latter. ASU No. 2020-06 is effective January 1, 2022, with early adoption permitted in interim periods beginning January 1, 2021. The Company is currently evaluating the impact of this new guidance.
3. Business Combinations
DBH
On July 25, 2019, the Company acquired DBH in a combination of: (a) cash, a portion of which was deferred until the expiration of certain customary seller indemnification obligations and was paid in full in May 2020 (Note 20); and (b) issuance of 21,478,515 OP Units, which were measured based upon the closing price of the Company's class A common stock on July 24, 2019 of $5.21 per share.
The Company acquired the fee streams but not the equity interests related to the 6 portfolio companies managed by DBH. The principals of DBH retained their equity investments, including general partner interests in existing DBH investment vehicles and in Digital Colony Partners fund (“DCP”), which was previously co-sponsored by the Company and DBH.
The acquisition is a strategic transaction that is expected to generate meaningful accretion in value to the Company through expansion of the digital real estate management platform by combining the industry sector knowledge, experience and relationships from the DBH team with the capital raising resources of the Company, as represented by the goodwill value.
The Company's acquisition of DBH included the remaining 50% equity interest held by DBH in Digital Colony Management, LLC ("Digital Colony Manager"), previously an equity method joint venture with DBH, which manages DCP. Upon closing of the acquisition, the Company obtained a controlling interest in Digital Colony Manager and remeasured its existing 50% interest at a fair value of $51.4 million. The full amount, representing the excess of fair value over carrying value of the Company's investment in Digital Colony Manager, was recognized in other gain on the Company's statement of operations, as the Company's carrying value of its investment in Digital Colony Manager prior to the business combination was nil. The fair value was based upon the value of 50% of estimated future net cash flows from the DCP fund management contract, discounted at 8%.
DataBank
On December 20, 2019, the Company acquired from third party investors a 20% interest in DataBank, a portfolio company managed by DBH and invested in by the principals and senior professionals of DBH. The Company is deemed to have a controlling interest in DataBank as control over the operations of DataBank resides substantially with the Company. Consideration included the payment of cash to third parties for the Company’s foreign subsidiaries dueinterests in DataBank and the issuance of 612,072 OP Units to Mr. Ganzi and Benjamin Jenkins (the DBH principals) for incentive units owned by the DBH principals and allocable to the Company’s acquired interests, measured based upon the closing price of the Company's class A common stock on December 20, 2019 of $4.85 per share. The OP Units were issued to the principals of DBH who had previously received incentive units from DataBank, in exchange for certain regulatory capital requirements.of their incentive units such that the Company will not be subject to future carried interest payments to the DBH principals with respect to the Company's investment in DataBank (Note 20). The DBH principals otherwise retained their equity interests in DataBank.
Allocation of Consideration Transferred
The following table summarizes the consideration and allocation to assets acquired, liabilities assumed and noncontrolling interests at acquisition. The estimated fair values and allocation of consideration are preliminary, based upon information available at the time of closing as the Company continues to evaluate underlying inputs and assumptions. Accordingly, these provisional values may be subject to adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed at the time of closing.
During the second quarter of 2020, certain measurement period adjustments were made to the purchase price allocation for DataBank, primarily (i) a reallocation of value to data center service contract intangible asset, (ii) changes in valuation and underlying assumptions pertaining to data center construction and market value of existing data center lease contracts, and (iii) the corresponding effect on deferred tax liabilities.
|
| | | | | | | | | | | | | | | | |
| | DBH | | | | DataBank | | |
(In thousands) | | As Reported June 30, 2020 | | As Reported December 20, 2019 | | Measurement Period Adjustments | | As Reported June 30, 2020 |
Consideration | | | | | | | | |
Cash | | $ | 181,167 |
| | $ | 182,731 |
| | $ | — |
| | $ | 182,731 |
|
Deferred consideration | | 35,500 |
| | — |
| | — |
| | — |
|
OP Units issued | | 111,903 |
| | 2,962 |
| | — |
| | 2,962 |
|
Total consideration for equity interest acquired | | 328,570 |
| | 185,693 |
| | — |
| | 185,693 |
|
| | | | | | | | |
Fair value of equity interest in Digital Colony Manager | | 51,400 |
| | — |
| | — |
| | — |
|
| | $ | 379,970 |
| | $ | 185,693 |
| | $ | — |
| | $ | 185,693 |
|
| | | | | | | | |
Assets acquired, liabilities assumed and noncontrolling interests | | | | | | | | |
Cash | | $ | — |
| | $ | 10,366 |
| | $ | — |
| | $ | 10,366 |
|
Real estate | | — |
| | 847,458 |
| | (8,405 | ) | | 839,053 |
|
Assets held for sale | | — |
| | 29,114 |
| | 152 |
| | 29,266 |
|
Intangible assets | | 153,300 |
| | 222,455 |
| | (2,804 | ) | | 219,651 |
|
Other assets | | 13,008 |
| | 106,648 |
| | 2,248 |
| | 108,896 |
|
Debt | | — |
| | (539,155 | ) | | — |
| | (539,155 | ) |
Tax liabilities, net | | (17,392 | ) | | (113,228 | ) | | 3,641 |
| | (109,587 | ) |
Intangible and other liabilities | | (16,194 | ) | | (132,480 | ) | | 12,302 |
| | (120,178 | ) |
Fair value of net assets acquired | | 132,722 |
| | 431,178 |
| | 7,134 |
| | 438,312 |
|
Noncontrolling interests in investment entities | | — |
| | (724,567 | ) | | — |
| | (724,567 | ) |
Goodwill | | $ | 247,248 |
| | $ | 479,082 |
| | $ | (7,134 | ) | | $ | 471,948 |
|
DBH
Intangible assets acquired included primarily management contracts, investor relationships and trade name.
The fair value of management contracts, including the Company's 50% interest in Digital Colony Manager, was estimated based upon estimated net cash flows generated from those contracts, discounted at 8%, with remaining lives estimated between 3 and 10 years.
Investor relationships represent the fair value of potential fees, net of operating costs, to be generated from repeat DBH investors in future sponsored funds, discounted at 11.5%, and potential carried interest discounted at 25%.
The Digital Bridge trade name was valued using a relief-from-royalty method, based upon estimated savings from avoided royalty at a rate of 1% on expected net income, discounted at 11.5%, with an estimated useful life of 10 years.
Other liabilities assumed were primarily deferred revenues and deferred tax liabilities recognized upon acquisition, representing the tax effect on the book-to-tax basis difference associated with management contract intangibles.
DataBank
Real Estate Assetsestate and lease intangibles of DataBank were measured based upon recent third party appraised values, allocated to tangible assets of land, building, construction in progress, data center infrastructure, as well as identified intangibles of in-place leases, above- and below-market leases, and tenant relationships.
Real Estate Acquisitions—RealThe remaining intangible assets acquired include data center service contracts, customer relationships and trade name. The value of data center service contracts was estimated based upon net cash flows generated from these contracts. Customer relationships were valued as the incremental net income attributable to these relationships considering the projected net cash flows of the business with and without the customer relationships in place. The trade name of DataBank was valued based upon estimated savings from avoided royalty at a royalty rate of 2%.
Other assets acquired and liabilities assumed primarily include right-of-use lease assets associated with leasehold data centers and corresponding lease liabilities. Deferred tax liabilities represent the tax effect on the book-to-tax basis difference related primarily to real estate acquisitions arerecordedassets arising from the transaction.
All assumed debt bears variable rates, with carrying values approximating fair values based upon market rates and spreads that prevailed at the time of acquisition.
Noncontrolling interests in investment entities were valued based upon their proportionate share of net assets of DataBank at fair value.
The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and noncontrolling interests was recorded as goodwill assigned to the DataBank reporting unit within the digital segment. Goodwill represents the value of the business acquired componentsnot already captured in identifiable assets, such as the potential for future customers, synergies, revenue and profit growth, as well as industry knowledge, experience and relationships that the DataBank management team brings.
4. Real Estate
The following table summarizes the Company's real estate held for investment. Real estate held for sale is presented in Note 8. |
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Land | | $ | 1,272,269 |
| | $ | 1,360,435 |
|
Buildings and improvements | | 7,462,712 |
| | 9,022,971 |
|
Tenant improvements | | 108,929 |
| | 105,440 |
|
Data center infrastructure | | 633,329 |
| | 595,603 |
|
Furniture, fixtures and equipment | | 581,285 |
| | 511,329 |
|
Construction in progress | | 125,702 |
| | 255,115 |
|
| | 10,184,226 |
| | 11,850,893 |
|
Less: Accumulated depreciation | | (1,196,324 | ) | | (990,375 | ) |
Real estate assets, net (1) | | $ | 8,987,902 |
| | $ | 10,860,518 |
|
__________
| |
(1) | For real estate acquired in a business combination, the purchase price allocation may be subject to adjustments during the measurement period, not to exceed 12 months from date of acquisition, based upon new information obtained about facts and circumstances that existed at time of acquisition (Note 3). |
Real Estate Sales
Results from sales of real estate, including discontinued operations (Note 16), are as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Proceeds from sales of real estate | | $ | 43,276 |
| | $ | 147,990 |
| | $ | 170,017 |
| | $ | 442,657 |
|
Gain (Loss) on sale of real estate | | (4,919 | ) | | 6,624 |
| | 3,013 |
| | 58,925 |
|
Real Estate Acquisitions
The following table summarizes the Company's real estate acquisitions, excluding real estate acquired as part of business combinations discussed in Note 3. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | | | | | Purchase Price Allocation (1) |
Acquisition Date | | Property Type and Location | | Number of Buildings | | Purchase Price (1) | | Land | | Buildings and Improvements | | Lease Intangible Assets | | ROU Lease and Other Assets | | Lease Intangible Liabilities | | Debt, Lease and Other Liabilities |
Six Months Ended June 30, 2020 | | | | | | | | | | | | | | | | |
Asset Acquisitions | | | | | | | | | | | | | | | | |
Various | | Hotel—France (2) | | 2 | | $ | 4,609 |
| | $ | 564 |
| | $ | 6,763 |
| | $ | — |
| | $ | 2,586 |
| | $ | — |
| | $ | (5,304 | ) |
| | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2019 | | | | | | | | | | | | | | | | |
Asset Acquisitions | | | | | | | | | | | | | | | | |
February | | Bulk industrial—Various in U.S. (3) | | 6 | | $ | 373,182 |
| | $ | 49,446 |
| | $ | 296,348 |
| | $ | 27,553 |
| | $ | — |
| | $ | (165 | ) | | $ | — |
|
October | | Healthcare—United Kingdom (4) | | 1 | | 12,376 |
| | 3,478 |
| | 9,986 |
| | 732 |
| | — |
| | (1,820 | ) | | — |
|
Various | | Light industrial—Various in U.S. (5) | | 84 | | 1,158,423 |
| | 264,816 |
| | 850,550 |
| | 47,945 |
| | — |
| | (4,888 | ) | | — |
|
| | | |
| | $ | 1,543,981 |
| | $ | 317,740 |
| | $ | 1,156,884 |
| | $ | 76,230 |
| | $ | — |
| | $ | (6,873 | ) | | $ | — |
|
__________
| |
(1) | Dollar amounts of purchase price and allocation to assets acquired and liabilities assumed are translated using foreign exchange rates as of the respective dates of acquisition, where applicable. |
| |
(2) | Bids for hotels under receivership were accepted by the French courts in prior years, with the transactions closing in 2020. Amounts include acquisition of hotel operations pursuant to operating leases on real estate owned by third parties. Useful life of real estate acquired is 40 years for buildings, 15 years for site improvements, 7 years for furniture, fixtures, and equipment, and 6 years for right-of-use ("ROU") lease assets. |
| |
(3) | The bulk industrial portfolio was classified as held for sale in June 2019. |
| |
(4) | Properties acquired pursuant to purchase option under the Company's development facility to a healthcare operator at purchase price equivalent to outstanding loan balance. |
| |
(5) | The entire light industrial portfolio was sold in December 2019. |
Depreciation and Impairment
The following table summarizes real estate depreciation and impairment.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Depreciation of real estate held for investment | | $ | 106,208 |
| | $ | 92,677 |
| | $ | 209,513 |
| | $ | 184,915 |
|
Impairment of real estate and related asset group (1) | | | | | | | | |
Held for sale | | 20,061 |
| | 42,998 |
| | 27,638 |
| | 68,181 |
|
Held for investment | | 1,454,199 |
| | 41,048 |
| | 1,754,890 |
| | 41,487 |
|
__________
| |
(1) | Includes impairment of real estate intangibles of $2.3 million and $9.3 million and right-of-use asset on ground leases of $0.8 million and $13.9 million in the three and six months ended June 30, 2020, respectively. |
Impairment of Real Estate Held for Sale
Real estate held for sale is carried at the timelower of acquisition, allocated among land, building, improvements, equipment, lease-related tangibleamortized cost or fair value. Real estate carried at fair value totaled $197.8 million at June 30, 2020 and identifiable intangible assets$253.4 million at December 31, 2019 based upon impairments recorded during the six months ended June 30, 2020 and liabilities, suchyear ended December 31, 2019, respectively, generally representing Level 3 fair values.
Real estate held for sale that was written down was generally valued using either broker opinions of value, or a combination of market information, including third-party appraisals and indicative sale prices, adjusted as tenant improvements, deferred leasing costs, in-place lease values, above- and below-market lease values. The estimateddeemed appropriate by management to account for the inherent risk associated with specific properties. In all cases, fair value of acquired landreal estate held for sale is derivedreduced for estimated selling costs ranging from recent comparable1% to 3%.
In 2020, the Company also considered the impact of a global economic downturn as a result of COVID-19, specifically as it affects real estate values, and where appropriate, factored in a reduction in potential sales prices, which resulted in additional impairment on real estate held for sale in 2020.
Impairment of land and listings within the same local region based on available market data. The estimated fair value of acquired buildings and building improvements is derived from comparable sales, discounted cash flow analysis using market-based assumptions, or replacement cost, as appropriate.The fair value of site and tenant improvements is estimated based upon current market replacement costs and other relevant market rate information.
Real Estate Held for Investment
Real estate held for investment are carriedthat was written down to fair value during the six months ended June 30, 2020 and year ended December 31, 2019 had carrying values totaling $3.7 billion and $355.0 million, respectively, at cost less accumulated depreciation.the time of impairment, representing Level 3 fair values.
Costs Capitalized or Expensed—Expenditures for ordinary repairsImpairment was driven by shortened holding period assumptions made in connection with the preparation and maintenance are expensed as incurred, while expenditures for significant renovations that improve or extend the useful lifereview of the asset are capitalizedfinancial statements, particularly in the hotel and depreciated over their estimated useful lives.
Depreciation—Real estate held for investment, other than land, are depreciatedhealthcare portfolios. The shortened holding period assumption is attributable to both the Company's accelerated digital transformation, and the risk that the Company is unable to obtain accommodation from lenders on a straight-line basis overnon-recourse mortgage debt that is in default or at risk of default. The Company's assessment considered various strategic and financial alternatives to maximize the estimated useful livesvalue of the assets, as follows: |
| | |
Real Estate Assets | | Term |
Building (fee interest) | | 15 to 40 years |
Building leasehold interests | | Lesser of remaining term of the lease or remaining life of the building |
Building improvements | | Lesser of useful life or remaining life of the building |
Land improvements | | 10 to 30 years |
Tenant improvements | | Lesser of useful life or remaining term of the lease |
Furniture, fixtures and equipment | | 5 to 15 years |
Impairment—The Company evaluates its non-digital real estate held for investment forassets, while also balancing the need to preserve liquidity and prioritize the growth of its digital business. A shortened holding period was an indicator of impairment periodically or whenever events or changes in circumstances indicate thatas it decreased the amount of carrying amounts may not be recoverable. The Company evaluates cash flows and determines impairments on an individual property basis. In making this determination, the Company reviews, among other things, current and estimatedvalue recoverable from future cash flows, associated with eachwhich was further exacerbated by a decline in property operating performance and market information for each sub-market, including, where applicable, competition levels, foreclosure levels, leasing trends, occupancy trends, lease or room rates, and the market prices of similar properties recently sold or currently being offered for sale, and other quantitative and qualitative factors. If an impairment indicator exists, the Company evaluates whether the expected future undiscounted cash flows is less than the carrying amount of the asset, and if the Company determines that the carrying value is not recoverable, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset.
Real Estate Held for Sale
Classification as Held for Sale—Real estate is classified as held for sale in the period when (i) management approves a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, subject only to usual and customary terms, (iii) a program is initiated to locate a buyer and actively market the asset for sale at a reasonable price, and (iv) completion of the sale is probable within one year. Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal cost, with any write-down to fair value less disposal cost recorded as an impairment loss. For any increase in fair value less disposal cost subsequent to classification as held for sale, the impairment loss may be reversed, but only up to the amount of cumulative loss previously recognized. Depreciation is not recorded on assets classified as held for sale.
If circumstances arise that were previously considered unlikely and,values as a result the Company decides not to sell the real estate asset previously classified as held for sale, the real estate asset is reclassified as held for investment. Upon reclassification, the real estate asset is measured at the lower of (i) its carrying amount prior to classification as held for sale, adjusted for depreciation expense that would have been recognized had the real estate been continuously classified as held for investment, or (ii) its estimated fair value at the time the Company decides not to sell.
Real Estate Sales—The Company evaluates if real estate sale transactions qualify for recognition under the full accrual method, considering whether, among other criteria, the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay, any receivable due to the Company is not subject to future subordination, the Company has transferred to the buyer the usual risks and rewards of ownership and the Company does not have a
substantial continuing involvement with the sold real estate. At the time the sale is consummated, a gain or loss is recognized as the difference between the sale price less disposal cost and the carrying value of the real estate.
Foreclosed Propertieseconomic effects of COVID-19.
The Company receives foreclosed properties in full or partial settlement of loans receivable by taking legal title or physical possession ofcompared the properties. Foreclosed properties are recognized, generally, at the time the real estate is received at foreclosure sale or upon execution of a deed in lieu of foreclosure. Foreclosed properties are initially measured at fair value. Deficiencies comparedcarrying values to the carrying value of the loan, after reversing any previously recognized loss provision on the loan, are recorded as impairment loss. The Company periodically evaluates foreclosed properties for subsequent decrease in fair value which is recorded as additional impairment loss. Fair value of foreclosed properties is generally based on third party appraisals, broker price opinions, comparable sales or a combination thereof.
Loans Receivable
The Company originates and purchases loans receivable. The accounting framework for loans receivable depends on the Company's strategy whether to hold or sell the loan, whether the loan was credit-impaired at time of acquisition, or if the lending arrangement is an acquisition, development and construction loan.
Loans Held for Investment (other than Purchased Credit-Impaired Loans)
Loans that the Company has the intent and ability to hold for the foreseeableundiscounted future are classified as held-for-investment. Originated loans are recorded at amortized cost, or outstanding unpaid principal balance less net deferred loan fees. Net deferred loan fees include unamortized origination and other fees charged to the borrower less direct incremental loan origination costs incurred by the Company. Purchased loans are recorded at amortized cost, or unpaid principal balance plus purchase premium or less unamortized discount. Costs to purchase loans are expensed as incurred.
Interest Income—Interest income is recognized based upon contractual interest rate and unpaid principal balance of the loans. Net deferred loan fees on originated loans are deferred and amortized as adjustments to interest income over the expected life of the loans using the effective yield method. Premium or discount on purchased loans are amortized as adjustments to interest income over the expected life of the loans using the effective yield method. For revolving loans, net deferred loan fees, premium or discount are amortized to interest income using the straight-line method. When a loan is prepaid, prepayment fees and any excess of proceeds over the carrying amount of the loan are recognized as additional interest income.
Nonaccrual—Accrual of interest income is suspended on nonaccrual loans. Loans that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual. Interest receivable is reversed against interest income when loans are placed on nonaccrual status. Interest collection on nonaccruing loans for which ultimate collectability of principal is uncertain is recognized using a cost recovery method by applying interest collected as a reduction to loan principal; otherwise, interest collected is recognized on a cash basis by crediting to income when received. Loans may be restored to accrual status when all principal and interest is current and full repayment of the remaining contractual principal and interest is reasonably assured.
Impairment and Allowance for Loan Losses—On a periodic basis, the Company analyzes the extent and effect of any credit migration from underwriting and the initial investment review associated with the performance of a loan and/or value of its underlying collateral, financial and operating capability of the borrower or sponsor, as well as amount and status of any senior loan, where applicable. Specifically, operating results of collateral properties and any cash reserves are analyzed and used to assess whether cash from operations are sufficient to cover debt service requirements currently and into the future, ability of the borrower to refinance the loan, liquidation value of collateral properties, financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the collateral properties. Such analysis is performed at least quarterly, or more often as needed when impairment indicators are present. The Company does not utilize a statistical credit rating system to monitor and assess the credit risk and investment quality of its acquired or originated loans. Given the diversity of the Company's portfolio, management believes there is no consistent method of assigning a numerical rating to a particular loan that captures all of the various credit metrics and their relative importance. Therefore, the Company evaluates impairment and allowance for loan losses on an individual loan basis.
Loans are considered to be impaired when it is probable that the Company will not be able to collect all amounts due in accordance with contractual terms of the loans, including consideration of underlying collateral value. Allowance for loan losses represents the estimated probable credit losses inherent in loans held for investment at balance sheet date. Changes in allowance for loan losses are recorded in the provision for loan losses on the statement of operations.
Allowance for loan losses generally exclude interest receivable as accrued interest receivable is reversed when a loan is placed on nonaccrual status. Allowance for loan losses is generally measured as the difference between the carrying value of the loan and either the present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan or an observable market price for the loan. Subsequent changes in impairment are recorded as adjustments to the provision for loan losses. Loans are charged off against allowance for loan losses when all or a portion of the principal amount is determined to be uncollectible. A loan is considered to be collateral-dependent when repayment of the loan is expected to be provided solelygenerated by the underlying collateral. Impaired collateral-dependent loans are written down to the fair value of the collateral less disposal cost, first through a charge-off against allowance for loan losses, if any, then recorded as impairment loss.
Troubled Debt Restructuring ("TDR")— A loan with contractual terms modified in a manner that grants concession to the borrower who is experiencing financial difficulty is classified as a TDR. Concessions could include term extensions, payment deferrals, interest rate reductions, principal forgiveness, forbearance, or other actions designed to maximize the Company's collection on the loan. As a TDR is generally considered to be an impaired loan, it is measured for impairment based on the Company's allowance for loan losses methodology.
Loans Held for Sale
Loans thatthese properties over their holding periods. In performing this analysis, the Company intendsconsidered the likelihood of possible outcomes under various holding period scenarios by applying a probability-weighted approach to sell or liquidate indifferent holding periods. For hotel properties, the foreseeable future are classified as held-for-sale. Loans heldCompany applied a range of reductions to near term cash flow projections to account for sale are carried atuncertainties due to COVID-19. For properties for which undiscounted expected net cash flows over their respective
holding periods fell short of carrying values, the lower of amortized cost or fair value less disposal cost, with valuation changes recognized as impairment loss. Loans held for sale are not subject to allowance for loan losses. Net deferred loan origination fees and loan purchase premiums or discounts are deferred and capitalized as part ofCompany expects that the carrying value of the held-for-sale loan until the loan is sold, therefore included in the periodic valuation adjustmentsthese properties would likely not be recoverable.
Fair values were estimated for these properties based on lower of costupon one or fair value less disposal cost.
Purchased Credit-Impaired ("PCI") Loans
PCI loans are acquired loans with evidence of credit quality deterioration for which it is probable at acquisition that the Company will collect less than the contractually required payments. PCI loans are recorded at the initial investment in the loans and accreted to the estimated cash flows expected to be collected as measured at acquisition date. The excess of cash flows expected to be collected, measured as of acquisition date, over the estimated fair value represents the accretable yield and is recognized in interest income over the remaining lifea combination of the loanfollowing: (i) third party appraisals, (ii) broker opinions of value with discounts applied based upon management judgment, (iii) income capitalization approach, using the effective interest method. The differencenet operating income for each property and applying capitalization rates between contractually required payments as of the acquisition date10.0% and the12.0%; or (iv) discounted cash flows expected to be collected ("nonaccretable difference") is not recognized as an adjustment of yield, loss accrual or valuation allowance.
flow analyses with terminal values determined using terminal capitalization rates between 7.0% and 11.25%, and discount rates between 8.5% and 12.0%. The Company evaluates estimated future cash flows expected to be collected on a quarterly basis, starting withconsidered the first full quarter after acquisition, or earlier if conditions indicating impairment are present. If the cash flows expected to be collected cannot be reasonably estimated, either at acquisition or in subsequent evaluation, the Company may consider placing such PCI loans on nonaccrual, with interest income recognized using the cost recovery method or on a cash basis. Subsequent decreases in cash flows expected to be collected are evaluated to determine whether a provision for loan loss should be established. If decreases in expected cash flows result in a decrease in the estimated fair value of the loan below its amortized cost, the Company records a provision for loan losses calculated as the difference between the loan’s amortized cost and the revised cash flows, discounted at the loan’s effective yield. Subsequent increases in cash flows expected to be collected are first applied to reverse any previously recorded allowance for loan losses, with any remaining increases recognized prospectively through an adjustment to yield over its remaining life.
Factors that most significantly affect estimates of cash flows expected to be collected, and accordingly the accretable yield, include: (i) estimate of the remaining life of acquired loans which may change the amount of future interest income; (ii) changes to prepayment assumptions; (iii) changes to collateral value assumptions for loans expected to foreclose; and (iv) changes in interest rates on variable rate loans.
PCI loans may be aggregated into pools based upon common risk characteristics, such as loan performance, collateral type and/or geographic location of the collateral. A pool is accounted for as a single asset with a single composite yield and an aggregate expectation of estimated future cash flows. A PCI loan modified within a pool remains in the pool, with the effect of the modification incorporated into the expected future cash flows. A loan resolution within a loan pool, which may involve the sale of the loan or foreclosure on the underlying collateral, results in the removal of an allocated carrying amount, including an allocable portion of any existing allowance.
Acquisition, Development and Construction ("ADC") Loan Arrangements
The Company provides loans to third party developers for the acquisition, development and construction of real estate. Under an ADC arrangement, the Company participates in the expected residual profits of the project through the
sale, refinancing or other use of the property. The Company evaluates the characteristics of each ADC arrangement, including its risksproperty in determining capitalization rates and rewards,where applicable, used higher capitalization rates or discount rates to determine whether they are more similar to those associated with a loan or an investment in real estate. ADC arrangements with characteristics implying loan classification are presented as loans receivable and result inreflect the recognition of interest income. ADC arrangements with characteristics implyinginherent stress on real estate joint ventures are presented as investments in unconsolidated joint ventures and are accounted for using the equity method. The classification of each ADC arrangement as either loan receivable or real estate joint venture involves significant judgment and relies on various factors, including market conditions, amount and timing of expected residual profits, credit enhancements in the form of guaranties, estimated fair value of the collateral, significance of borrower equity in the project, among others. The classification of ADC arrangements is performed at inception, and periodically reassessed when significant changes occur in the circumstances or conditions described above.
Investments in Unconsolidated Ventures
A noncontrolling, unconsolidated ownership interest in an entity may be accounted for using the equity method, cost method or under the fair value option, if elected.
The Company accounts for investments under the equity method of accounting if it has the ability to exercise significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest. The equity method investment is initially recorded at cost and adjusted each period for capital contributions, distributions and the Company's share of the entity’s net income or loss as well as other comprehensive income or loss. The Company's share of net income or loss may differ from the stated ownership percentage interest in an entity if the governing documents prescribe a substantive non-pro rata earnings allocation formula or a preferred return to certain investors. The Company's share of net income or loss from its interests in funds, which are accounted for under the equity method, reflects fair value changes in the underlying investments of the fund, which are reported at fair value in accordance with investment company guidelines. For certain equity method investments, the Company records its proportionate share of income on a one to three month lag. Distributions of operating profits from equity method investments are reported as operating activities, while distributions in excess of operating profits or those related to capital transactions, such as a financing transactions or sales, are reported as investing activities in the statement of cash flows.
Investments that do not qualify for equity method accounting are accounted for under the cost method. Dividends from cost method investments, when received, are recorded as dividend income to the extent they are not considered a return of capital; otherwise such amounts are recorded as a reduction of the cost of investment.
The Company elected the fair value option for certain cost method and equity method investments. The Company records the change in fair value of such investments in earnings from investments in unconsolidated ventures in the consolidated statements of operations.
Impairment—If indicators of impairment exist, the Company performs an evaluation of its equity method and cost method investments to assess whether the fair value of its investment is less than its carrying value. To the extent the decrease in value is considered to be other-than-temporary and an impairment has occurred, the investment is written down to its estimated fair value, recorded as an impairment loss.
Securities
Debt securities and marketable equity securities are recorded as of the trade date. Securities designated as available-for-sale (“AFS”) are carried at fair value with unrealized gains or losses included as a component of other comprehensive income. Upon disposition of AFS securities, the cumulative gains or losses in other comprehensive income (loss) that are realized are recognized in other gain (loss), net, on the statement of operations based on specific identification.
Dividend income—Dividend income from marketable equity securities is recognized on the ex-dividend date.
Interest Income—Interest income from debt securities, including stated coupon interest payments and amortization of purchase premiums or discounts, is recognized using the effective interest method over the expected lives of the debt securities.
For beneficial interests in debt securities that are not of high credit quality (generally credit rating below AA) or that can be contractually settled such that the Company would not recover substantially all of its recorded investment, interest income is recognized as the accretable yield over the life of the securities using the effective yield method. The accretable yield is the excess of current expected cash flows to be collected over the net investment in the security, including the yield accreted to date. The Company evaluates estimated future cash flows expected to be collected on a quarterly basis, starting with the first full quarter after acquisition, or earlier if conditions indicating impairment are present. If the cash flows expected to be collected cannot be reasonably estimated, either at acquisition or in subsequent evaluation, the
Company may consider placing the securities on nonaccrual, with interest income recognized using the cost recovery method.
Impairment—The Company performs an assessment, at least quarterly, to determine whether a decline in fair value below amortized cost of AFS debt securities is other than temporary. Other-than-temporary impairment ("OTTI") exists when either (i) the holder has the intent to sell the impaired security, (ii) it is more likely than not the holder will be required to sell the security, or (iii) the holder does not expect to recover the entire amortized cost of the security. For beneficial interests in debt securities that are not of high credit quality or that can be contractually settled such that the Company would not recover substantially all of its recorded investment, OTTI also exists when there has been an adverse change in cash flows expected to be collected from the last measurement date.
If the Company intends to sell the impaired security or more likely than not will be required to sell the impaired security before recovery of its amortized cost, the entire impairment amount is recognized in earnings. If the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, the Company further evaluates the security for impairment due to credit losses. In determining whether a credit loss exists, an assessment is made of the cash flows expected to be collected from the security. The credit component of OTTI is recognized in earnings, while the remaining non-credit component is recognized in other comprehensive income. The amortized cost basis of the security is written down by the amount of impairment recognized in earnings and will not be adjusted for subsequent recoveries in fair value. The difference between the new amortized cost basis and the cash flows expected to be collected will be accreted as interest income.
In assessing OTTI and estimating future expected cash flows, factors considered include, but are not limited to, credit rating of the security, financial condition of the issuer, defaults for similar securities, performance and value of assets underlying an asset-backed security.
PCI Debt Securities—Debt securities acquired that are deemed to be credit impaired at acquisition date are recorded at their initial investment and accreted to the estimated cash flows expected to be collected as measured at acquisition date. The excess of cash flows expected to be collected, measured at acquisition date, over the estimated fair value represents the accretable yield and is recognized in interest income over the remaining life of the security using the effective yield method. The difference between contractually required payments at the acquisition date and the cash flows expected to be collected ("nonaccretable difference"), which reflects estimated future credit losses expected to be incurred over the life of the security, is not accreted to interest income nor recorded on the balance sheet. Subsequent decreases in undiscounted expected cash flows attributable to further credit deterioration as well as changes in expected timing of future cash flows can result in recognition of OTTI. Subsequent increases in expected cash flows, other than due to interest rate changes on variable rate securities, are recognized prospectively over the remaining life of the security as an adjustment to accretable yield.
Identifiable Intangibles
In a business combination or asset acquisition, the Company may recognize identifiable intangibles that meet either or both the contractual-legal criterion or the separability criterion. Indefinite-lived intangibles are not subject to amortization until such time that its useful life is determined to no longer be indefinite, at which point, it will be assessed for impairment and its adjusted carrying amount amortized over its remaining useful life. Finite-lived intangibles are amortized over their useful lifevalues in a manner that reflects the pattern in which the intangible is being consumed if readily determinable, such as based upon expected cash flows; otherwise they are amortized on a straight line basis. The useful life of all identified intangibles will be periodically reassessed and if useful life changes, the carrying amount of the intangible will be amortized prospectively over the revised useful life. Finite-lived intangibles are periodically reviewed for impairment and an impairment loss is recognized if the carrying amount of the intangible is not recoverable and exceeds its fair value. An impairment establishes a new basis for the identifiable intangibles and any impairment loss recognized is not subject to subsequent reversal.
Identifiable intangibles recognized in acquisitions of operating real estate properties generally include in-place leases, above- or below-market leases and deferred leasing costs. In-place leases generate value over and above the tangible real estate because a property that is occupied with leased space is typically worth more than a vacant building without an operating lease contract in place. The estimated fair value of acquired in-place leases is derived based on management's assessment of costs avoided from having tenants in place, including lost rental income, rent concessions and tenant allowances or reimbursements, that hypothetically would be incurred to lease a vacant building to its actual existing occupancy level on the valuation date. The net amount recorded for acquired in-place leases is included in intangible assets and amortized on a straight-line basis as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If an in-place lease is terminated, the unamortized portion is charged to depreciation and amortization expense.
The estimated fair value of the above- or below-market component of acquired leases represents the present value of the difference between contractual rents of acquired leases and market rents at the time of the acquisition for the remaining lease term, discounted for tenant credit risks. Above- or below-market operating lease values are amortized on a straight-line basis as a decrease or increase to rental income, respectively, over the applicable lease terms. This includes fixed rate renewal options in acquired leases that are below-market, which is amortized to decrease rental income over the renewal period. Above- or below-market ground lease obligations are amortized on a straight-line basis as a decrease or increase to rent expense, respectively, over the applicable lease terms. If the above- or below-market operating lease values or above- or below-market ground lease obligations are terminated, the unamortized portion of the lease intangibles are recorded in rental income or rent expense, respectively.
Deferred leasing costs represent management's estimation of the avoided leasing commissions and legal fees associated with an existing in-place lease. The net amount is included in intangible assets and amortized on a straight-line basis as an increase to depreciation and amortization expense over the remaining term of the applicable lease.
Goodwill
Goodwill is an unidentifiable intangible asset and is recognized as a residual, generallydeteriorating economic environment. Impairment was measured as the excess of consideration transferred in a business combinationcarrying value over the identifiable assets acquired, liabilities assumed and noncontrolling interests in the acquiree. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination.
Goodwill is tested for impairment at the reporting units to which it is assigned at least on an annual basis in the fourth quarter of each year, or more frequently if events or changes in circumstances occur that would more likely than not reduce the fair value of a reporting unit below its carrying value. The assessment of goodwill for impairment may initially be performed based on qualitative factors to determine if it is more likely than not that the fair value of the reporting unit to which the goodwill is assigned is less than its carrying value. If so, a two-step quantitative assessment is performed to determine if an impairment has occurred and measure the impairment loss. In the first step, if the fair value of the reporting unit is less than its carrying value (including goodwill), then the goodwill is considered to be impaired. In the second step, the implied fair value of the goodwill is determined by comparing the fair value of the reporting unit (in step one) to the fair value of the net assets of the reporting unit as if the reporting unit is being acquired in a business combination. If the carrying value of goodwill exceeds the resulting implied fair value of goodwill, then an impairment charge is recognized for the excess. An impairment establishes a new basis for the goodwill and any impairment loss recognized is not subject to subsequent reversal. Goodwill impairment tests require judgment, including identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.
Accounts Receivable and Related Allowance
Property Operating Income Receivables—The Company periodically evaluates aged receivables as well as considers the collectability of unbilled receivables for each tenant, operator, resident or guest, individually. The Company establishes an allowance when, based upon current information and events, it is probable thatof these properties.
As of June 30, 2020, the Company will be unable to collect all amounts due under existing contractual terms, and the amount can be reasonably estimated.
Cost Reimbursements and Recoverable Expenses—The Company is entitled to reimbursements and/or recovers certain costs paid on behalf of the retail companies and private funds managed by the Company, which include: (i) organization and offering costs associated with the formation and offering of the retail companies not to exceed a certain percentage of the proceeds expected to be raised from the offering and excluding shares being offered pursuant to distribution reinvestment plans; (ii) direct and indirect operating costs associated with managing the operations of the retail companies; and (iii) costs incurred in performing investment due diligence. Indirect operating costs are recorded as expenses of the Company when incurred and amounts allocated and reimbursable are recorded as other income in the consolidated statements of operations. The Company facilitates the payments of organization and offering costs, due diligence costs to the extent the related investments are consummated and direct operating costs, all of which are recorded as due from affiliates on the consolidated balance sheets, until such amounts are repaid. Due diligence costs related to unconsummated investments are borne by the Company and expensed as investment, servicing and commission expense in the consolidated statement of operations. The Company assesses the collectability of such receivables considering the offering period, historical and forecasted sales of shares and capital reinvestment of the proceeds from the sale of shares under the respective offerings of the retail companies, and establishes an allowance for any balances considered not collectible.
Fixed Assets
Fixed assets of the Company are presented within other assets and carried at cost less accumulated depreciation and amortization. Ordinary repairs and maintenance are expensed as incurred. Major replacements and betterments which improve or extend the life of assets are capitalized and depreciated over their useful life. Depreciation and amortization is recognized on a straight-line basis over the estimated useful life of the assets, which range between 3 to 5 years for furniture, fixtures, equipment and capitalized software, 15 years for aircraft and over the shorter of the lease term or useful life for leasehold improvements.
Transfers of Financial Assets
Sale accounting for transfers of financial assets is limited to the transfer of an entire financial asset, a group of financial assets in their entirety, or a component of a financial asset which meets the definition of a participating interest by having characteristics that are similar to the original financial asset.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. If the Company has any continuing involvement, rights or obligations with the transferred financial asset (outside of standard representations and warranties), sale accounting would require that the transfer meets the following conditions: (1) the transferred asset has been legally isolated; (2) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred asset; and (3) the Company does not maintain effective control over the transferred asset through an agreement that provides for (a) both an entitlement and an obligation by the Company to repurchase or redeem the asset before its maturity, (b) the unilateral ability by the Company to reclaim the asset and a more than trivial benefit attributable to that ability, or (c) the transferee requiring the Company to repurchase the asset at a price so favorable to the transfereebelieves that it is probable the repurchase will occur.
If the criteria for sale accounting are met, the transferred financial asset is removed from the balance sheet and a net gain or loss is recognized upon sale, taking into account any retained interests. Transfers of financial assets that do not meet the criteria for sale are accounted for as financing transactions.
Derivative Instruments and Hedging Activities
The Company uses derivative instruments to manage its foreign currency risk and interest rate risk. The Company does not use derivative instruments for speculative or trading purposes. All derivative instruments are recorded at fair value and includedhas materially addressed overall recoverability in other assets or other liabilities on a gross basis on the balance sheet. The accounting for changes in fair value of derivatives depends upon whether or not the Company has elected to designate the derivative in a hedging relationship and the derivative qualifies for hedge accounting. The Company has economic hedges that have not been designated for hedge accounting.
Changes in fair value of derivatives not designated as accounting hedges are recorded in the statement of operations in other gain (loss).
For designated accounting hedges, the relationships between hedging instruments and hedged items, risk management objectives and strategies for undertaking the accounting hedges as well as the methods to assess the effectiveness of the derivative prospectively and retrospectively, are formally documented at inception. Hedge effectiveness relates to the amount by which the gain or loss on the designated derivative instrument exactly offsets the change in the hedged item attributable to the hedged risk. If it is determined that a derivative is not expected to be or has ceased to be highly effective at hedging the designated exposure, hedge accounting is discontinued.
Cash Flow Hedges—The Company uses interest rate caps and swaps to hedge its exposure to interest rate fluctuations in forecasted interest payments on floating rate debt. The effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income, while hedge ineffectiveness is recorded in earnings. If the derivative in a cash flow hedge is terminated or the hedge designation is removed, related amounts in accumulated other comprehensive income (loss) are reclassified into earnings.
Net Investment Hedges—The Company uses foreign currency hedges to protect the value of its net investmentsnon-digital real estate assets, applying the Company's best estimates and assumptions at this time based upon external factors known to date and the Company's expected digital transformation timeline. If the extent and duration of the economic effects of COVID-19 negatively affect the Company's real estate operations and its ability to meet its non-recourse mortgage debt obligations beyond the Company's current projections, the estimates and assumptions currently applied by the Company may change, which may lead to further impairment of its non-digital real estate assets, in foreign subsidiaries or equity method investees whose functional currencies are not U.S. dollars. Changesparticular, its healthcare and hospitality assets, that could be material in the fair value of derivatives used as hedges of net investment in foreign operations, to the extent effective, are recorded in the cumulative translation adjustment account within accumulated other comprehensive income (loss).future.
At the end of each quarter, the Company reassesses the effectiveness of its net investment hedges and as appropriate, dedesignates the portion of the derivative notional that is in excess of the beginning balance of its net investments as nondesignated hedges.
Release of accumulated other comprehensive income related to net investment hedges occurs upon losing a controlling financial interest in an investment or obtaining control over an equity method investment. Upon sale, complete or substantially complete liquidation of an investment in a foreign subsidiary, or partial sale of an equity method investment, the gain or loss on the related net investment hedge is reclassified from accumulated other comprehensive income to earnings.
Financing Costs
Debt discounts and premiums as well as debt issuance costs (except for revolving credit arrangements) are presented net against the associated debt on the balance sheet and amortized into interest expense using the effective interest method over the contractual term of the debt or expected life of the debt instrument. Costs incurred in connection with revolving credit arrangements are recorded as deferred financing costs in other assets, and amortized on a straight-line basis over the expected term of the credit facility.
Property Operating IncomeFuture Application of Accounting Standards
Property operatingIncome Tax Accounting
In December 2019, the FASB issued ASU No. 2019-12, Simplifying Accounting for Income Taxes. The ASU simplifies accounting for income includestaxes by eliminating certain exceptions to the following.general approach in ASC 740, Income Taxes, and clarifies certain aspects of the guidance for more consistent application. The simplifications relate to intraperiod tax allocations when there is a loss in continuing operations and a gain outside of continuing operations, accounting for tax law or tax rate changes and year-to-date losses in interim periods, recognition of deferred tax liability for outside basis
Rental Income—Rental income
difference when investment ownership changes, and accounting for franchise taxes that are partially based on income. The ASU also provides new guidance that clarifies the accounting for transactions resulting in a step-up in tax basis of goodwill, among other changes. Transition is recognizedgenerally prospective, other than the provision related to outside basis difference which is on a straight-linemodified retrospective basis overwith cumulative effect adjusted to retained earnings at the noncancelable termbeginning of the related leaseperiod adopted, and franchise tax provision which includesis on either full or modified retrospective. ASU No. 2019-12 is effective January 1, 2021, with early adoption permitted in an interim period, to be applied to all provisions. The Company is currently evaluating the effectsimpact of minimum rent increasesthis new guidance.
Accounting for Certain Equity Investments
In January 2020, the FASB issued ASU No. 2020-01, Clarifying the Interactions between Topic 321 Investments—Equity Securities, Topic 323—Investments Equity Method and rent abatementsJoint Ventures, and Topic 815—Derivatives and Hedging. The ASU clarifies that if as a result of an observable transaction, an equity investment under the lease. Rents receivedmeasurement alternative is transitioned into equity method and vice versa, an equity method investment is transitioned into measurement alternative, the investment is to be remeasured immediately before and after the transaction, respectively. The ASU also clarifies that certain forward contracts or purchased options to acquire equity securities that are not deemed to be derivatives or in-substance common stock will generally be measured using the fair value principles of ASC 321 before settlement or exercise, and that an entity should not be considering how it will account for the resulting investments upon eventual settlement or exercise. ASU No. 2020-01 is to be applied prospectively, effective January 1, 2021, with early adoption permitted in advancean interim period. The Company is currently evaluating the impact of this new guidance.
Accounting for Convertible Instruments and Contracts on Entity's Own Equity
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity.
With respect to convertible instruments, under the new guidance, a convertible debt instrument will be accounted for wholly as debt, and convertible preferred stock wholly as preferred stock, that is, as a single unit of account, except for (1) a convertible instrument that contains features requiring bifurcation as a derivative under Topic 815 or (2) a convertible debt instrument that was issued at a substantial premium. Expanded disclosures are deferred.required, including, but not limited to, the terms and features of convertible instruments, and information about events, conditions, and circumstances that could affect assessment of the amount or timing of future cash flows related to those instruments.
When itWith respect to contracts on an entity's own equity, one of the requirements prescribed by the new guidance is determinedto account for freestanding contracts on an entity’s own equity that do not qualify as equity under Subtopic ASC 815-40 at fair value, with changes in fair value recognized in earnings, irrespective of whether such contracts meet the definition of a derivative in Topic 815.
The ASU also amends certain guidance on the computation of earnings per share for convertible instruments and contracts on an entity’s own equity. In calculating diluted earnings per share, the new guidance (1) requires the if-converted method to be applied for all convertible instruments (the treasury stock method is no longer available), and (2) removes the ability to rebut the presumption of share settlement for contracts that may be settled in cash or stock.
Upon adoption, a one-time election may be made to apply the fair value option for any liability-classified financial instrument that is a convertible security. In the period of adoption, disclosure is required of (1) the nature of and reason for the change in accounting principle in both the interim and annual period of change, and (2) earnings per share transition information about the effect of the change on affected per-share amounts.
Adoption of the new standard may be made either on a full or modified retrospective approach, with cumulative effect adjustment recorded to beginning retained earnings under the latter. ASU No. 2020-06 is effective January 1, 2022, with early adoption permitted in interim periods beginning January 1, 2021. The Company is currently evaluating the impact of this new guidance.
3. Business Combinations
DBH
On July 25, 2019, the Company is the owner of tenant improvements, the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants, is capitalized. For Company-owned tenant improvements, the amount funded by or reimbursed by the tenants are recorded as deferred revenue, which is amortized onacquired DBH in a straight-line basis as additional rental income over the term of the related lease. Rental income recognition commences when the leased space is substantially ready for its intended use and the tenant takes possession of the leased space.
When it is determined that the tenant is the owner of tenant improvements, the Company's contribution towards those improvements is recorded as a lease incentive, included in deferred leasing costs and intangible assets on the balance sheet, and amortized as a reduction to rental income on a straight-line basis over the term of the lease. Rental income recognition commences when the tenant takes possession of the lease space.
Tenant Reimbursements—In net lease arrangements, the tenant is generally responsible for operating expenses relating to the property, including real estate taxes, property insurance, maintenance, repairs and improvements. Costs reimbursable from tenants and other recoverable costs are recognized as revenue in the period the recoverable costs are incurred. When the Company is the primary obligor with respect to purchasing goods and services for property operations and has discretion in selecting the supplier and retains credit risk, tenant reimbursement revenue and property operating expenses are presented on a gross basis in the statements of operations. For certain triple net leases where the lessee self-manages the property, hires its own service providers and retains credit risk for routine maintenance contracts, no reimbursement revenue and expense are recognized.
Resident Fee Income—Resident fee income is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges.
Hotel Operating Income—Hotel operating income includes room revenue, food and beverage sales and other ancillary services. Revenue is recognized upon occupancy of rooms, consummation of sales and provision of services.
Fee Income
Fee income consists of the following:
Base Management Fees—The Company earns base management fees for the day-to-day operations and administration of its managed private funds, traded and non-traded REITs and investment companies. Base management fees are recognized over the period in which the related services are performed in accordance with contractual terms of the underlying management agreements.
Asset Management Fees (including fees related to acquisition and disposition of investments)—The Company receives a one-time asset management fee upon closing of each investment made by certain managed private funds. In accordance with contractual terms of the underlying management and advisory agreements,combination of: (a) cash, a portion of asset management fees is recognized upon completion of initial underwriting, with remaining feeswhich was deferred and recognized over the holding period of each investment in which the related services are performed for each investment.
The Company also earns fees related to acquisition and disposition of investments by certain managed non-traded REITs, which are recognized upon closing of the respective acquisition or disposition of underlying investments.
Incentive Fees—The Company may earn incentive fees from its managed private funds, traded and non-traded REITs and investment companies. Incentive fees are determined based on the performance of the investment vehicles subject to the achievement of minimum return levels in accordance with the terms set out in the respective governing agreements. Incentive fees are recognized when fixed or determinable and related contingencies have been resolved, which is generally at the end of the measurement period of the respective investment vehicles. Any incentive fees received prior to that date are recorded as deferred income.
Advisory Fees—The Company earns advisory fees from its clients at a fixed annual retainer. Advisory fees are recognized over the period in which the related services are performed in accordance with contractual terms of the underlying advisory agreements.
Selling Commission and Dealer Manager Fees—These fees are earned by the Company for selling equity in the non-traded REITs and investment companies, and are recognized on trade date.
Other Income
Other income includes the following:
Expense Recoveries from Borrowers—Expenses, primarily legal costs incurred in administering non-performing loans and foreclosed properties held by investment entities, may be subsequently recovered through payments received when these investments are resolved. The Company recognizes income when the cost recoveries are determinable and repayment is assured.
Collateral Management Fees—These fees are earned in the Company's capacity as collateral manager or collateral manager delegate of collateralized debt obligation vehicles ("CDOs") sponsored by the Company or by third parties. Collateral management fees are recognized over the period in which the related services are performed in accordance with contractual terms of the underlying agreements. If amounts distributable on any payment date are insufficient to pay the collateral management fees according to the priority of payments, any shortfall is deferred and payable on subsequent payment dates. Collateral management fees earned from consolidated CDOs are eliminated in consolidation.
Cost Reimbursements from Affiliates—For various services provided to certain affiliates, including managed investment vehicles, the Company is entitled to receive reimbursements of expenses incurred, generally based on expenses that are directly attributable to providing those services and/or a portion of overhead costs. The Company acts in the capacity of a principal under these arrangements. Accordingly, the Company records the expenses and corresponding reimbursement income on a gross basis in the period the services are rendered and costs are incurred.
Compensation
Compensation comprises salaries, bonus including discretionary awards and contractual amounts for certain senior executives, benefits, severance payments and equity-based compensation. Bonus is accrued over the employment period to which it relates.
Equity-Based Compensation
Equity-classified stock awards granted to employees that have a service condition only are measured at fair value at date of grant and remeasured at fair value only upon a modification of the award. Stock awards granted to non-employees that have a service condition only are remeasured at fair value at the end of each reporting period until the award is fully vested. Fair value is determinedexpiration of certain customary seller indemnification obligations and was paid in full in May 2020 (Note 20); and (b) issuance of 21,478,515 OP Units, which were measured based onupon the closing price of the Company's class A common stock at dateon July 24, 2019 of grant or date$5.21 per share.
The Company recognizes compensation expenseacquired the fee streams but not the equity interests related to the 6 portfolio companies managed by DBH. The principals of DBH retained their equity investments, including general partner interests in existing DBH investment vehicles and in Digital Colony Partners fund (“DCP”), which was previously co-sponsored by the Company and DBH.
The acquisition is a strategic transaction that is expected to generate meaningful accretion in value to the Company through expansion of the digital real estate management platform by combining the industry sector knowledge, experience and relationships from the DBH team with the capital raising resources of the Company, as represented by the goodwill value.
The Company's acquisition of DBH included the remaining 50% equity interest held by DBH in Digital Colony Management, LLC ("Digital Colony Manager"), previously an equity method joint venture with DBH, which manages DCP. Upon closing of the acquisition, the Company obtained a controlling interest in Digital Colony Manager and remeasured its existing 50% interest at a fair value of $51.4 million. The full amount, representing the excess of fair value over carrying value of the Company's investment in Digital Colony Manager, was recognized in other gain on the Company's statement of operations, as the Company's carrying value of its investment in Digital Colony Manager prior to the business combination was nil. The fair value was based upon the value of 50% of estimated future net cash flows from the DCP fund management contract, discounted at 8%.
DataBank
On December 20, 2019, the Company acquired from third party investors a straight-line basis20% interest in DataBank, a portfolio company managed by DBH and invested in by the principals and senior professionals of DBH. The Company is deemed to have a controlling interest in DataBank as control over the requisite service periodoperations of DataBank resides substantially with the Company. Consideration included the payment of cash to third parties for the Company’s interests in DataBank and the issuance of 612,072 OP Units to Mr. Ganzi and Benjamin Jenkins (the DBH principals) for incentive units owned by the DBH principals and allocable to the Company’s acquired interests, measured based upon the closing price of the awards,Company's class A common stock on December 20, 2019 of $4.85 per share. The OP Units were issued to the principals of DBH who had previously received incentive units from DataBank, in exchange for certain of their incentive units such that the Company will not be subject to future carried interest payments to the DBH principals with respect to the amountCompany's investment in DataBank (Note 20). The DBH principals otherwise retained their equity interests in DataBank.
Allocation of compensation expense recognizedConsideration Transferred
The following table summarizes the consideration and allocation to assets acquired, liabilities assumed and noncontrolling interests at acquisition. The estimated fair values and allocation of consideration are preliminary, based upon information available at the endtime of closing as the Company continues to evaluate underlying inputs and assumptions. Accordingly, these provisional values may be subject to adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed at the time of closing.
During the second quarter of 2020, certain measurement period adjustments were made to the purchase price allocation for DataBank, primarily (i) a reporting periodreallocation of value to data center service contract intangible asset, (ii) changes in valuation and underlying assumptions pertaining to data center construction and market value of existing data center lease contracts, and (iii) the corresponding effect on deferred tax liabilities.
|
| | | | | | | | | | | | | | | | |
| | DBH | | | | DataBank | | |
(In thousands) | | As Reported June 30, 2020 | | As Reported December 20, 2019 | | Measurement Period Adjustments | | As Reported June 30, 2020 |
Consideration | | | | | | | | |
Cash | | $ | 181,167 |
| | $ | 182,731 |
| | $ | — |
| | $ | 182,731 |
|
Deferred consideration | | 35,500 |
| | — |
| | — |
| | — |
|
OP Units issued | | 111,903 |
| | 2,962 |
| | — |
| | 2,962 |
|
Total consideration for equity interest acquired | | 328,570 |
| | 185,693 |
| | — |
| | 185,693 |
|
| | | | | | | | |
Fair value of equity interest in Digital Colony Manager | | 51,400 |
| | — |
| | — |
| | — |
|
| | $ | 379,970 |
| | $ | 185,693 |
| | $ | — |
| | $ | 185,693 |
|
| | | | | | | | |
Assets acquired, liabilities assumed and noncontrolling interests | | | | | | | | |
Cash | | $ | — |
| | $ | 10,366 |
| | $ | — |
| | $ | 10,366 |
|
Real estate | | — |
| | 847,458 |
| | (8,405 | ) | | 839,053 |
|
Assets held for sale | | — |
| | 29,114 |
| | 152 |
| | 29,266 |
|
Intangible assets | | 153,300 |
| | 222,455 |
| | (2,804 | ) | | 219,651 |
|
Other assets | | 13,008 |
| | 106,648 |
| | 2,248 |
| | 108,896 |
|
Debt | | — |
| | (539,155 | ) | | — |
| | (539,155 | ) |
Tax liabilities, net | | (17,392 | ) | | (113,228 | ) | | 3,641 |
| | (109,587 | ) |
Intangible and other liabilities | | (16,194 | ) | | (132,480 | ) | | 12,302 |
| | (120,178 | ) |
Fair value of net assets acquired | | 132,722 |
| | 431,178 |
| | 7,134 |
| | 438,312 |
|
Noncontrolling interests in investment entities | | — |
| | (724,567 | ) | | — |
| | (724,567 | ) |
Goodwill | | $ | 247,248 |
| | $ | 479,082 |
| | $ | (7,134 | ) | | $ | 471,948 |
|
DBH
Intangible assets acquired included primarily management contracts, investor relationships and trade name.
The fair value of management contracts, including the Company's 50% interest in Digital Colony Manager, was estimated based upon estimated net cash flows generated from those contracts, discounted at least equal to8%, with remaining lives estimated between 3 and 10 years.
Investor relationships represent the fair value of the portionpotential fees, net of the award that has vested through that date. Compensation expense is adjusted for actual forfeituresoperating costs, to be generated from repeat DBH investors in future sponsored funds, discounted at 11.5%, and potential carried interest discounted at 25%.
The Digital Bridge trade name was valued using a relief-from-royalty method, based upon occurrence.
Income Taxes
A REIT is generally not subject to corporate-level federal and state income taxestimated savings from avoided royalty at a rate of 1% on expected net income, it distributesdiscounted at 11.5%, with an estimated useful life of 10 years.
Other liabilities assumed were primarily deferred revenues and deferred tax liabilities recognized upon acquisition, representing the tax effect on the book-to-tax basis difference associated with management contract intangibles.
DataBank
Real estate and lease intangibles of DataBank were measured based upon recent third party appraised values, allocated to its stockholders. To qualify as a REIT, the Company must meet a numbertangible assets of organizational and operational requirements, including a requirement to distribute at least 90% of its REIT taxable income to its stockholders. If the Company fails to qualify as a REITland, building, construction in any taxable year and if the statutory relief provisions were not to apply, the Company would be subject to federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it
and its subsidiaries may be subject to certain U.S federal, state and localprogress, data center infrastructure, as well as foreign taxes on its incomeidentified intangibles of in-place leases, above- and propertybelow-market leases, and to U.S federal income and excise taxes on its undistributed taxable income.tenant relationships.
The Company has elected or may electremaining intangible assets acquired include data center service contracts, customer relationships and trade name. The value of data center service contracts was estimated based upon net cash flows generated from these contracts. Customer relationships were valued as the incremental net income attributable to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”). In general, a TRS may perform non-customary services for tenantsthese relationships considering the projected net cash flows of the REIT, holdbusiness with and without the customer relationships in place. The trade name of DataBank was valued based upon estimated savings from avoided royalty at a royalty rate of 2%.
Other assets that the REIT cannot or does not intend to hold directlyacquired and subject to certain exceptions related to hotels and healthcare properties, may engage in any real estate or non-real estate related business. The Company uses TRS entities to conduct certain activities that cannot be conducted directly by a REIT, such as investment management, property management including hotel operations as well as loan servicing and workout activities. A TRS is treated as a regular, taxable corporation for U.S income tax purposes and therefore, is subject to U.S federal corporate tax on its income and property.
Deferred Income Taxes—The provision for income taxes includes current and deferred portions. The current income tax provision differs from the amount of income tax currently payable because of temporary differences in the recognition of certain income and expense items between financial reporting and income tax reporting. The Company uses the asset and liability method to provide for income taxes, which requires that the Company's income tax expense reflect the expected future tax consequences of temporary differences between the carrying amounts ofliabilities assumed primarily include right-of-use lease assets or liabilities for financial reporting versus income tax purposes. Accordingly, a deferred tax asset or liability for each temporary difference is determined based on enacted tax rates that the Company expects to be in effect when the underlying items of income and expense are realized and the differences reverse. A deferred tax asset is also recognized for net operating loss carryforwards and the income tax effect of accumulated other comprehensive income items of the TRS entities. A valuation allowance for deferred tax assets is established if the Company believes it is more likely than not that all or some portion of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent on the Company's TRS entities generating sufficient taxable income in future periods or employing certain tax planning strategies to realize such deferred tax assets.
Uncertain Tax Positions—Income tax benefits are recognized for uncertain tax positions that are more likely than not to be sustained based solely on their technical merits. Such uncertain tax positions are measured as the largest amount of benefit that is more-likely-than-not to be realized upon settlement. The difference between the benefit recognized and the tax benefit claimed on a tax return results in an unrecognized tax benefit. The Company periodically evaluates whether it is more likely than not that its uncertain tax positions would be sustained upon examination by a tax authority for all open tax years, as defined by the statute of limitations.
Earnings Per Share
The Company calculates basic earnings per share using the two-class method which defines unvested share-based payment awards that contain nonforfeitable rights to dividends as participating securities. The two-class method is an allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. Earnings per common share is calculated by dividing earnings allocated to common shareholders by the weighted-average number of common shares outstanding during the period.
Diluted earnings per common share is based on the weighted-average number of common shares and the effect of potentially dilutive common share equivalents outstanding during the period. Potentially dilutive common share equivalents include shares to be issued upon the assumed conversion of the Company's outstanding convertible notes, which are included under the if-converted method when dilutive. The earnings allocated to common shareholders is adjusted to add back the after-tax amount of interest expense associated with leasehold data centers and corresponding lease liabilities. Deferred tax liabilities represent the convertible notes, except when doing so would be antidilutive.
Reclassifications
Certain prior period amounts on the balance sheet and statement of cash flows have been reclassified to conform to current period presentation for the combined company. Significant reclassifications include presentation of all assets held for sale and related liabilities separately on the consolidated balance sheet as well as the presentation of preferred stock at carrying value, which was previously presented at par. Additionally, $2.4 million was reclassified from allowance for bad debts, which was netted against other assets, to allowance for loan losses, which is netted against loans receivable. Such reclassifications did not have a materialtax effect on the Company's financial position, resultsbook-to-tax basis difference related primarily to real estate assets arising from the transaction.
All assumed debt bears variable rates, with carrying values approximating fair values based upon market rates and spreads that prevailed at the time of operations or its cash flows.acquisition.
Accounting Standards Adopted19
Noncontrolling interests in 2017investment entities were valued based upon their proportionate share of net assets of DataBank at fair value.
Equity-Based Compensation—In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2016-09, Improvements to Share-Based Payment Accounting, which amends certain aspectsThe excess of accounting for share-based payments to employees. This includes accounting for income tax effects in the income statement, increasing the fair value of shares appliedconsideration transferred over the fair values of identifiable assets acquired, liabilities assumed and noncontrolling interests was recorded as goodwill assigned to the DataBank reporting unit within the digital segment. Goodwill represents the value of the business acquired not already captured in identifiable assets, such as the potential for income tax withholding without triggering liability accounting, allowing forfeitures related to service condition to be recognized upon occurrence,future customers, synergies, revenue and profit growth, as well as changesindustry knowledge, experience and relationships that the DataBank management team brings.
4. Real Estate
The following table summarizes the Company's real estate held for investment. Real estate held for sale is presented in cash flow classifications. This guidance may be adopted prospectivelyNote 8. |
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Land | | $ | 1,272,269 |
| | $ | 1,360,435 |
|
Buildings and improvements | | 7,462,712 |
| | 9,022,971 |
|
Tenant improvements | | 108,929 |
| | 105,440 |
|
Data center infrastructure | | 633,329 |
| | 595,603 |
|
Furniture, fixtures and equipment | | 581,285 |
| | 511,329 |
|
Construction in progress | | 125,702 |
| | 255,115 |
|
| | 10,184,226 |
| | 11,850,893 |
|
Less: Accumulated depreciation | | (1,196,324 | ) | | (990,375 | ) |
Real estate assets, net (1) | | $ | 8,987,902 |
| | $ | 10,860,518 |
|
__________
| |
(1) | For real estate acquired in a business combination, the purchase price allocation may be subject to adjustments during the measurement period, not to exceed 12 months from date of acquisition, based upon new information obtained about facts and circumstances that existed at time of acquisition (Note 3). |
Real Estate Sales
Results from sales of real estate, including discontinued operations (Note 16), are as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Proceeds from sales of real estate | | $ | 43,276 |
| | $ | 147,990 |
| | $ | 170,017 |
| | $ | 442,657 |
|
Gain (Loss) on sale of real estate | | (4,919 | ) | | 6,624 |
| | 3,013 |
| | 58,925 |
|
Real Estate Acquisitions
The following table summarizes the Company's real estate acquisitions, excluding real estate acquired as part of business combinations discussed in Note 3. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | | | | | Purchase Price Allocation (1) |
Acquisition Date | | Property Type and Location | | Number of Buildings | | Purchase Price (1) | | Land | | Buildings and Improvements | | Lease Intangible Assets | | ROU Lease and Other Assets | | Lease Intangible Liabilities | | Debt, Lease and Other Liabilities |
Six Months Ended June 30, 2020 | | | | | | | | | | | | | | | | |
Asset Acquisitions | | | | | | | | | | | | | | | | |
Various | | Hotel—France (2) | | 2 | | $ | 4,609 |
| | $ | 564 |
| | $ | 6,763 |
| | $ | — |
| | $ | 2,586 |
| | $ | — |
| | $ | (5,304 | ) |
| | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2019 | | | | | | | | | | | | | | | | |
Asset Acquisitions | | | | | | | | | | | | | | | | |
February | | Bulk industrial—Various in U.S. (3) | | 6 | | $ | 373,182 |
| | $ | 49,446 |
| | $ | 296,348 |
| | $ | 27,553 |
| | $ | — |
| | $ | (165 | ) | | $ | — |
|
October | | Healthcare—United Kingdom (4) | | 1 | | 12,376 |
| | 3,478 |
| | 9,986 |
| | 732 |
| | — |
| | (1,820 | ) | | — |
|
Various | | Light industrial—Various in U.S. (5) | | 84 | | 1,158,423 |
| | 264,816 |
| | 850,550 |
| | 47,945 |
| | — |
| | (4,888 | ) | | — |
|
| | | |
| | $ | 1,543,981 |
| | $ | 317,740 |
| | $ | 1,156,884 |
| | $ | 76,230 |
| | $ | — |
| | $ | (6,873 | ) | | $ | — |
|
__________
| |
(1) | Dollar amounts of purchase price and allocation to assets acquired and liabilities assumed are translated using foreign exchange rates as of the respective dates of acquisition, where applicable. |
| |
(2) | Bids for hotels under receivership were accepted by the French courts in prior years, with the transactions closing in 2020. Amounts include acquisition of hotel operations pursuant to operating leases on real estate owned by third parties. Useful life of real estate acquired is 40 years for buildings, 15 years for site improvements, 7 years for furniture, fixtures, and equipment, and 6 years for right-of-use ("ROU") lease assets. |
| |
(3) | The bulk industrial portfolio was classified as held for sale in June 2019. |
| |
(4) | Properties acquired pursuant to purchase option under the Company's development facility to a healthcare operator at purchase price equivalent to outstanding loan balance. |
| |
(5) | The entire light industrial portfolio was sold in December 2019. |
Depreciation and Impairment
The following table summarizes real estate depreciation and impairment.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Depreciation of real estate held for investment | | $ | 106,208 |
| | $ | 92,677 |
| | $ | 209,513 |
| | $ | 184,915 |
|
Impairment of real estate and related asset group (1) | | | | | | | | |
Held for sale | | 20,061 |
| | 42,998 |
| | 27,638 |
| | 68,181 |
|
Held for investment | | 1,454,199 |
| | 41,048 |
| | 1,754,890 |
| | 41,487 |
|
__________
| |
(1) | Includes impairment of real estate intangibles of $2.3 million and $9.3 million and right-of-use asset on ground leases of $0.8 million and $13.9 million in the three and six months ended June 30, 2020, respectively. |
Impairment of Real Estate Held for Sale
Real estate held for sale is carried at the lower of amortized cost or onfair value. Real estate carried at fair value totaled $197.8 million at June 30, 2020 and $253.4 million at December 31, 2019 based upon impairments recorded during the six months ended June 30, 2020 and year ended December 31, 2019, respectively, generally representing Level 3 fair values.
Real estate held for sale that was written down was generally valued using either broker opinions of value, or a modified retrospective transition basis depending on the requirementscombination of each provision. ASU No. 2016-09 is effective for fiscal yearsmarket information, including third-party appraisals and interim periods beginning after December 15, 2016. The Company adopted this new guidance prospectively on January 1, 2017. The Company has made a policy electionindicative sale prices, adjusted as deemed appropriate by management to account for forfeitures upon occurrence.the inherent risk associated with specific properties. In all cases, fair value of real estate held for sale is reduced for estimated selling costs ranging from 1% to 3%.
In 2020, the Company also considered the impact of a global economic downturn as a result of COVID-19, specifically as it affects real estate values, and where appropriate, factored in a reduction in potential sales prices, which resulted in additional impairment on real estate held for sale in 2020.
Impairment of Real Estate Held for Investment
Real estate held for investment that was written down to fair value during the six months ended June 30, 2020 and year ended December 31, 2019 had carrying values totaling $3.7 billion and $355.0 million, respectively, at the time of impairment, representing Level 3 fair values.
Impairment was driven by shortened holding period assumptions made in connection with the preparation and review of the financial statements, particularly in the hotel and healthcare portfolios. The adoption of this standard did not have a material impact onshortened holding period assumption is attributable to both the Company's accelerated digital transformation, and the risk that the Company is unable to obtain accommodation from lenders on non-recourse mortgage debt that is in default or at risk of default. The Company's assessment considered various strategic and financial condition, resultsalternatives to maximize the value of operations orits non-digital real estate assets, while also balancing the need to preserve liquidity and prioritize the growth of its digital business. A shortened holding period was an indicator of impairment as it decreased the amount of carrying value recoverable from future cash flows.flows, which was further exacerbated by a decline in property operating performance and market values as a result of the economic effects of COVID-19.
ModificationThe Company compared the carrying values to the undiscounted future net cash flows expected to be generated by these properties over their holding periods. In performing this analysis, the Company considered the likelihood of Equity-Based Awards—In May 2017,possible outcomes under various holding period scenarios by applying a probability-weighted approach to different holding periods. For hotel properties, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718),ScopeCompany applied a range of Modification Accounting,reductions to near term cash flow projections to account for uncertainties due to COVID-19. For properties for which limitsundiscounted expected net cash flows over their respective
holding periods fell short of carrying values, the scopeCompany expects that the carrying value of modification accounting for equity-based awards. Modification accountingthese properties would likely not be recoverable.
Fair values were estimated for these properties based upon one or a combination of the following: (i) third party appraisals, (ii) broker opinions of value with discounts applied ifbased upon management judgment, (iii) income capitalization approach, using net operating income for each property and applying capitalization rates between 10.0% and 12.0%; or (iv) discounted cash flow analyses with terminal values determined using terminal capitalization rates between 7.0% and 11.25%, and discount rates between 8.5% and 12.0%. The Company considered the risk characteristics of each property in determining capitalization rates and where applicable, used higher capitalization rates or discount rates to reflect the inherent stress on real estate values in a deteriorating economic environment. Impairment was measured as the excess of carrying value over fair value vesting conditionsfor each of these properties.
As of June 30, 2020, the Company believes that it has materially addressed overall recoverability in the value of its non-digital real estate assets, applying the Company's best estimates and classificationassumptions at this time based upon external factors known to date and the Company's expected digital transformation timeline. If the extent and duration of the award as an equity or liability instrument areeconomic effects of COVID-19 negatively affect the same immediately beforeCompany's real estate operations and afterits ability to meet its non-recourse mortgage debt obligations beyond the modification. In assessingCompany's current projections, the fair value criterion, ifestimates and assumptions currently applied by the modification does not affect anyCompany may change, which may lead to further impairment of its non-digital real estate assets, in particular, its healthcare and hospitality assets, that could be material in the inputs to the valuation technique used to value the award, then an actual estimate of fair value before and after the modification is not required. Disclosure of significant changes to the terms and conditions of a modified equity award continues to be required even if modification accounting is not applied. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, to be applied prospectively to awards modified on or after the adoption date. Early adoption is permitted in any interim period for which financial statements have not yet been issued. The adoption of this guidance would limit instances of incremental compensation cost being recognized when a non-substantive change is made to an equity award, which under modification accounting, would have otherwise resulted in a remeasurement of the award at a higher fair value on modification date. The Company adopted this guidance prospectively on April 1, 2017. There were no award modifications subsequent to adoption.future.
Future Application of Accounting Standards
Revenue Recognition—Income Tax Accounting
In May 2014,December 2019, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends existing revenue2019-12, Simplifying Accounting for Income Taxes. The ASU simplifies accounting for income taxes by eliminating certain exceptions to the general approach in ASC 740, Income Taxes, and clarifies certain aspects of the guidance for more consistent application. The simplifications relate to intraperiod tax allocations when there is a loss in continuing operations and a gain outside of continuing operations, accounting for tax law or tax rate changes and year-to-date losses in interim periods, recognition standards by establishing principlesof deferred tax liability for a single comprehensive modeloutside basis
difference when investment ownership changes, and accounting for revenue measurement and recognition, along with enhanced disclosure requirements. Key provisions include, butfranchise taxes that are not limited to, determining which goods or services are capable of being distinctpartially based on income. The ASU also provides new guidance that clarifies the accounting for transactions resulting in a contract to be accounted for separately as a performance obligation and recognizing variable consideration only to the extent that itstep-up in tax basis of goodwill, among other changes. Transition is probable a significant revenue reversal would not occur. The new revenue standard may be applied retrospectively to each prior period presented (full retrospective) or retrospectively to contracts not completed as of date of initial application with the cumulative effect recognized in retained earnings (modified retrospective). ASU No. 2014-09 is effective for fiscal years and interim periods beginning after December 15, 2017. The FASB has subsequently issued several amendments to the standard, including clarifying the guidance on assessing principal versus agent based on the notion of control, which affects recognition of revenue on a gross or net basis. These amendments have the same effective date and transition requirements as the new standard.
The Company plans to adopt the standard on its required effective date of January 1, 2018 using the modified retrospective approach, to be applied to contracts not yet completed as of date of adoption. The standard excludes from its scope the areas of accounting that most significantly affect revenue recognition for the core activities of the Company, including accounting for financial instruments and leases. However, non-lease service components within a gross lease such as common area maintenance reimbursed by tenants as well as resident service charges embedded within resident fee income and other separate resident charges will be considered individual performance obligations and be subject to the new revenue recognition standard, with such revenue recognized over the period in which the related services are performed. The Company expects to apply the new revenue guidance to non-lease components within gross tenant leases upon adoption of the lease standard effective January 1, 2019. Evaluation of the impact of this guidance to the Company is on-going.
Financial Instruments—In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which affects accounting for investments in equity securities, financial liabilities under the fair value option, as well as presentation and disclosures, but does not affect accounting for investments in debt securities and loans. Investments in equity securities,generally prospective, other than equity method investments, will be measured at fair value through earnings, except for equity securities without readily determinable fair values which may be measured at cost less impairment and adjusted for observable price changes. Thisthe provision eliminates cost method accounting and recognition of unrealized holding gains or losses on equity investments in other comprehensive income. For financial liabilities under fair value option, changes in fair value due to instrument specific credit risk will be recorded separately in
other comprehensive income. Fair value disclosures of financial instruments measured at amortized cost will be based on exit price and corresponding disclosures of valuation methodology and significant inputs will no longer be required. ASU No. 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is limited to specific provisions. ASU 2016-01 is to be applied retrospectively with cumulative effect as of the beginning of the first reporting period adopted recognized in retained earnings, except for provisions related to equity investments without readily determinable fair values and exit price fair value disclosures for financial instruments measured at amortized cost,outside basis difference which are to be applied prospectively.
The Company plans to adopt the new guidance on its required effective date of January 1, 2018. Upon adoption, unrealized holding gains or losses on the Company's investment in equity securities, classified as available for sale, will no longer be recorded in other comprehensive income but in earnings. As it relates to cost method investments, the Company has elected the fair value option to account for its limited partnership interests in private funds while its interests in non-traded REITs in aggregate are not material. The Company does not have any other cost method investments as of September 30, 2017 that would have readily determinable fair values and would be affected by this new guidance. The Company continues to evaluate the impact of this new guidance but does not expect the adoption of this standard to have a material effect on its financial condition or results of operations.
Leases—In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends existing lease accounting standards, primarily requiring lessees to recognize most leases on balance sheet, as well as making targeted changes to lessor accounting. ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The new leases standard requires adoption using a modified retrospective approach for all leases existing at, or entered into after, the date of initial application, and provides for certain practical expedients. Full retrospective application is prohibited. Transition will require application of the new guidance at the beginning of the earliest comparative period presented.
As lessor, gross leases will be subject to allocation between lease and non-lease service components, with the latter accounted for under the new revenue recognition standard. The Company expects to apply the new revenue guidance to non-lease components within gross tenant leases upon adoption of the lease standard effective January 1, 2019. As the new lease standard requires congruous accounting treatment between lessor and lessee in a sale-leaseback transaction, if the seller/lessee does not achieve sale accounting, it would be considered a financing transaction to the Company, as the buyer/lessor. As lessee, the Company will recognize a right-of-use asset and corresponding liability for future obligations under its leasing arrangements, such as ground leases and office leases, which as of September 30, 2017, have future contractual payments of $186.2 million and $76.0 million, respectively. Additionally, under the new lease standard, only incremental initial direct costs incurred in the execution of a lease can be capitalized by the lessor and lessee. The Company continues to evaluate the impact of this guidance on its financial statements.
Credit Losses—In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, which amends the credit impairment model for financial instruments. The existing incurred loss model will be replaced with a lifetime current expected credit loss ("CECL") model for financial instruments carried at amortized cost and off-balance sheet credit exposures, such as loans, loan commitments, held-to-maturity ("HTM") debt securities, financial guarantees, net investment in leases, reinsurance and trade receivables, which will generally result in earlier recognition of allowance for losses. For AFS debt securities, unrealized credit losses will be recognized as allowances rather than reductions in amortized cost basis and elimination of the OTTI concept will result in more frequent estimation of credit losses. The accounting model for purchased credit impaired loans and debt securities will be simplified, including elimination of some of the asymmetrical treatment between credit losses and credit recoveries, to be consistent with the CECL model for originated and purchased non-credit impaired assets. The existing model for beneficial interests that are not of high credit quality will be amended to conform to the new impairment models for HTM and AFS debt securities. Expanded disclosures on credit risk include credit quality indicators by vintage for financing receivables and net investment in leases. Transition will generally be on a modified retrospective basis with prospective application for other-than-temporarily impaired debt securitiescumulative effect adjusted to retained earnings at the beginning of the period adopted, and purchased credit impaired assets.franchise tax provision which is on either full or modified retrospective. ASU No. 2016-132019-12 is effective for fiscal years andJanuary 1, 2021, with early adoption permitted in an interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018.period, to be applied to all provisions. The Company expects that recognition of credit losses will generally be accelerated under the CECL model. Evaluation ofis currently evaluating the impact of this new guidance is on-going.guidance.
Cash Flow Classifications—Accounting for Certain Equity Investments
In August 2016,January 2020, the FASB issued ASU No. 2016-15, Statement2020-01, Clarifying the Interactions between Topic 321 Investments—Equity Securities, Topic 323—Investments Equity Method and Joint Ventures, and Topic 815—Derivatives and Hedging. The ASU clarifies that if as a result of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, whichan observable transaction, an equity investment under the measurement alternative is intended to reduce diversity in practice in certain classifications on the statement of cash flows. This guidance addresses eight types of cash flows, which includes clarifying how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows, as well as requiring an accounting policy election for classification of distributions received fromtransitioned into equity method investees using eitherand vice versa, an equity method investment is transitioned into measurement alternative, the cumulative earningsinvestment is to be remeasured immediately before and after the transaction, respectively. The ASU also clarifies that certain forward contracts or nature of distributions approach, among others. Transitionpurchased options to acquire equity securities that are not deemed to be derivatives or in-substance common stock will generally be on a retrospective basis.measured using the fair value principles of ASC 321 before settlement or exercise, and that an entity should not be considering how it will account for the resulting investments upon eventual settlement or exercise. ASU No. 2016-152020-01 is to be applied prospectively, effective for fiscal years andJanuary 1, 2021, with early adoption permitted in an interim
periods beginning after December 15, 2017. Early adoption is permitted, provided that all amendments within the guidance are adopted in the same period. The Company anticipates making an accounting policy election for classification of distributions from its equity method investees usingis currently evaluating the cumulative earnings approach. The Company does not expect the adoptionimpact of this standard to have a material effectnew guidance.
Accounting for Convertible Instruments and Contracts on presentation in its statement of cash flows.Entity's Own Equity
Restricted Cash—In November 2016,August 2020, the FASB issued ASU No. 2016-18, Statement2020-06, Debt—Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies the accounting for certain financial instruments with characteristics of Cash Flows: Restricted Cash, which requiresliabilities and equity, including convertible instruments and contracts on an entity’s own equity.
With respect to convertible instruments, under the new guidance, a convertible debt instrument will be accounted for wholly as debt, and convertible preferred stock wholly as preferred stock, that cashis, as a single unit of account, except for (1) a convertible instrument that contains features requiring bifurcation as a derivative under Topic 815 or (2) a convertible debt instrument that was issued at a substantial premium. Expanded disclosures are required, including, but not limited to, the terms and cash equivalent balances infeatures of convertible instruments, and information about events, conditions, and circumstances that could affect assessment of the statementamount or timing of future cash flows include restricted cash and restricted cash equivalent amounts, and therefore,related to those instruments.
With respect to contracts on an entity's own equity, one of the requirements prescribed by the new guidance is to account for freestanding contracts on an entity’s own equity that do not qualify as equity under Subtopic ASC 815-40 at fair value, with changes in restricted cash and restricted cash equivalents be presentedfair value recognized in earnings, irrespective of whether such contracts meet the statementdefinition of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents with restricted cash and restricted cash equivalentsa derivative in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line itemTopic 815.
The ASU also amends certain guidance on the balance sheet, this ASU requires disclosurecomputation of a reconciliation betweenearnings per share for convertible instruments and contracts on an entity’s own equity. In calculating diluted earnings per share, the totals in the statement of cash flows and the related captions in the balance sheet. The new guidance also(1) requires the if-converted method to be applied for all convertible instruments (the treasury stock method is no longer available), and (2) removes the ability to rebut the presumption of share settlement for contracts that may be settled in cash or stock.
Upon adoption, a one-time election may be made to apply the fair value option for any liability-classified financial instrument that is a convertible security. In the period of adoption, disclosure is required of (1) the nature of restricted cash and restricted cash equivalents, similar to existing requirements under Regulation S-X; however, it does not define restricted cash and restricted cash equivalents. ASU No. 2016-18 is effectivereason for fiscal years and interim periods beginning after December 15, 2017, to be applied retrospectively, with early adoption permitted. If early adoptedthe change in an interim period, adjustments are to be reflected as ofaccounting principle in both the beginning of the fiscal year of adoption. The Company does not expect the adoption of this standard to have a material effect on presentation in its statement of cash flows.
Goodwill Impairment—In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removes the second step of the goodwill impairment test that requires a hypothetical purchase price allocation. Goodwill impairment is now measured as the excess in carrying value over fair value of the reporting unit, with the loss recognized not to exceed the amount of goodwill assigned to that reporting unit. The one-step impairment test will also be applied to goodwill at reporting units that have zero or negative carrying values, with a disclosure of the amount of goodwill at these reporting units. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, to be applied prospectively. Early adoption is permitted for interim and annual goodwill impairment testing dates afterperiod of change, and (2) earnings per share transition information about the effect of the change on affected per-share amounts.
Adoption of the new standard may be made either on a full or modified retrospective approach, with cumulative effect adjustment recorded to beginning retained earnings under the latter. ASU No. 2020-06 is effective January 1, 2017. The Company will early adopt this new guidance for its annual goodwill impairment assessment in 2017.
Derecognition and Partial Sales of Nonfinancial Assets—In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of Accounting Standards Codification ("ASC") 610-20, Other Income—Gains and Losses from Derecognition of Nonfinancial Assets, and defines in substance nonfinancial assets. ASC 610-20 applies to derecognition of all nonfinancial assets which are not contracts with customers or revenue transactions under ASC 606, Revenue from Contracts with Customers. Derecognition of a business is governed by ASC 810, Consolidation, while derecognition of financial assets, including equity method investments, even if the investee holds predominantly nonfinancial assets, is governed by ASC 860, Transfers and Servicing. The ASU also aligns the accounting for partial sales of nonfinancial assets to be more consistent with accounting for sale of a business. Specifically, in a partial sale to a noncustomer, when a noncontrolling interest is received or retained, the latter is considered a noncash consideration and measured at fair value in accordance with ASC 606, which would result in full gain or loss recognized upon sale. This ASU removes guidance on partial exchanges of nonfinancial assets in ASC 845, Nonmonetary Transactions, and eliminates the real estate sales guidance in ASC 360-20, Property, Plant and Equipment—Real Estate Sales. ASU 2017-05 has the same effective date as the new revenue guidance, which is January 1, 2018,2022, with early adoption permitted in interim periods beginning January 1, 2017. Both ASC 606 and ASC 610-20 must be adopted concurrently. While the transition method is similar to the new revenue guidance, either full retrospective or modified retrospective, the transition approach applied need not be aligned between both standards.
2021. The Company plans to adopt this standard on January 1, 2018, consistent with its adoption of the new revenue standard, using the modified retrospective approach. Under the new standard, if the Company sells a partial interest in its real estate assets to noncustomers or contributes real estate assets to unconsolidated ventures, and the Company retains a noncontrolling interest in the asset, such transactions could result in a larger gain on sale. The adoption of this standard could have a material impact to the Company's results of operations in a period if the Company sells a significant partial interest in a real estate asset. There were no such sales in the nine months ended September 30, 2017.
Hedge Accounting—In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which simplifies and expands the application of hedge accounting. This standard amends hedge accounting recognition and presentation, including eliminating the requirement to separately measure and present hedge ineffectiveness as well as presenting the entire fair value change of a hedging instrument in the same income statement line as the hedged item. The new guidance also provides alternatives for applying hedge accounting to additional hedging strategies, and easing requirements for effectiveness testing and hedging documentation, although the "highly effective" threshold for a qualifying hedging relationship has not changed. Revised disclosures include tabular disclosures that focus
on the effect of hedge accounting by income statement line item. Transition will generally be on a modified retrospective basis applied to existing hedging relationships as of date of adoption, with prospective application for income statement presentation and disclosure, and specific transition elections are available to modify existing hedge documentation. ASU 2017-12 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted, with adjustments to be reflected as of the beginning of the fiscal year of adoption if early adopted in an interim period.
The Company plans to adopt the standard on its effective date. Upon adoption, as it relates to the Company’s cash flow and net investment hedges, the Company will record the entire change in fair value of the hedging instrument (other than amounts excluded from assessment of hedge effectiveness for net investment hedges) in other comprehensive income and there will be no hedge ineffectiveness recorded in earnings. Additionally, subsequent to initial quantitative hedge assessment, the Company may elect to perform effectiveness testing qualitatively so long as the Company can reasonably support an expectation that the hedge is highly effective now and in subsequent periods. As the standard allows more flexibility in hedging interest rate risk in cash flow hedges beyond a specified benchmark rate, the Company may be able to designate in the future other contractually specified variable interest rate as the hedged risk, which if effective, could decrease fluctuations in earnings. The Company continues to evaluatecurrently evaluating the impact of this new guidance but at this time, does not expect the adoption of this standard to have a material effect on its financial condition or results of operations.guidance.
3. Business Combinations
Merger with NSAM and NRFDBH
On July 25, 2019, the Closing Date,Company acquired DBH in a combination of: (a) cash, a portion of which was deferred until the Mergerexpiration of NSAM, Colonycertain customary seller indemnification obligations and NRF was completedpaid in an all-stock exchange to create Colony NorthStar.
The Merger was accomplished through a seriesfull in May 2020 (Note 20); and (b) issuance of transactions. On the Closing Date, NSAM merged with and into Colony NorthStar in order to redomesticate NSAM as a Maryland corporation, followed by a series of internal reorganization transactions with subsidiaries of NRF resulting in NRF becoming a subsidiary of Colony NorthStar, and the merger of Colony into Colony NorthStar, with Colony NorthStar surviving as the combined company.
Upon21,478,515 OP Units, which were measured based upon the closing price of the Merger, NSAM outstanding common stock was converted into Colony NorthStar common stock, and the outstanding common stock and preferred stock of NRF and Colony were converted into the right to receive shares of common stock and preferred stock of Colony NorthStar at pre-determined exchange ratios.
The specific exchanges of common stock and preferred stock as a result of the Merger were as follows:
Each share of NSAM common stock and performance common stock issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into one share of Colony NorthStarCompany's class A common stock on July 24, 2019 of $5.21 per share.
The Company acquired the fee streams but not the equity interests related to the 6 portfolio companies managed by DBH. The principals of DBH retained their equity investments, including general partner interests in existing DBH investment vehicles and performance common stock, respectively;in Digital Colony Partners fund (“DCP”), which was previously co-sponsored by the Company and DBH.
Each shareThe acquisition is a strategic transaction that is expected to generate meaningful accretion in value to the Company through expansion of class Athe digital real estate management platform by combining the industry sector knowledge, experience and class B common stockrelationships from the DBH team with the capital raising resources of the Company, as represented by the goodwill value.
The Company's acquisition of DBH included the remaining 50% equity interest held by DBH in Digital Colony issuedManagement, LLC ("Digital Colony Manager"), previously an equity method joint venture with DBH, which manages DCP. Upon closing of the acquisition, the Company obtained a controlling interest in Digital Colony Manager and outstanding immediatelyremeasured its existing 50% interest at a fair value of $51.4 million. The full amount, representing the excess of fair value over carrying value of the Company's investment in Digital Colony Manager, was recognized in other gain on the Company's statement of operations, as the Company's carrying value of its investment in Digital Colony Manager prior to the effective timebusiness combination was nil. The fair value was based upon the value of 50% of estimated future net cash flows from the DCP fund management contract, discounted at 8%.
DataBank
On December 20, 2019, the Company acquired from third party investors a 20% interest in DataBank, a portfolio company managed by DBH and invested in by the principals and senior professionals of DBH. The Company is deemed to have a controlling interest in DataBank as control over the operations of DataBank resides substantially with the Company. Consideration included the payment of cash to third parties for the Company’s interests in DataBank and the issuance of 612,072 OP Units to Mr. Ganzi and Benjamin Jenkins (the DBH principals) for incentive units owned by the DBH principals and allocable to the Company’s acquired interests, measured based upon the closing price of the Merger was canceled and converted into the right to receive 1.4663 shares of Colony NorthStar class A and class B common stock for each share of Colony's class A and class B common stock;
Each share of common stock of NRF issued and outstanding prior to the effective time of the Merger was canceled and converted into the right to receive 1.0996 shares of Colony NorthStarCompany's class A common stock for each shareon December 20, 2019 of NRF common stock;
Each share of each series of the preferred stock of Colony and of NRF issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into the right to receive one share of a corresponding series of Colony NorthStar preferred stock with substantially identical preferences, conversion and other rights, voting powers, restrictions, limitations as to dividend, qualification and terms and conditions of redemption; and
Concurrently, the OP issued$4.85 per share. The OP Units to equal the number of OP membership units outstanding on the day prior to the closing of the Merger multiplied by the exchange ratio of 1.4663.
Upon consummation of the Merger, the former stockholders of Colony, NSAM and NRF owned, or had the right to own, approximately 33.25%, 32.85% and 33.90%, respectively, of Colony NorthStar, on a fully diluted basis, excluding the effect of certain equity-based awards issued in 2017 in connection with the Merger.
The Merger is accounted for as a reverse acquisition, with NSAM as the legal acquirer for certain legal and regulatory matters and Colony as the accounting acquirer for purposes of the financial information set forth herein. See Note 2 for further discussion on the accounting treatment of the Merger.
Merger Consideration
As the Merger is accounted for as a reverse acquisition, the fair value of the consideration transferred in common stock was measured based upon the number of shares of common stock that Colony, as the accounting acquirer, would theoretically havewere issued to the shareholdersprincipals of NSAM and NRFDBH who had previously received incentive units from DataBank, in exchange for certain of their incentive units such that the Company will not be subject to achieve the same ratio of ownership in Colony NorthStar upon completion of the Merger, multiplied by the closing price of Colony class A common stock of $21.52 on the Closing Date. As a result, the implied shares of Colony common stock issued in consideration was computed as the number of outstanding shares of NSAM and NRF common stock priorfuture carried interest payments to the Closing Date divided by the exchange ratios of 1.4663 and 1.3335, respectively.
Substantially all NSAM and NRF equity awards outstanding on the Closing Date vested upon consummation of the Merger. As Colony NorthStar issued its common stock upon consummation of the Merger and settlement of these equity awards relate to pre-Merger services, these equity awards were included in the outstanding shares of NSAM and NRF common stock used to determine the merger consideration.
NSAM and NRF equity awards outstanding on the Closing Date that did not vest upon consummation of the Merger were assumed by Colony NorthStar through the conversion of such equity awards into comparable Colony NorthStar equity awardsDBH principals with substantially the same vesting terms pre-Merger. The portion of the replacement awards attributable to pre-Merger services forms part of the merger consideration, while the portion attributable to post-Merger services is recognized prospectively as compensation expense of Colony NorthStar in the post-Merger period.
The Colony NorthStar preferred stock issued as merger consideration upon the closing of the Mergerrespect to the holdersCompany's investment in DataBank (Note 20). The DBH principals otherwise retained their equity interests in DataBank.
Allocation of NRF preferred stock was on a one-for-one basis.Consideration Transferred
The Company assumed certain liabilities of NSAM and NRF which arose as a result of the Merger and were settled shortly after the Closing Date. These amounts included approximately $226.1 million which was paid to former NSAM stockholders, representing a one-time special dividend, and approximately $78.9 million in payroll taxes representing shares that were canceled and remitted to taxing authorities on behalf of employees whose equity-based compensation was accelerated and fully vested on the Closing Date. These amounts, net of $260.6 million of cash assumed, are presented as investing cash outflows in the consolidated statement of cash flows.
Fair value of the merger consideration was determined as follows: |
| | | | | | | | | | | | |
(In thousands, except price per share) | | NSAM | | NRF | | Total |
Outstanding shares of common stock prior to closing of the Merger | | 190,202 |
| | 183,147 |
| | |
Replacement equity-based awards attributable to pre-combination services(i) | | 300 |
| | 150 |
| | |
| | 190,502 |
| | 183,297 |
| | |
Exchange ratio(ii) | | 1.4663 |
| | 1.3335 |
| | |
Implied shares of Colony common stock issued in consideration | | 129,920 |
| | 137,456 |
| | 267,376 |
|
Price per share of Colony class A common stock | | $ | 21.52 |
| | $ | 21.52 |
| | $ | 21.52 |
|
Fair value of implied shares of Colony common stock issued in consideration | | $ | 2,795,890 |
| | $ | 2,958,039 |
| | $ | 5,753,929 |
|
Fair value of Colony NorthStar preferred stock issued(iii) | | — |
| | 1,010,320 |
| | 1,010,320 |
|
Fair value of NRF stock owned by NSAM (iv) | | (43,795 | ) | | — |
| | (43,795 | ) |
Total merger consideration | | $ | 2,752,095 |
| | $ | 3,968,359 |
| | $ | 6,720,454 |
|
__________
| |
(i) | Represents the portion of non-employee restricted stock unit awards that did not vest upon consummation of the Merger and pertains to services rendered prior to the Merger. |
| |
(ii) | Represents (a) the pre-determined exchange ratio of one share of Colony common stock for 1.4663 shares of Colony NorthStar common stock; and (b) the derived exchange ratio of one share of Colony common stock for 1.3335 shares of NRF common stock based on the pre-determined exchange ratio of one NRF share of common stock for 1.0996 shares of Colony NorthStar common stock. |
| |
(iii) | Fair value of Colony NorthStar preferred stock issued was measured based on the shares of NRF preferred stock outstanding at the Closing Date and the closing traded price of the respective series of NRF preferred stock on the Closing Date, including accrued dividends, as follows: |
|
| | | | | | | | | | | |
(In thousands, except price per share) | | Number of Shares Outstanding | | Price Per Share | | Fair Value |
NRF preferred stock | | | | | | |
Series A 8.75% | | 2,467 |
| | $ | 25.61 |
| | $ | 63,182 |
|
Series B 8.25% | | 13,999 |
| | 25.15 |
| | 352,004 |
|
Series C 8.875% | | 5,000 |
| | 25.80 |
| | 128,995 |
|
Series D 8.50% | | 8,000 |
| | 25.82 |
| | 206,597 |
|
Series E 8.75% | | 10,000 |
| | 25.95 |
| | 259,542 |
|
Fair value of Colony NorthStar preferred stock issued | | 39,466 |
| | | | $ | 1,010,320 |
|
| |
(iv) | Represents 2.7 million shares of NRF common stock owned by NSAM prior to the Merger and canceled upon consummation of the Merger, valued at the closing price of NRF common stock of $16.13 on the Closing Date. |
The following table presents a preliminarysummarizes the consideration and allocation of the merger consideration to assets acquired, liabilities assumed and noncontrolling interests of NSAM and NRF based on their respective estimated fair values as of the Closing Date. The resulting goodwill represents the value expected from the economies of scale and synergies created through combining the operations of the merged entities, and is assigned to the investment management segment.
at acquisition. The estimated fair values and allocation of the merger consideration presented below are preliminary, and based onupon information available asat the time of the Closing Dateclosing as the Company continues to evaluate the underlying inputs and assumptions. Accordingly, these preliminary estimates areprovisional values may be subject to adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed asat the time of the Closing Date. closing.
During the thirdsecond quarter of 2017,2020, certain measurement period adjustments were made to the purchase price allocation for DataBank, primarily (i) a reallocation of value to data center service contract intangible asset, (ii) changes in valuation and underlying assumptions pertaining to certain NRF real estatedata center construction and related assetsmarket value of existing data center lease contracts, and liabilities, NRF equity method investment, and the off-market component of the management agreement, including(iii) the corresponding effect on deferred tax liabilities.
|
| | | | | | | | | | | | | | | | |
| | DBH | | | | DataBank | | |
(In thousands) | | As Reported June 30, 2020 | | As Reported December 20, 2019 | | Measurement Period Adjustments | | As Reported June 30, 2020 |
Consideration | | | | | | | | |
Cash | | $ | 181,167 |
| | $ | 182,731 |
| | $ | — |
| | $ | 182,731 |
|
Deferred consideration | | 35,500 |
| | — |
| | — |
| | — |
|
OP Units issued | | 111,903 |
| | 2,962 |
| | — |
| | 2,962 |
|
Total consideration for equity interest acquired | | 328,570 |
| | 185,693 |
| | — |
| | 185,693 |
|
| | | | | | | | |
Fair value of equity interest in Digital Colony Manager | | 51,400 |
| | — |
| | — |
| | — |
|
| | $ | 379,970 |
| | $ | 185,693 |
| | $ | — |
| | $ | 185,693 |
|
| | | | | | | | |
Assets acquired, liabilities assumed and noncontrolling interests | | | | | | | | |
Cash | | $ | — |
| | $ | 10,366 |
| | $ | — |
| | $ | 10,366 |
|
Real estate | | — |
| | 847,458 |
| | (8,405 | ) | | 839,053 |
|
Assets held for sale | | — |
| | 29,114 |
| | 152 |
| | 29,266 |
|
Intangible assets | | 153,300 |
| | 222,455 |
| | (2,804 | ) | | 219,651 |
|
Other assets | | 13,008 |
| | 106,648 |
| | 2,248 |
| | 108,896 |
|
Debt | | — |
| | (539,155 | ) | | — |
| | (539,155 | ) |
Tax liabilities, net | | (17,392 | ) | | (113,228 | ) | | 3,641 |
| | (109,587 | ) |
Intangible and other liabilities | | (16,194 | ) | | (132,480 | ) | | 12,302 |
| | (120,178 | ) |
Fair value of net assets acquired | | 132,722 |
| | 431,178 |
| | 7,134 |
| | 438,312 |
|
Noncontrolling interests in investment entities | | — |
| | (724,567 | ) | | — |
| | (724,567 | ) |
Goodwill | | $ | 247,248 |
| | $ | 479,082 |
| | $ | (7,134 | ) | | $ | 471,948 |
|
DBH
Intangible assets acquired included primarily management contracts, investor relationships and trade name.
The fair value of management contracts, including the Company's 50% interest in Digital Colony Manager, was estimated based upon estimated net cash flows generated from those contracts, discounted at 8%, with remaining lives estimated between 3 and 10 years.
Investor relationships represent the fair value of potential fees, net of operating costs, to be generated from repeat DBH investors in future sponsored funds, discounted at 11.5%, and potential carried interest discounted at 25%.
The Digital Bridge trade name was valued using a relief-from-royalty method, based upon estimated savings from avoided royalty at a rate of 1% on expected net income, discounted at 11.5%, with an estimated useful life of 10 years.
Other liabilities assumed were primarily deferred revenues and deferred tax liabilities recognized upon acquisition, representing the tax effect on the book-to-tax basis difference associated with management contract intangibles.
DataBank
Real estate and lease intangibles of DataBank were measured based upon recent third party appraised values, allocated to tangible assets of land, building, construction in progress, data center infrastructure, as well as identified intangibles of in-place leases, above- and below-market leases, and tenant relationships.
The remaining intangible assets acquired include data center service contracts, customer relationships and trade name. The value of data center service contracts was estimated based upon net cash flows generated from these adjustmentscontracts. Customer relationships were valued as the incremental net income attributable to these relationships considering the projected net cash flows of the business with and without the customer relationships in place. The trade name of DataBank was valued based upon estimated savings from avoided royalty at a royalty rate of 2%.
Other assets acquired and liabilities assumed primarily include right-of-use lease assets associated with leasehold data centers and corresponding lease liabilities. Deferred tax liabilities represent the tax effect on noncontrollingthe book-to-tax basis difference related primarily to real estate assets arising from the transaction.
All assumed debt bears variable rates, with carrying values approximating fair values based upon market rates and spreads that prevailed at the time of acquisition.
Noncontrolling interests in investment entities as applicable.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As Reported at June 30, 2017 | | Measurement Period Adjustments | | As Reported at September 30, 2017 |
(In thousands) | | NSAM | | NRF | | Total | | NSAM | | NRF | | Total |
Assets | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 152,858 |
| | $ | 107,751 |
| | $ | 260,609 |
| | $ | — |
| | $ | — |
| | $ | 260,609 |
|
Restricted cash | | 18,052 |
| | 158,762 |
| | 176,814 |
| | — |
| | — |
| | 176,814 |
|
Real estate | | — |
| | 9,895,252 |
| | 9,895,252 |
| | — |
| | (20,340 | ) | | 9,874,912 |
|
Loans receivable | | 28,485 |
| | 331,056 |
| | 359,541 |
| | — |
| | — |
| | 359,541 |
|
Investments in unconsolidated ventures | | 76,671 |
| | 588,368 |
| | 665,039 |
| | — |
| | (900 | ) | | 664,139 |
|
Securities | | 3,065 |
| | 433,850 |
| | 436,915 |
| | — |
| | — |
| | 436,915 |
|
Identifiable intangible assets | | 661,556 |
| | 354,643 |
| | 1,016,199 |
| | — |
| | (2,907 | ) | | 1,013,292 |
|
Management agreement between NSAM and NRF | | 1,576,253 |
| | — |
| | 1,576,253 |
| | (20,423 | ) | | — |
| | 1,555,830 |
|
Assets held for sale | | — |
| | 2,096,671 |
| | 2,096,671 |
| | — |
| | — |
| | 2,096,671 |
|
Other assets | | 93,455 |
| | 682,389 |
| | 775,844 |
| | — |
| | (52 | ) | | 775,792 |
|
Total assets | | 2,610,395 |
| | 14,648,742 |
| | 17,259,137 |
| | (20,423 | ) | | (24,199 | ) | | 17,214,515 |
|
Liabilities | | | | | | | | | | | | |
Debt | | — |
| | 6,723,222 |
| | 6,723,222 |
| | — |
| | — |
| | 6,723,222 |
|
Intangible liabilities | | — |
| | 215,821 |
| | 215,821 |
| | — |
| | (2,603 | ) | | 213,218 |
|
Management agreement between NSAM and NRF | | — |
| | 1,576,253 |
| | 1,576,253 |
| | — |
| | (20,423 | ) | | 1,555,830 |
|
Liabilities related to assets held for sale | | — |
| | 1,281,406 |
| | 1,281,406 |
| | — |
| | — |
| | 1,281,406 |
|
Tax liabilities | | 169,387 |
| | 69,373 |
| | 238,760 |
| | — |
| | — |
| | 238,760 |
|
Accrued and other liabilities | | 979,969 |
| | 307,855 |
| | 1,287,824 |
| | — |
| | (405 | ) | | 1,287,419 |
|
Total liabilities | | 1,149,356 |
| | 10,173,930 |
| | 11,323,286 |
| | — |
| | (23,431 | ) | | 11,299,855 |
|
Redeemable noncontrolling interests | | 78,843 |
| | — |
| | 78,843 |
| | — |
| | — |
| | 78,843 |
|
Noncontrolling interests—investment entities | | — |
| | 506,453 |
| | 506,453 |
| | — |
| | (768 | ) | | 505,685 |
|
Noncontrolling interests—Operating Company | | 8,162 |
| | — |
| | 8,162 |
| | — |
| | — |
| | 8,162 |
|
Fair value of net assets acquired | | $ | 1,374,034 |
| | $ | 3,968,359 |
| | $ | 5,342,393 |
| | $ | (20,423 | ) | | $ | — |
| | $ | 5,321,970 |
|
| | | | | | | | | | | | |
Merger consideration | | 2,752,095 |
| | 3,968,359 |
| | 6,720,454 |
| | — |
| | — |
| | 6,720,454 |
|
Goodwill | | $ | 1,378,061 |
| | $ | — |
| | $ | 1,378,061 |
| | $ | 20,423 |
| | $ | — |
| | $ | 1,398,484 |
|
were valued based upon their proportionate share of net assets of DataBank at fair value.The Merger effectively resulted in the settlementexcess of the pre-merger management agreement between NSAM and NRF. The terms of the management agreement were determined to be off-market when compared to the terms of similar management agreements of other externally managed mortgage and equity REITs. The off-market component was valued at $1.6 billion based on a discounted cash flow analysis using a discount rate of 10%, and recorded as an intangible asset attributed to NSAM and a corresponding intangible liability attributed to NRF, in each case as of the Closing Date. Upon settlement of the management agreement, the intangible asset and the corresponding intangible liability were eliminated. No net gain or loss was recognized by Colony NorthStar from the settlement.
Certain deferred tax liabilities were recognized in connection with the Merger, related primarily to NSAM's investment management contract intangible assets and basis differences in NRF's real estate assets in the United Kingdom arising from recording those assets at fair value onof consideration transferred over the Closing Date.
Fair valuefair values of otheridentifiable assets acquired, liabilities assumed and noncontrolling interests were estimatedwas recorded as follows:
Real Estate and Related Intangibles—Fairgoodwill assigned to the DataBank reporting unit within the digital segment. Goodwill represents the value is based onof the income approach which includes a direct capitalization method, applying overall capitalization rates ranging between 4.4% and 12.5%. For real estate held for sale, fair value was determined based on contracted sale price or a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangiblebusiness acquired not already captured in identifiable assets, such as land, buildingthe potential for future customers, synergies, revenue and leaseholds, tenant and land improvementsprofit growth, as well as identified intangible assetsindustry knowledge, experience and liabilities such as above- and below-market leases, below market ground lease obligations and in-place lease value. Useful lives ofrelationships that the intangibles acquired range from 6 to 90 years for ground lease obligations and 1 to 17 years for all other real estate related intangibles.
Loans Receivable—Fair value is determined by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment; or based on discounted cash flow projections of principal and interest expected to be collected, which
include consideration of borrower or sponsor credit, as well as operating results of the underlying collateral. For certain loans receivable considered to be impaired, their carrying value approximated fair value.
Investments in Unconsolidated Ventures—Fair value is based on timing and amount of expected future cash flows for income as well as realization events of the underlying assets of the investees, and for certain investments in funds, a proportionate share of its most recent net asset value.
Securities—Fair value is based on quotations from brokers or financial institutions that act as underwriters of the debt securities, third-party pricing service or discounted cash flows depending on the type of debt securities. Fair value of NorthStar Realty Europe Corp ("NRE") common stock is based on the closing stock price on the Closing Date.
Investment Management Related Intangible Assets—These consist primarily ofDataBank management contracts, customer relationships, trade names and the broker-dealer license, including those related to an 84% interest acquired by NSAM in January 2016 in Townsend, which provides real estate investment management and advisory services. The fair value of management contracts represents the discounted excess earnings attributable to the future management fee income from in-place management contracts, with discount rates ranging between 8% and 10%. The management contracts have useful lives ranging from 2 years to 18 years.The fair value of customer relationships represents the potential fee income from repeat customers through future sponsored investment vehicles, with the useful lives of such vehicles ranging from 20 to 30 years. The trade names of NSAM and Townsend were valued as the discounted savings of royalty fees by applying a royalty rate of 1.5% and 2%, respectively, against expected fee income, and have useful lives of 20 years and 30 years, respectively. The fair value of NSAM's broker-dealer license represents the estimated cost of obtaining a license.
Debt—Fair value of exchangeable notes was determined based on unadjusted quoted prices in a non-active market. Fair value of mortgage and other notes payable was estimated by reviewing rates currently available with similar terms and remaining maturities. Fair value of securitization bonds payable was based on quotations from brokers or financial institutions that act as underwriters of the securitized bonds. Fair value of junior subordinated debt was based on unadjusted quotations from a third party valuation firm, with such quotes derived using a combination of internal valuation models, comparable trades in non-active markets and other market data.
Noncontrolling Interests—Fair value of noncontrolling interests in investment entities was estimated as their share of fair values of the net assets of the underlying investment entities, including any incentive distributions. The fair value of noncontrolling interests in Operating Company was determined based upon the closing price of Colony class A common stock multiplied by the number of OP Units assumed in the Merger, after applying the exchange ratio.
Merger-Related Costs
Merger-related costs include transactions costs consisting primarily of professional fees for legal, financial advisory, accounting and consulting services, and fees incurred on a bridge facility commitment that was terminated on the Closing Date. Merger-related costs also include costs incurred to transition and integrate the operations of the combined entity, including compensation costs and various administrative costs, such as system integration, lease termination and professional fees paid to third party advisors and consultants. Merger-related costs are expensed as incurred. Costs expensed by NSAM and NRF prior to the Closing Date are excluded from the Company's results of operations.
|
| | | | | | | | |
(In thousands) | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Merger-related costs: | | | | |
Transaction costs | | | | |
Fees to investment bankers contingent upon consummation of the Merger | | $ | — |
| | $ | 66,800 |
|
Other fees | | 204 |
| | 18,502 |
|
| | 204 |
| | 85,302 |
|
Compensation expense | | | | |
Equity-based compensation for replacement awards to NSAM executives | | 30,336 |
| | 86,390 |
|
Severance and other employee transition | | 2,869 |
| | 23,803 |
|
| | 33,205 |
| | 110,193 |
|
Administrative expense | | 4,861 |
| | 11,080 |
|
| | $ | 38,270 |
| | $ | 206,575 |
|
Results of NSAM and NRF
The combined results of operations included contributions from the legacy business of NSAM and NRF as follows:
|
| | | | | | | | |
(In thousands) | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Total revenues | | $ | 468,433 |
| | $ | 1,329,282 |
|
Net loss attributable to Colony NorthStar, Inc. | | (17,970 | ) | | (43,947 | ) |
Pro Forma Financial Information (Unaudited)
The following table presents pro forma financial information of the Company as if the Merger had been consummated on January 1, 2016. The pro forma financial information includes the pro forma impact of purchase accounting adjustments primarily related to fair value adjustments and depreciation and amortization, and excludes Merger-related transaction costs of $0.2 million and $85.3 million for the three and nine months ended September 30, 2017, respectively. The pro forma financial information also gives effect to certain sales initiatives by NRF, cessation of the management agreement between NSAM and NRF, as well as a pay down of NSAM and NRF corporate borrowings. The pro forma financial information, however, does not reflect any potential benefits that may result from realization of future cost savings from operating efficiencies, or other incremental synergies expected to result from the Merger.
The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of the Company had the Merger been completed on January 1, 2016, nor indicative of future results of operations of the Company.
|
| | | | | | | | |
| | Nine months ended September 30, |
(In thousands, except per share data) | | 2017 | | 2016 |
Pro forma: | | | | |
Total revenues | | $ | 2,103,134 |
| | $ | 1,971,733 |
|
Net income (loss) attributable to Colony NorthStar, Inc. | | 270,322 |
| | (192,288 | ) |
Net income (loss) attributable to common stockholders | | 165,124 |
| | (291,532 | ) |
Earnings (loss) per common share: | | | | |
Basic | | $ | 0.31 |
| | $ | (0.53 | ) |
Diluted | | $ | 0.31 |
| | $ | (0.53 | ) |
Restructuring of Real Estate Loans into Equity Ownership
In the normal course of business, the Company may foreclose on the underlying asset in settlement of its loan receivable or otherwise undertake various restructuring measures in connection with its investments.
CPI Group
On January 25, 2017, the Company and its joint venture partners, through a consolidated investment venture of the Company, acquired a controlling equity interest in a defaulted borrower, a real estate investment group in Europe ("CPI") in connection with a restructuring of the CPI group. Certain entities within the CPI group were in receivership proceedings at the time of the restructuring. The Company acquired CPI's real estate portfolio, consisting of hotels, offices and mixed-use properties, and assumed the underlying mortgage debt, some of which were in payment default, including maturity default. Certain CPI employees responsible for asset and property management became employees of the Company. As a result of the acquisition, the Company's outstanding loans receivable to CPI were deemed to be effectively settled at their carrying value and formed part of the consideration transferred.
The following table summarizes the consideration and preliminary allocation to assets acquired and liabilities assumed. The estimated fair values and preliminary purchase price allocation were based on information available at the time of acquisition and the Company continues to evaluate the underlying inputs and assumptions. Accordingly, these preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of acquisition. During the third quarter of 2017, adjustments were made to the valuation and underlying assumptions pertaining to real estate and related assets, debt and estimation of tax liabilities.
|
| | | | | | | | | | | | |
(In thousands) | | As Reported At June 30, 2017 | | Measurement Period Adjustments | | As Reported At September 30, 2017 |
Consideration | | | | | | |
Carrying value of loans receivable outstanding at the time of restructuring | | $ | 182,644 |
| | $ | — |
| | $ | 182,644 |
|
Cash | | 49,537 |
| | — |
| | 49,537 |
|
Total consideration | | $ | 232,181 |
| | $ | — |
| | $ | 232,181 |
|
Identifiable assets acquired and liabilities assumed | | | | | | |
Cash | | $ | 303 |
| | $ | — |
| | $ | 303 |
|
Real estate | | 539,350 |
| | 5,057 |
| | 544,407 |
|
Real estate held for sale | | 26,263 |
| | (4,658 | ) | | 21,605 |
|
Lease intangibles and other assets | | 39,967 |
| | — |
| | 39,967 |
|
Debt | | (274,387 | ) | | (3,203 | ) | | (277,590 | ) |
Tax liabilities | | (36,079 | ) | | 3,141 |
| | (32,938 | ) |
Lease intangibles and other liabilities | | (60,448 | ) | | (337 | ) | | (60,785 | ) |
Liabilities related to assets held for sale | | (2,788 | ) | | — |
| | (2,788 | ) |
Fair value of net assets acquired | | $ | 232,181 |
| | $ | — |
| | $ | 232,181 |
|
Fair value of assets acquired and liabilities assumed were estimated as follows:
Real Estate and Related Intangibles—Fair value of real estate is based upon a discounted cash flow analysis with a weighted average discount rate of 6.6% or direct capitalization analysis with weighted average capitalization rate of 13.5%. For real estate held for sale, fair value was determined based upon a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangible assets of land, building and tenant and site improvements and identified intangibles, such as above- and below-market leases and in-place lease values.
Debt—Fair value of debt is estimated by discounting expected future cash outlays at interest rates currently available for instruments with similar terms and remaining maturities, applying discount rates ranging between 1.25% and 3.6%, with such debt fair values not exceeding the fair value of their underlying collateral, or estimated based upon expected payoff amounts.
Results of operations of CPI as included in the Company's consolidated statement of operations were as follows:
|
| | | | | | | | |
(In thousands) | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Total revenues | | $ | 11,723 |
| | $ | 32,151 |
|
Net loss attributable to Colony NorthStar, Inc. | | (561 | ) | | (3,138 | ) |
THL Hotel Portfolio
In May 2013, the Company and certain investment vehicles managed by the Company participated in the refinancing of a limited service hospitality portfolio, primarily located across the Southwest and Midwest U.S. (the "THL Hotel Portfolio"), through the origination of a junior and senior mezzanine loan. On July 1, 2017, the Company and certain investment vehicles managed by the Company took control of the THL Hotel Portfolio of 148 limited service hotels through a consensual foreclosure following a maturity default by the borrower on the Company's outstanding junior mezzanine loan. Through the consensual foreclosure, the Company assumed the borrower's in-place hotel management contracts with third party operators, which were determined to be at market, the borrower's in-place franchise obligations, primarily with Marriott, as well as the borrower's outstanding senior mortgage debt and senior mezzanine debt.
The consideration for the consensual foreclosure consisted of the following:
Carrying value of the Company’s junior mezzanine loan to the borrower which is considered to be effectively settled upon the consensual foreclosure;
Cash to pay down principal and accrued interest on the borrower’s senior mortgage and senior mezzanine debt to achieve a compliant debt yield, and payment of an extension fee to exercise an extension option on the senior mortgage debt; and
In consideration of the former preferred equity holder of the borrower providing certain releases, waivers and covenants to and in favor of the Company and certain investment vehicles managed by the Company in executing the consensual foreclosure, the former preferred equity holder is entitled to an amount up to $13.0
million based on the performance of the THL Hotel Portfolio, subject to meeting certain repayment and return thresholds to the Company (and certain investment vehicles managed by the Company).
The following table summarizes the consideration and preliminary allocation to assets acquired and liabilities assumed. The estimated fair values and preliminary purchase price allocation were based on information available at the time of acquisition and the Company continues to evaluate the underlying inputs and assumptions. Accordingly, these preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of acquisition.
|
| | | | |
(In thousands) | | July 1, 2017 |
Consideration | | |
Carrying value of the Company's junior mezzanine loan receivable at the time of foreclosure | | $ | 310,932 |
|
Cash | | 43,643 |
|
Contingent consideration (Note 13) | | 6,771 |
|
Total consideration | | $ | 361,346 |
|
Identifiable assets acquired and liabilities assumed | | |
Cash | | $ | 16,188 |
|
Real estate | | 1,190,613 |
|
Real estate held for sale | | 69,099 |
|
Intangible and other assets | | 37,031 |
|
Debt | | (907,867 | ) |
Other liabilities | | (43,718 | ) |
Fair value of net assets acquired | | $ | 361,346 |
|
Fair value of assets acquired and liabilities assumed were estimated as follows:
Real Estate and Related Intangibles—Fair value of real estate was based on a combination of the cost, income and market approaches which applies capitalization rates between 7.0% and 11.5% (weighted average rate of 11.1%) as well as discount rates between 8.3% and 13.0% (weighted average rate of 9.5%), and also considers future capital expenditure needs of the hotels. For real estate held for sale, fair value was determined based on a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangible assets of land, building, site improvements and furniture, fixtures and equipment as well as identified intangibles for below-market ground lease obligations.
Debt—The assumed senior mortgage and senior mezzanine debt had carrying values that approximated fair values based on current market rates and recent rates on the Company's refinancing of its other hotel portfolios.
Results of operations of the THL Hotel Portfolio as included in the Company's consolidated statement of operations and in other equity and debt segment for segment reporting were as follows:
|
| | | | |
(In thousands) | | Three and Nine Months Ended September 30, 2017 |
Total revenues | | $ | 105,065 |
|
Net income attributable to Colony NorthStar, Inc. | | 2,690 |
|
team brings.4. Real Estate
The following table summarizes the Company's real estate including foreclosed properties, were as follows:held for investment. Real estate held for sale is presented in Note 8. |
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Land | | $ | 1,272,269 |
| | $ | 1,360,435 |
|
Buildings and improvements | | 7,462,712 |
| | 9,022,971 |
|
Tenant improvements | | 108,929 |
| | 105,440 |
|
Data center infrastructure | | 633,329 |
| | 595,603 |
|
Furniture, fixtures and equipment | | 581,285 |
| | 511,329 |
|
Construction in progress | | 125,702 |
| | 255,115 |
|
| | 10,184,226 |
| | 11,850,893 |
|
Less: Accumulated depreciation | | (1,196,324 | ) | | (990,375 | ) |
Real estate assets, net (1) | | $ | 8,987,902 |
| | $ | 10,860,518 |
|
|
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Land and improvements | | $ | 2,297,586 |
| | $ | 764,365 |
|
Buildings, building leaseholds and improvements | | 11,938,562 |
| | 2,559,682 |
|
Tenant improvements | | 128,998 |
| | 87,643 |
|
Furniture, fixtures and equipment | | 360,279 |
| | 7 |
|
Construction in progress | | 86,747 |
| | 8,856 |
|
| | 14,812,172 |
| | 3,420,553 |
|
Less: Accumulated depreciation | | (457,631 | ) | | (176,922 | ) |
Real estate assets, net | | $ | 14,354,541 |
| | $ | 3,243,631 |
|
__________ | |
(1) | For real estate acquired in a business combination, the purchase price allocation may be subject to adjustments during the measurement period, not to exceed 12 months from date of acquisition, based upon new information obtained about facts and circumstances that existed at time of acquisition (Note 3). |
Real Estate Sales
Results from sales of real estate, wereincluding discontinued operations (Note 16), are as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Proceeds from sales of real estate | | $ | 43,276 |
| | $ | 147,990 |
| | $ | 170,017 |
| | $ | 442,657 |
|
Gain (Loss) on sale of real estate | | (4,919 | ) | | 6,624 |
| | 3,013 |
| | 58,925 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Proceeds from sales of real estate | | $ | 366,456 |
| | $ | 119,294 |
| | $ | 1,340,059 |
| | $ | 344,271 |
|
Gain on sale of real estate | | 72,541 |
| | 11,151 |
| | 96,701 |
| | 68,114 |
|
Real estate sold through the nine months ended September 30, 2017 and 2016 did not constitute discontinued operations, other than the sale of a manufactured housing portfolio acquired through the Merger and certain properties in the THL Hotel Portfolio which qualified as held for sale upon acquisition, as discussed in Note 17.Real estate held for sale at September 30, 2017 is presented in Note 9.
Real Estate Acquisitions
The following table summarizes the Company's real estate acquisitions, excluding real estate acquired as part of business combinations discussed in Note 3. | | ($ in thousands) | ($ in thousands) | | | | Purchase Price Allocation | ($ in thousands) | | | | Purchase Price Allocation (1) |
Acquisition Date | | | Property Type and Location | | Number of Buildings | | Purchase Price (1) | | Land | | Buildings and Improvements | | Lease Intangible Assets | | ROU Lease and Other Assets | | Lease Intangible Liabilities | | Debt, Lease and Other Liabilities |
Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 | | | | | | | | | | | | | | |
Asset Acquisitions | | Asset Acquisitions | | | | | | | | | | | | | | |
Various | | | Hotel—France (2) | | 2 | | $ | 4,609 |
| | $ | 564 |
| | $ | 6,763 |
| | $ | — |
| | $ | 2,586 |
| | $ | — |
| | $ | (5,304 | ) |
| Acquisition Date | | Property Type and Location | | Number of Buildings | | Purchase Price (1) | | Land and Improvements | | Building and Improvements | | Lease Intangible Assets | | Lease Intangible Liabilities | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2017 (2) | | | | | | | | | | | |
Year Ended December 31, 2019 | | Year Ended December 31, 2019 | | | | | | | | | | | | | | |
Asset Acquisitions | Asset Acquisitions | | | | | | | | | | | Asset Acquisitions | | | | | | | | | | | | | | |
February | | | Bulk industrial—Various in U.S. (3) | | 6 | | $ | 373,182 |
| | $ | 49,446 |
| | $ | 296,348 |
| | $ | 27,553 |
| | $ | — |
| | $ | (165 | ) | | $ | — |
|
October | | | Healthcare—United Kingdom (4) | | 1 | | 12,376 |
| | 3,478 |
| | 9,986 |
| | 732 |
| | — |
| | (1,820 | ) | | — |
|
Various | | | Light industrial—Various in U.S. (5) | | 84 | | 1,158,423 |
| | 264,816 |
| | 850,550 |
| | 47,945 |
| | — |
| | (4,888 | ) | | — |
|
| January | | Industrial—Spain | | 2 | | $ | 10,374 |
| | $ | 3,855 |
| | $ | 5,564 |
| | $ | 955 |
| | $ | — |
| |
| | $ | 1,543,981 |
| | $ | 317,740 |
| | $ | 1,156,884 |
| | $ | 76,230 |
| | $ | — |
| | $ | (6,873 | ) | | $ | — |
|
| June | | Office—California, U.S.(3) | | 1 | | 455,699 |
| | 93,577 |
| | 314,590 |
| | 50,518 |
| | (2,986 | ) | |
| Various | | Light industrial—Various in U.S. | | 52 | | 603,591 |
| | 129,093 |
| | 449,021 |
| | 29,745 |
| | (4,268 | ) | |
| |
| | $ | 1,069,664 |
| | $ | 226,525 |
| | $ | 769,175 |
| | $ | 81,218 |
| | $ | (7,254 | ) | |
Year Ended December 31, 2016 | | | | | | | | | | | |
Business Combinations (4) | | | | | | | | | | | |
| January | | Industrial—Spain | | 23 | | $ | 94,403 |
| | $ | 33,265 |
| | $ | 56,585 |
| | $ | 5,318 |
| | $ | (765 | ) | |
| April | | Industrial—Massachusetts, U.S. (5) | | 1 | | 34,900 |
| | 5,235 |
| | 27,731 |
| | 1,934 |
| | — |
| |
| May | | Office—France | | 1 | | 18,203 |
| | 14,150 |
| | 3,815 |
| | 388 |
| | (150 | ) | |
| Various | | Light industrial—Various in U.S. | | 18 | | 201,635 |
| | 36,974 |
| | 151,689 |
| | 16,063 |
| | (3,091 | ) | |
Asset Acquisitions | | | | | | | | | | | |
| Various | | Light industrial—Various in U.S. | | 12 | | 113,200 |
| | 20,749 |
| | 84,724 |
| | 8,398 |
| | (671 | ) | |
| |
| | $ | 462,341 |
| | $ | 110,373 |
| | $ | 324,544 |
| | $ | 32,101 |
| | $ | (4,677 | ) | |
__________
| |
(1) | Dollar amounts of purchase price and allocation to assets acquired and liabilities assumed are translated based onusing foreign exchange rates as of the respective dates of acquisition, where applicable. Transaction costs are included in purchase price for asset acquisitions and excluded for business combinations. |
| |
(2) | Bids for hotels under receivership were accepted by the French courts in prior years, with the transactions closing in 2020. Amounts include acquisition of hotel operations pursuant to operating leases on real estate owned by third parties. Useful life of real estate acquired in 2017 ranges from 26 to 39is 40 years for buildings, 3 to 1115 years for site improvements, and 2 to 147 years for otherfurniture, fixtures, and equipment, and 6 years for right-of-use ("ROU") lease intangibles.assets. |
| |
(3) | In September 2017, 90% of equityThe bulk industrial portfolio was classified as held for sale in the property holding entity was syndicated to third party investors. The new equity partners were granted certain participation rights in the business, resulting in a deconsolidation of the investment. The Company's remaining interest is reflected as an equity method investment.June 2019. |
| |
(4) | PriorProperties acquired pursuant to purchase option under the adoption of the new definition ofCompany's development facility to a business effective October 1, 2016, real estate acquisitions with existing leases generally met the definition of a business combination.healthcare operator at purchase price equivalent to outstanding loan balance. |
| |
(5) | Real estateThe entire light industrial portfolio was sold in August 2016.December 2019. |
Depreciation and Impairment
Depreciation expense and impairment loss recognized onThe following table summarizes real estate were as follows:depreciation and impairment.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Depreciation on real estate | | $ | 121,886 |
| | $ | 27,005 |
| | $ | 328,756 |
| | $ | 81,373 |
|
Impairment loss on real estate held for investment | | 1,756 |
| | — |
| | 11,507 |
| | — |
|
Impairment loss on real estate held for sale | | 13,256 |
| | 941 |
| | 24,786 |
| | 5,141 |
|
Property Operating Income
The components of property operating income were as follows: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Rental income | | $ | 172,846 |
| | $ | 69,120 |
| | $ | 491,459 |
| | $ | 206,173 |
|
Tenant reimbursements | | 36,764 |
| | 17,637 |
| | 102,533 |
| | 48,467 |
|
Resident fee income (1) | | 75,882 |
| | — |
| | 216,414 |
| | — |
|
Hotel operating income | | 328,173 |
| | 5,748 |
| | 730,644 |
| | 24,830 |
|
| | $ | 613,665 |
| | $ | 92,505 |
| | $ | 1,541,050 |
| | $ | 279,470 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Depreciation of real estate held for investment | | $ | 106,208 |
| | $ | 92,677 |
| | $ | 209,513 |
| | $ | 184,915 |
|
Impairment of real estate and related asset group (1) | | | | | | | | |
Held for sale | | 20,061 |
| | 42,998 |
| | 27,638 |
| | 68,181 |
|
Held for investment | | 1,454,199 |
| | 41,048 |
| | 1,754,890 |
| | 41,487 |
|
__________
| |
(1) | Healthcare properties that operate through management agreements with independent third-party operators through structures permitted byIncludes impairment of real estate intangibles of $2.3 million and $9.3 million and right-of-use asset on ground leases of $0.8 million and $13.9 million in the REIT Investment Diversificationthree and Empowerment Act of 2007 (“RIDEA”) permits us, through a TRS, to have direct exposure to resident fee income and incur customary related operating expenses.six months ended June 30, 2020, respectively. |
Future Minimum RentsImpairment of Real Estate Held for Sale
The Company has operating leasesReal estate held for sale is carried at the lower of amortized cost or fair value. Real estate carried at fair value totaled $197.8 million at June 30, 2020 and $253.4 million at December 31, 2019 based upon impairments recorded during the six months ended June 30, 2020 and year ended December 31, 2019, respectively, generally representing Level 3 fair values.
Real estate held for sale that was written down was generally valued using either broker opinions of value, or a combination of market information, including third-party appraisals and indicative sale prices, adjusted as deemed appropriate by management to account for the inherent risk associated with tenants that expire at various dates through 2070. Future contractual minimum rental payments to be received under noncancelable operating leases forspecific properties. In all cases, fair value of real estate held for investment as of September 30, 2017 are as follows: sale is reduced for estimated selling costs ranging from 1% to 3%.
|
| | | | |
Year Ending December 31, | | (In thousands) |
Remaining 2017 | | $ | 136,149 |
|
2018 | | 512,293 |
|
2019 | | 467,725 |
|
2020 | | 424,354 |
|
2021 | | 359,927 |
|
2022 and after | | 1,431,535 |
|
Total (1) | | $ | 3,331,983 |
|
__________
| |
(1)
| Excludes hotel operating income, as well as resident fee income from healthcare properties and rental income from multifamily properties, both of which are subject to short-term leases. |
Commitments and Contractual Obligations
Purchase Commitments—At September 30, 2017,In 2020, the Company hadalso considered the impact of a deposit of $0.2 million and a remaining unfunded purchase commitment of $8.3 million for the acquisition of one building in Las Vegas in the Industrial segment.
Guarantee Agreements—In connection with certain hotel properties acquired through the Merger, the Company entered into guarantee agreements with various hotel franchisors, pursuant to which the Company guaranteed the payment of its obligationsglobal economic downturn as a franchisee, including paymentsresult of franchise fees and marketing fees for the term of the agreements, which expire between 2025 and 2030. At September 30, 2017, the Company did not have any obligations under these guarantees.
Ground Lease Obligation—In connection withCOVID-19, specifically as it affects real estate acquisitions, the Company assumed certain noncancelable operating ground leases as lessee or sublessee with expiration dates between 2019values, and 2252. Rents on certain ground leases are paid directly by the tenants or operators. Ground rent expense, including contingent rent, was $2.3 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $4.5 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively.
At September 30, 2017, future minimum rental payments on noncancellable ground leases, excluding any contingent rent payments,where appropriate, factored in a reduction in potential sales prices, which resulted in additional impairment on real estate held for sale in 2020.
Impairment of Real Estate Held for Investment
Real estate held for investment werethat was written down to fair value during the six months ended June 30, 2020 and year ended December 31, 2019 had carrying values totaling $3.7 billion and $355.0 million, respectively, at the time of impairment, representing Level 3 fair values.
Impairment was driven by shortened holding period assumptions made in connection with the preparation and review of the financial statements, particularly in the hotel and healthcare portfolios. The shortened holding period assumption is attributable to both the Company's accelerated digital transformation, and the risk that the Company is unable to obtain accommodation from lenders on non-recourse mortgage debt that is in default or at risk of default. The Company's assessment considered various strategic and financial alternatives to maximize the value of its non-digital real estate assets, while also balancing the need to preserve liquidity and prioritize the growth of its digital business. A shortened holding period was an indicator of impairment as follows.it decreased the amount of carrying value recoverable from future cash flows, which was further exacerbated by a decline in property operating performance and market values as a result of the economic effects of COVID-19.
The Company compared the carrying values to the undiscounted future net cash flows expected to be generated by these properties over their holding periods. In performing this analysis, the Company considered the likelihood of possible outcomes under various holding period scenarios by applying a probability-weighted approach to different holding periods. For hotel properties, the Company applied a range of reductions to near term cash flow projections to account for uncertainties due to COVID-19. For properties for which undiscounted expected net cash flows over their respective
|
| | | | |
Year Ending December 31, | | (In thousands) |
Remaining 2017 | | $ | 1,592 |
|
2018 | | 6,493 |
|
2019 | | 6,427 |
|
2020 | | 6,466 |
|
2021 | | 6,545 |
|
2022 and after | | 158,705 |
|
Total (1) | | $ | 186,228 |
|
__________
| |
(1)
| Includes automatically-renewed ground leases related to the Company's hotel properties. |
Impactholding periods fell short of Hurricanescarrying values, the Company expects that the carrying value of these properties would likely not be recoverable.
A smallFair values were estimated for these properties based upon one or a combination of the following: (i) third party appraisals, (ii) broker opinions of value with discounts applied based upon management judgment, (iii) income capitalization approach, using net operating income for each property and applying capitalization rates between 10.0% and 12.0%; or (iv) discounted cash flow analyses with terminal values determined using terminal capitalization rates between 7.0% and 11.25%, and discount rates between 8.5% and 12.0%. The Company considered the risk characteristics of each property in determining capitalization rates and where applicable, used higher capitalization rates or discount rates to reflect the inherent stress on real estate values in a deteriorating economic environment. Impairment was measured as the excess of carrying value over fair value for each of these properties.
As of June 30, 2020, the Company believes that it has materially addressed overall recoverability in the value of its non-digital real estate assets, applying the Company's best estimates and assumptions at this time based upon external factors known to date and the Company's expected digital transformation timeline. If the extent and duration of the economic effects of COVID-19 negatively affect the Company's real estate operations and its ability to meet its non-recourse mortgage debt obligations beyond the Company's current projections, the estimates and assumptions currently applied by the Company may change, which may lead to further impairment of its non-digital real estate assets, in particular, its healthcare and hospitality assets, that could be material in the future.
Property Operating Income
Following the acquisition of DataBank in December 2019, lease income includes: (i) fixed lease payments for colocation rent, interconnection services and a committed amount of power in connection with contracted leased space; and (ii) variable payments for additional metered power reimbursements based upon usage at prevailing rates.
The Company also earns data center service revenue, primarily composed of cloud services, data storage, data protection, network services, software licensing, and other related information technology services, which are recognized as services are provided; and to a lesser extent, installation services that are recognized at a point in time upon completion of the installation and accompanying services.
For the three and six months ended June 30, 2020 and 2019, components of property operating income are as follows, excluding amounts related to discontinued operations (Note 16).
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Lease income: | | | | | | | | |
Fixed lease income | | $ | 180,067 |
| | $ | 164,940 |
| | $ | 362,159 |
| | $ | 335,354 |
|
Variable lease income | | 16,820 |
| | 14,891 |
| | 33,111 |
| | 31,240 |
|
| | 196,887 |
| | 179,831 |
| | 395,270 |
| | 366,594 |
|
Hotel operating income | | 85,735 |
| | 308,957 |
| | 300,795 |
| | 581,092 |
|
Data center service revenue | | 11,194 |
| | — |
| | 23,167 |
| | — |
|
| | $ | 293,816 |
| | $ | 488,788 |
| | $ | 719,232 |
| | $ | 947,686 |
|
Lease Concessions Related to COVID-19
As a result of the COVID-19 crisis, a number of the Company's properties weretenants failed to make rent payments or make timely payments, and some sought more flexible payment terms or rent concessions. Local governments in certain jurisdictions have implemented or are considering implementing programs that permit or require forbearance of rent payments by tenants affected by Hurricanes HarveyCOVID-19. The Company is currently engaged with affected tenants on a case-by-case basis to evaluate and Irmarespond to the current environment.
For lease concessions resulting directly from the impact of COVID-19 that do not result in a substantial increase in the third quarterrights of 2017,the lessor or the obligations of the lessee, for example, where total payments required by the modified contract will be substantially the same as follows:
Healthcare—Certain medical office buildingsor less than the original contract, the Company made a policy election to account for the concessions as though the enforceable rights and net lease properties in Texas and Florida suffered some physical damage, resultingobligations for those concessions existed in the closurelease contracts, under a relief provided by the FASB. Under the relief, the concessions will not be treated as lease modifications that are accounted for over the remaining term of one hospital in Texas, which is expectedthe respective leases, as the Company believes this would not accurately reflect the temporary economic effect of the concessions. Instead, (i) rent deferrals that meet the criteria will be treated as if no changes were made to re-open in December 2017. The Company's senior housing operating facilities, however, experienced only minor damage.the lease contract, with continued recognition of lease income and receivable
Industrial—The impact to properties
under the original terms of the contract; and (ii) rent forgiveness that meets the criteria will be accounted for as variable lease payments in the Industrial segment was immaterial.
Hospitality—In our core hotel portfolio, there was only minor damage and business interruption to a small number of our hotels. Business interruption losses were fully offset by incremental revenue from hurricane-related demand.
Other Equity and Debt—Twenty-five non-core hotels in the THL Hotel Portfolio in Texas, Florida and Georgia suffered varying degrees of damage, with certain hotels experiencing business interruption. One hotel in Florida was forced to close and is expected to re-open in January 2018.affected periods.
The Company has insurance policies thatagreed to provide coveragethe affected tenants primarily with a deferral of full or partial rent for property damage and business interruption,two to three months, generally with deferred rent to be repaid in monthly installments over periods of four to 18 months. This resulted in an increase in receivables totaling $0.7 million as of June 30, 2020. All lease income receivable, including straight-line rents, are subject to deductibles. Basedthe Company's policy for evaluation of collectability based upon claims filed and management's estimates ascreditworthiness of September 30, 2017,the lessee. In certain instances, the Company recognized $1.4has also agreed to rent forgiveness, totaling $0.6 million for full year 2020, of impairment loss in aggregate for damage on its properties, after taking into consideration $8.2which $0.2 million of anticipated insurance recoveries for property damage. As of Septemberrelates to the six months ended June 30, 2017, the Company is still assessing the estimated business interruption losses affecting certain hotels in its THL Hotel Portfolio. While the Company believes that, through its insurance policies, losses above and beyond its deductible will be recoverable, there can be no assurance that such insurance will be sufficient to compensate the Company for all lost revenue and expenses incurred.2020.
5. Loans Receivable
Effective January 1, 2020, the Company elected the fair value option for all of its outstanding loans receivable under a transitional relief upon adoption of ASC 326. The following table provides a summaryprevious distinction of purchased credit-impaired ("PCI") loans and troubled debt restructurings ("TDR") are not applicable under fair value accounting. Refer to Note 12 for additional disclosures on loans receivable carried at fair value under the Company’s loans held for investment:fair value option.
Loans receivable carried at fair value at June 30, 2020 are as follows:
|
| | | | | | | | | | | | | |
| | June 30, 2020 |
($ in thousands) | | Unpaid Principal Balance | | Fair Value | | Weighted Average Coupon | | Weighted Average Maturity in Years |
Fixed rate | | | | | | | | |
Mortgage loans | | $ | 1,602,093 |
| | $ | 672,983 |
| | 8.2 | % | | 0.8 |
Mezzanine loans | | 610,073 |
| | 348,579 |
| | 12.6 | % | | 0.7 |
Non-mortgage loans | | 182,974 |
| | 167,583 |
| | 13.8 | % | | 4.7 |
| | 2,395,140 |
| | 1,189,145 |
| | | | |
Variable rate | | | | | | | | |
Mortgage loans | | 163,911 |
| | 161,127 |
| | 3.3 | % | | 0.1 |
Mezzanine loans | | 47,815 |
| | 47,815 |
| | 12.5 | % | | 1.1 |
| | 211,726 |
| | 208,942 |
| |
| | |
Loans receivable | | $ | 2,606,866 |
| | $ | 1,398,087 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(Dollars in thousands) | | Unpaid Principal Balance | | Carrying Value | | Weighted Average Coupon | | Weighted Average Maturity in Years | | Unpaid Principal Balance | | Carrying Value | | Weighted Average Coupon | | Weighted Average Maturity in Years |
Non-PCI Loans | | | | | | | | | | | | | | | | |
Fixed rate | | | | | | | | | | | | | | | | |
Mortgage loans | | $ | 1,029,753 |
| | $ | 1,027,935 |
| | 9.0 | % | | 3.1 | | $ | 894,232 |
| | $ | 881,755 |
| | 9.0 | % | | 3.5 |
|
Securitized loans (1) | | 42,686 |
| | 43,924 |
| | 6.1 | % | | 16.1 | | 105,586 |
| | 107,609 |
| | 6.4 | % | | 15.4 |
|
Mezzanine loans | | 435,095 |
| | 431,933 |
| | 11.9 | % | | 2.6 | | 372,247 |
| | 369,207 |
| | 12.3 | % | | 2.8 |
|
Corporate loans | | 47,343 |
| | 47,039 |
| | 9.9 | % | | 10.2 | | — |
| | — |
| | — | % | | — |
|
| | 1,554,877 |
| | 1,550,831 |
| | | | | | 1,372,065 |
| | 1,358,571 |
| | | | |
Variable rate | | | | | | | | | | | | | | | | |
Mortgage loans | | 581,254 |
| | 588,259 |
| | 7.2 | % | | 1.4 | | 494,797 |
| | 487,651 |
| | 8.2 | % | | 0.8 |
|
Securitized loans (1) | | 576,153 |
| | 576,877 |
| | 6.3 | % | | 3.1 | | 775,963 |
| | 776,156 |
| | 5.7 | % | | 2.7 |
|
Mezzanine loans | | 34,391 |
| | 34,258 |
| | 9.6 | % | | 1.5 | | 348,035 |
| | 347,469 |
| | 11.2 | % | | 0.6 |
|
| | 1,191,798 |
| | 1,199,394 |
| | | | | | 1,618,795 |
| | 1,611,276 |
| | | | |
| | 2,746,675 |
| | 2,750,225 |
| | | | | | 2,990,860 |
| | 2,969,847 |
| | | | |
PCI Loans | | | | | | | | | | | | | | | | |
Mortgage loans | | 1,939,757 |
| | 748,247 |
| | | | | | 748,930 |
| | 521,905 |
| | | | |
Securitized mortgage loans | | 23,313 |
| | 3,390 |
| | | | | | 8,146 |
| | 6,836 |
| | | | |
Mezzanine loans | | 7,425 |
| | 3,671 |
| | | | | | — |
| | — |
| | | | |
| | 1,970,495 |
| | 755,308 |
| | | | | | 757,076 |
| | 528,741 |
| | | | |
Allowance for loan losses | |
|
| | (49,631 | ) | | | | | |
|
| | (67,980 | ) | | | | |
Loans receivable, net | | $ | 4,717,170 |
| | $ | 3,455,902 |
| | | | | | $ | 3,747,936 |
| | $ | 3,430,608 |
| | | | |
Loans receivable carried at amortized cost at December 31, 2019 were as follows: |
| | | | | | | | | | | | | |
| | December 31, 2019 |
($ in thousands) | | Unpaid Principal Balance | | Amortized Cost | | Weighted Average Coupon | | Weighted Average Maturity in Years |
Non-PCI Loans | | | | | | | | |
Fixed rate | | | �� | | | | | |
Mortgage loans | | $ | 471,472 |
| | $ | 492,709 |
| | 10.7 | % | | 1.6 |
Mezzanine loans | | 495,182 |
| | 494,238 |
| | 12.6 | % | | 0.6 |
Non-mortgage loans | | 149,380 |
| | 148,623 |
| | 12.9 | % | | 5.4 |
| | 1,116,034 |
| | 1,135,570 |
| | | | |
Variable rate | | | | | | | | |
Mortgage loans | | 171,848 |
| | 172,269 |
| | 4.1 | % | | 0.3 |
Mezzanine loans | | 44,887 |
| | 44,637 |
| | 12.7 | % | | 1.6 |
| | 216,735 |
| | 216,906 |
| | | | |
| | 1,332,769 |
| | 1,352,476 |
| | | | |
PCI Loans | | | | | | | | |
Mortgage loans | | 1,165,804 |
| | 248,535 |
| | | | |
Allowance for loan losses | |
|
| | (48,187 | ) | | | | |
| |
|
| | 1,552,824 |
| | | | |
Interest receivable | | | | 13,504 |
| | | | |
Loans receivable | | $ | 2,498,573 |
| | $ | 1,566,328 |
| | | | |
__________
| |
(1)
| Represents loans transferred into securitization trusts that are consolidated by the Company (Note 14). |
Nonaccrual and Past Due and Nonaccrual Loans
Non-PCI loansLoans that are 90 days or more past due as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual status.
The table below presents the fair value and unpaid principal balance by aging of loans receivable at June 30, 2020 for which fair value option was elected. |
| | | | | | | | | | | | |
| | June 30, 2020 |
(In thousands) | | Fair Value | | Unpaid Principal Balance | | Fair Value less Unpaid Principal Balance |
Loans receivable—fair value option | | | | | | |
Current or less than 30 days past due | | $ | 687,273 |
| | $ | 679,505 |
| | $ | 7,768 |
|
30-59 days past due | | — |
| | — |
| | — |
|
60-89 days past due | | — |
| | — |
| | — |
|
90 days or more past due or nonaccrual | | 710,814 |
| | 1,927,361 |
| | (1,216,547 | ) |
| | $ | 1,398,087 |
| | $ | 2,606,866 |
| | $ | (1,208,779 | ) |
The following table provides an aging summary of non-PCI loans held for investment at carrying values before allowance for loan losses.losses and interest receivable at December 31, 2019:
|
| | | | |
(In thousands) | | December 31, 2019 |
Non-PCI loans at carrying values before allowance for loan losses | | |
Current or less than 30 days past due | | $ | 1,042,260 |
|
30-59 days past due | | — |
|
60-89 days past due | | — |
|
90 days or more past due or nonaccrual | | 310,216 |
|
| | $ | 1,352,476 |
|
|
| | | | | | | | | | | | | | | | | | | |
(In thousands) | Current or Less Than 30 Days Past Due | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90 Days or More Past Due and Nonaccrual | | Total Non-PCI Loans |
September 30, 2017 | $ | 2,558,938 |
| | $ | 990 |
| | $ | — |
| | $ | 190,297 |
| | $ | 2,750,225 |
|
December 31, 2016 | 2,912,023 |
| | 7,379 |
| | 1,172 |
| | 49,273 |
| | 2,969,847 |
|
For the Three and Six Months Ended June 30, 2019 and as of December 31, 2019Troubled Debt Restructuring
The following table providesDuring the three and six months ended June 30, 2019, there were 0 loans modified in a summary of non-PCI loan modifications classified as TDRs,troubled debt restructuring ("TDR"), in which the Company provided the borrowers, who are experiencing financial difficulties, with various concessions in interest rates, payment terms or default waivers. There were no loans modified as TDRs in the nine months ended September 30, 2017.
|
| | | | |
(Dollars in thousands) | | Nine Months Ended September 30, 2016 |
Loans modified as TDRs during the period: | | |
Number of loans | | 1 |
|
Carrying value of loans before allowance for loan losses | | $ | 37,611 |
|
Loss incurred | | $ | 1,687 |
|
At September 30, 2017 and December 31, 2016,2019, the Company had 1 existing TDR loan that was in maturity default with a carrying value of TDR loans before allowance for loan losses was $66.3loss and interest receivable of $37.8 million and $66.2 million, respectively. Thesean allowance for loan loss of $37.8 million. The Company had 0 additional lending commitment on the TDR loans were not in default post-modification. As of September 30, 2017, the Company has no additional commitments to lend to borrowers with TDR loans.
loan.
Non-PCI Impaired Loans
Non-PCI loans, excluding loans carried at fair value, are identified as impaired when it is no longer probable that interest or principal will be collected according to the contractual terms of the original loan agreement. Non-PCI impaired loans include predominantly loans under nonaccrual, performing and nonperforming TDRs. TDRs, as well as loans in maturity default.
The following table summarizes the non-PCI impaired loans:loans at December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | |
| | Unpaid Principal Balance | | Gross Carrying Value | | Allowance for Loan Losses |
(In thousands) | | | With Allowance for Loan Losses | | Without Allowance for Loan Losses | | Total | |
September 30, 2017 | | $ | 293,319 |
| | $ | 124,288 |
| | $ | 171,641 |
| | $ | 295,929 |
| | $ | 7,926 |
|
December 31, 2016 | | 116,881 |
| | 56,650 |
| | 60,025 |
| | 116,675 |
| | 6,287 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Gross Carrying Value before Interest Receivable | | |
(In thousands) | | Unpaid Principal Balance | | With Allowance for Loan Losses | | Without Allowance for Loan Losses | | Total | | Allowance for Loan Losses |
December 31, 2019 | | $ | 326,151 |
| | $ | 71,754 |
| | $ | 259,011 |
| | $ | 330,765 |
| | $ | 48,146 |
|
The average carrying value and interest income recognized on non-PCI impaired loans for the three and six months ended June 30, 2019 were as follows:follows.
|
| | | | | | | | |
(In thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Average carrying value before allowance for loan losses and interest receivable | | $ | 310,914 |
| | $ | 298,092 |
|
Total interest income recognized during the period impaired | | 1,289 |
| | 4,292 |
|
Cash basis interest income recognized | | — |
| | 447 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Average carrying value before allowance for loan losses | | $ | 201,600 |
| | $ | 104,000 |
| | $ | 156,450 |
| | $ | 83,891 |
|
Total interest income recognized | | 2,546 |
| | — |
| | 4,343 |
| | — |
|
Purchased Credit-Impaired Loans
PCI loans are acquired loans with evidence of credit quality deterioration for which it is probable at acquisition that the Company will collect less than the contractually required payments.
In January 2017, the Company acquired additional PCI loans throughare recorded at the Mergerinitial investment in the loans and accreted to the estimated cash flows expected to be collected as wellmeasured at acquisition date. The excess of cash flows expected to be collected, measured as part of a loan portfolio secured by commercial propertiesacquisition date, over the estimated fair value represents the accretable yield and is recognized in Ireland. Information about theseinterest income over the remaining life of the loan. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected, which represents the nonaccretable difference, is not recognized as an adjustment of yield, loss accrual or valuation allowance.
Factors that most significantly affect estimates of cash flows expected to be collected, and accordingly the accretable yield, include: (i) estimate of the remaining life of acquired loans which may change the amount of future interest income; (ii) changes to prepayment assumptions; (iii) changes to collateral value assumptions for loans expected to foreclose; and (iv) changes in interest rates on variable rate loans.
There were 0 PCI loans atacquired in the time of their acquisition is presented below:
|
| | | | |
(In thousands) | | January 2017 |
Contractually required payments including interest | | $ | 1,154,596 |
|
Less: Nonaccretable difference | | (878,257 | ) |
Cash flows expected to be collected | | 276,339 |
|
Less: Accretable yield | | (23,594 | ) |
Fair value of loans acquired | | $ | 252,745 |
|
six months ended June 30, 2019.Changes in accretable yield of PCI loans for the six months ended June 30, 2019 were as follows:
|
| | | | |
(In thousands) | | Six Months Ended June 30, 2019 |
Beginning accretable yield | | $ | 9,620 |
|
Changes in accretable yield | | 407 |
|
Accretion recognized in earnings | | (5,924 | ) |
Effect of changes in foreign exchange rates | | (15 | ) |
Ending accretable yield | | $ | 4,088 |
|
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 |
Beginning accretable yield | | $ | 52,572 |
| | $ | 66,639 |
|
Additions | | 23,594 |
| | 6,595 |
|
Changes in accretable yield | | 26,008 |
| | 21,228 |
|
Accretion recognized in earnings | | (46,426 | ) | | (50,012 | ) |
Effect of changes in foreign exchange rates | | 2,217 |
| | 105 |
|
Ending accretable yield | | $ | 57,965 |
| | $ | 44,555 |
|
At September 30, 2017 and December 31, 2016, the Company applied either2019, there were 0 PCI loans on the cash basis or cost recovery method for recognition of interest income on PCI loans with carrying value before allowance for loan losses of $195.5 million and $32.0 million, respectively, as the Company did not have reasonable expectations of the timing and amount of future cash receipts on these loans.income.
Allowance for Loan Losses
The allowanceAllowance for loan losses and related carrying values before interest receivable of loans held for investment at December 31, 2019 were as follows:
| | | | September 30, 2017 | | December 31, 2016 | | December 31, 2019 |
(In thousands) | | Allowance for Loan Losses | | Carrying Value | | Allowance for Loan Losses | | Carrying Value | | Allowance for Loan Losses | | Carrying Value |
Non-PCI loans | | $ | 7,926 |
| | $ | 124,288 |
| | $ | 6,287 |
| | $ | 56,650 |
| | $ | 48,146 |
| | $ | 71,754 |
|
PCI loans | | 41,705 |
| | 217,055 |
| | 61,693 |
| | 243,155 |
| | 41 |
| | 17,935 |
|
| | $ | 49,631 |
| | $ | 341,343 |
| | $ | 67,980 |
| | $ | 299,805 |
| | $ | 48,187 |
| | $ | 89,689 |
|
Changes in allowance for loan losses isfor the six months ended June 30, 2019 are presented below:below. |
| | | | |
(In thousands) | | Six Months Ended June 30, 2019 |
Allowance for loan losses at January 1 | | $ | 32,940 |
|
Provision for loan losses, net | | 18,614 |
|
Charge-off | | (616 | ) |
Allowance for loan losses at June 30 | | $ | 50,938 |
|
|
| | | | | | | | |
| | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 |
Allowance for loan losses at January 1 | | $ | 67,980 |
| | $ | 35,187 |
|
Provision for loan losses | | 12,907 |
| | 17,271 |
|
Charge-off | | (31,256 | ) | | (1,066 | ) |
Allowance for loan losses at September 30 | | $ | 49,631 |
| | $ | 51,392 |
|
Included in provisionProvision for loan losses in the nine months ended September 30, 2017by loan type was a recoveryas follows: |
| | | | | | | | |
(In thousands) | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Non-PCI loans | | $ | 12,807 |
| | $ | 12,807 |
|
PCI loans | | 2,196 |
| | 5,807 |
|
Total provision for loan losses, net | | $ | 15,003 |
| | $ | 18,614 |
|
Lending Commitments
The Company has lending commitments to borrowers pursuant to certain loan agreements in which the borrower may submit a request for funding contingent on achieving certain criteria, which must be approved by the Company as lender, such as leasing, performance of capital expenditures and construction in progress with an approved budget. At SeptemberJune 30, 2017, assuming the terms to qualify for future fundings, if any, have been met,2020, total unfunded lending commitments was $137.6$140.6 million, of which the Company's share was $71.0$37.9 million, net of amounts attributable to noncontrolling interests.
6. Equity and Debt Investments in Unconsolidated Ventures
The Company's equity investments in unconsolidated venturesand debt securities are represented by the following:
|
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Equity Investments | | | | |
Equity method investments | | | | |
Investment ventures | | $ | 1,448,069 |
| | $ | 1,845,129 |
|
Private funds | | 182,807 |
| | 142,386 |
|
| | 1,630,876 |
| | 1,987,515 |
|
Other equity investments | | | | |
Marketable equity securities | | 116,911 |
| | 138,586 |
|
Investment ventures | | 1,668 |
| | 91,472 |
|
Private funds and non-traded REIT | | 42,044 |
| | 38,641 |
|
Total equity investments | | 1,791,499 |
| | 2,256,214 |
|
| | | | |
Debt Securities | | | | |
N-Star CDO bonds, available for sale | | 32,271 |
| | 54,859 |
|
CMBS of consolidated fund, at fair value | | 1,678 |
| | 2,732 |
|
Total debt securities | | 33,949 |
| | 57,591 |
|
Equity and debt investments | | $ | 1,825,448 |
| | $ | 2,313,805 |
|
Equity Investments
The Company's equity investments represent noncontrolling equity interests in various entities,
as follows: |
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Equity method investments | | | | |
Investment ventures | | $ | 1,118,537 |
| | $ | 933,262 |
|
Private funds and retail companies | | 23,638 |
| | 19,997 |
|
| | 1,142,175 |
| | 953,259 |
|
Cost method investments | | | | |
Investment venture | | 89,261 |
| | 99,736 |
|
Private fund and retail companies | | 26,882 |
| | — |
|
| | 116,143 |
| | 99,736 |
|
Investments under fair value option | | | | |
Private funds | | 287,886 |
| | — |
|
Investment ventures | | 26,388 |
| | — |
|
| | 314,274 |
| | — |
|
| | $ | 1,572,592 |
| | $ | 1,052,995 |
|
Investments in unconsolidated ventures acquired inincluding investments for which the Merger were recorded atCompany has elected the fair value at the Closing Date. Any difference between the Company's carrying value of an equity method investment and the Company's proportionate share of historical carrying value of the underlying net assets of the equity method investee represents a basis difference. Any basis difference not attributed to goodwill is amortized over the remaining weighted average useful life of the underlying identifiable assets of each acquired equity method investment, recorded in earnings from investments in unconsolidated ventures.option.
Equity Method Investments
CertainThe Company owns a significant interest in CLNC, a publicly-traded REIT that it manages. The Company accounts for its investment under the equity method as it exercises significant influence over operating and financial policies of CLNC through a combination of its ownership interest, its role as the external manager and board representation, but does not control CLNC. The Company also owns equity method investments that are structured as joint ventures with one or more private funds or other investment vehicles managed by the Company, or with third party joint venture partners. These investment ventures are generally capitalized through equity contributions from the members and/or leveraged through various financing arrangements. The Company elected the fair value option to account for its interests in certain investment ventures and limited partnership interests in third party private equity funds (Note 12).
The assetsliabilities of the equity method investment entities may only be used to settlesettled using the liabilitiesassets of these entities and there is no recourse to the general credit of either the Company noror the other investors for the obligations of these investment entities. Neither the Company nor the other investors are required to provide financial or other support in excess of their capital commitments, except for the Company's distribution support obligations to retail companies, as discussed below.
commitments. The Company’s exposure to the investment entities is limited to its equity method investment balance asbalance.
The Company’s investments accounted for under the equity method are summarized below:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | | | Ownership Interest (1) | | Carrying Value |
Investments | | Description | | September 30, 2017 | | September 30, 2017 | | December 31, 2016 |
Starwood Waypoint Homes | | Common equity in operating company of single family residential REIT | | —% | | $ | — |
| | $ | 316,113 |
|
Colony American Finance | | Common equity in specialty finance company that lends to owners of single family homes for rent | | —% | | — |
| | 57,754 |
|
NorthStar Realty Europe Corp | | Common equity in publicly traded REIT managed by the Company | (2) | 8.9% | | 63,075 |
| | — |
|
RXR Realty | | Common equity in investment venture with a real estate owner, developer and investment manager | (2) | 27.2% | | 103,510 |
| | — |
|
Preferred equity | | Preferred equity investments with underlying real estate | (3) | Various | | 432,937 |
| | 188,255 |
|
ADC investments | | Investments in acquisition, development and construction loans in which the Company participates in residual profits from the projects, and the risk and rewards of the arrangements are more similar to those associated with investments in joint ventures | (4) | Various | | 330,160 |
| | 271,649 |
|
Private funds and retail companies | | GP interests in Company sponsored private funds, LP interest in third-party sponsored private fund, as well as seed capital in investment companies | (5) | Various | | 23,638 |
| | 19,997 |
|
Other investment ventures | | Interests in 16 investments, each with less than $62 million carrying value at September 30, 2017 | | Various | | 188,855 |
| | 99,491 |
|
| | | | | | $ | 1,142,175 |
| | $ | 953,259 |
|
|
| | | | | | | | | | |
($ in thousands) | | | | Carrying Value at |
Investments (1) | | Description | | June 30, 2020 | | December 31, 2019 |
Colony Credit Real Estate, Inc.(2) | | Common equity in publicly traded commercial real estate credit REIT managed by the Company and membership units in its operating subsidiary (36.4% ownership) | | $ | 336,513 |
| | $ | 725,443 |
|
RXR Realty, LLC | | Common equity in investment venture with a real estate investor, developer and investment manager (sold in February 2020) | | — |
| | 93,390 |
|
Preferred equity | | Preferred equity investments with underlying real estate | | 140,313 |
| | 138,428 |
|
ADC investments | | Investments in acquisition, development and construction loans in which the Company participates in residual profits from the projects, and the risk and rewards of the arrangements are more similar to those associated with investments in joint ventures | | 575,555 |
| | 543,296 |
|
Private funds | | General partner and/or limited partner interests in private funds (excluding carried interest allocation) | | 179,270 |
| | 115,055 |
|
Private funds—carried interest | | Disproportionate allocation of returns to the Company as general partner or equivalent based on the extent to which cumulative performance of the fund exceeds minimum return hurdles | | 393 |
| | 21,940 |
|
Other investment ventures | | Interests in 11 investments at June 30, 2020 | | 189,569 |
| | 127,088 |
|
Fair value option | | Interests in initial stage, real estate development and hotel ventures and limited partnership interests in private equity funds | | 209,263 |
| | 222,875 |
|
| | | | $ | 1,630,876 |
| | $ | 1,987,515 |
|
__________
| |
(1) | The Company's ownership interest represents capital contributed to date and may not be reflective of the Company's economic interest in the entity because of provisions in operating agreements governing various matters, such as classes of partner or member interests, allocations of profits and losses, preferential returns and guaranty of debt. Each equity method investment has been determined to be either a VIE for which the Company was not deemed to be the primary beneficiary or a voting interest entity in which the Company does not have the power to control through a majority of voting interest or through other arrangements. |
| |
(2) | CLNC is governed by its board of directors. The Company has significant influence overCompany's role as manager is under the investees through its voting rights and/or representation on the investees'supervision and direction of CLNC's board of directors, or equivalent committee. |
| |
(3) | For one investment wherewhich includes representatives from the Company has 75% ownership at September 30, 2017,but the minority member has control over day-to-day operationsmajority of the investment venture, therefore, the Company does not control but has significant influence over the investment venture through its majority interest. Some preferred equity investments may not have stated ownership interest. |
| |
(4) | Ownership interests generally range between 34% to 50%. Certain ADC investments have residual profit participation without a stated ownership interest. |
| |
(5) | Consists of (i) immaterial general partner ("GP") interests in private funds between 0.1% to 2.1%, (ii) 15% limited partner ("LP") interest in a private fund in which the Company has an equity method investment in the sponsor and (iii) seed capital for a 50% interest in investment companies.whom are independent directors. |
Starwood Waypoint Homes (formerly known as Colony Starwood Homes; NYSE: SFR)—Significant Sales of Equity Method Investments
In connection with a secondary offering of common shares in March 2017 by SFR, the Company sold approximately 7.6 million shares for net proceeds of $239.1 million. In June 2017,February 2020, the Company sold its remaining 7.5 million sharesequity investment in RXR Realty, LLC for net proceeds after taxes of $261.4 million. The Company recognized total gains$179.1 million, recording a gain of $191.2$106.1 million, from the sales, which is included in earnings from investments in unconsolidated ventures.equity method earnings.
Colony American Finance—Impairment of Equity Method Investments
The Company evaluates its equity method investments for OTTI at each reporting period and recorded impairment of $297.0 million and $247.8 million for the three months ended June 30, 2020 and 2019, respectively, and $297.8 million and $250.4 million for the six months ended June 30, 2020 and 2019, respectively. Equity method investments that were written down to fair value during the six months ended June 30, 2020 and year ended December 31, 2019 had carrying values totaling $388.8 million and $745.3 million, respectively, at the time of impairment. Impairment charges were generally determined using recoverable values for investments resolved or sold, its entire 17.4% ownership interest in July 2017, with immaterial income statement impact resulting from the sale transaction.or investment values based upon projected exit strategies, other than for CLNC as discussed below.
NorthStar Realty Europe CorpCLNC
Other-Than-Temporary Impairment ("OTTI")—At September 30, 2017, the Company owned 4.9 million shares of NRE common stock or an 8.9% ownership interest, with approximately 4.7 million of the shares acquired inIn the second quarter of 2017. Prior to May 2017,2020 and 2019, the Company accounted fordetermined that its previously immaterial interest in NRE as an investment in marketable equity securities.
Cost Method Investments
Investments that do not qualify forCLNC was other-than-temporarily impaired and recorded an impairment charge, included in equity method accountinglosses, of $274.7 million and $227.9 million, respectively. In each case, the OTTI charge was measured as the excess of carrying value over market value of its investment in CLNC based upon CLNC's closing stock price on the last trading day of the quarter of $7.02 per share on June 30, 2020 and $15.50 per share on June 28, 2019.
At June 30, 2020, the Company's investment in CLNC had a carrying value of $611.2 million prior to the OTTI charge, which was in excess of its market value of $336.5 million. In March and April 2020, there was a significant decrease in CLNC's stock price, which reflected the significant volatility in equity markets and the significant decline in equity prices, for whichmortgage REITs and across industries, due to the COVID-19 crisis. Along with other publicly traded mortgage REITs, CLNC has seen a rebound in its stock price in May and June 2020, but its stock continues to trade below pre-COVID-19 levels. As of June 30, 2020, there was not a large disparity between the Company's carrying value in CLNC and CLNC's internal estimated NAV. Nevertheless, with increasing uncertainty over the extent and duration of the COVID-19 crisis, and the timeline for a recovery in the U.S economy, the Company believes that it is unlikely that the CLNC stock will recover and trade closer to its NAV in the near term. Accordingly, the Company also believes that it would be unlikely that the shortfall in market value relative to carrying value of its investment in CLNC would recover in the near term. As a result, the Company recognized an other-than-temporary impairment on its investment in CLNC.
Basis Difference—The impairment charge in June 2019 resulted in a basis difference between the Company's carrying value of its investment in CLNC and the Company's proportionate share of CLNC's book value of equity. The impairment charge was applied to the Company's investment in CLNC as a whole and was not determined based on an impairment assessment of individual assets held by CLNC. In order to address this basis difference, the Company allocated the impairment charge on a relative fair value option is not elected are accountedbasis to investments identified by CLNC as non-strategic assets. Accordingly, for underany future impairment charges taken by CLNC on these non-strategic assets, the cost method, as follows:
Investment Ventures—The Company funded $50 million to an investor consortium, alongside $50 million from a passive co-investment partner, in common stock of a supermarket chain. Dividends of $10.3 million were received in June 2017 as a return of capital andCompany's share thereof will be applied to reduce the costbasis difference and will not be recorded as an equity method loss until such time the basis difference associated with the respective underlying investments has been fully eliminated. For the three and six months ended June 30, 2020, the Company reduced its share of investment.net loss from CLNC by $8.7 million and $27.9 million, respectively, representing the basis difference allocated to non-strategic assets realized by CLNC during these periods. The remaining basis difference at June 30, 2020 was $58.9 million. The impairment charge on its investment in CLNC in June 2020 will establish additional basis difference moving forward.
RetailOther Equity Investments
Other equity investments consist of the following:
Marketable Equity Securities—These are primarily equity investment in a third party managed mutual fund and publicly traded equity securities held by a consolidated private open-end fund. The equity securities of the consolidated fund comprise listed stocks primarily in the U.S. and to a lesser extent, in Europe, and predominantly in the digital real estate and telecommunication sectors.
Investment Ventures—In April 2020, the Company recapitalized its co-investment venture, which holds common equity in the Albertsons supermarket chain, and reduced its interest in the venture from 50% to 2%, generating total proceeds of $148.5 million and realizing a gain of $60.7 million to the venture, of which the Company's share is 50%. The interest recapitalized by the venture entitles the Company and its original co-investors to potential future profit allocation, which takes the form of an allocation of returns from the venture in excess of a minimum return threshold achieved by the new venture partner. The potential future profit allocation, of which the Company shares in 49%, is assigned a fair value each reporting period assuming a liquidation of the venture as of the reporting date. Such fair value may fluctuate over time based upon achievement of the minimum return threshold. Additionally, a portion of the venture's interest in Albertsons was monetized in conjunction with Albertsons' recapitalization and subsequent initial public offering in June 2020. The Company's remaining equity interest in the venture is valued based upon the publicly traded stock price of Albertsons Companies, Inc. ("ACI"), adjusted for liquidity restrictions attributable to lock-up provisions on the venture's holdings in ACI.
Private Funds and Non-Traded REIT—The Company has immaterialThis represents interests in its sponsoreda Company-sponsored private fund and a non-traded REITs, NorthStar Income I, NorthStar Income II,REIT, NorthStar Healthcare Income, Inc. ("NorthStar Healthcare"), and NorthStar/RXR New York Metro Real Estate, Inc. ("NorthStar/RXR NY Metro").
Private Funds—This represents immaterial limited partnership interestsinterest in a third party private real estate fund sponsored by an equity method investee, offor which the Company.
Investments under Fair Value Option
The Company elected the fair value option to account for its limited partnership interests, which range from 0.1% to 22.2%, in third-party sponsored funds acquired through the Merger, as well as equity method investments in certain investment ventures. The Company records earnings from these investments based on a change in fair value of its share of projected future cash flows. Unrealized gains or losses on changes in fair value of these investments is presented in Note 13NAV practical expedient (Note 12).
Investment and Other Commitments
Investment Ventures—Pursuant to the operating agreements of certain unconsolidated ventures, the venture partners may be required to fund additional amounts for future investments, unfunded lending commitments, ordinary operating costs, guaranties or commitments of the venture entities. The Company also has lending commitments under ADC arrangements which are accounted for as equity method investments. At SeptemberJune 30, 2017,2020, the Company’s share of these commitments was $45.0$49.7 million.
Private Funds—At SeptemberJune 30, 2017,2020, the Company hadhas unfunded commitments of $121.8 million and $17.5$228.6 million to Company-sponsored funds that are not consolidatedCompany sponsored and third party-sponsored funds, respectively, including a private real estate fundparty sponsored by an equity method investee of the Company.funds.
Retail Companies—The Company has committed to purchase up to $10.0 million in shares of common stock of its retail companies, which consist of non-traded REITs and investment companies, during the period from when each offering was declared effective through the end of their respective offering period, in the event that distributions to their stockholders, on a quarterly basis, exceed certain measures of operating performance. In addition, the Company committed up to $10.0 million to provide as distribution support in future sponsored retail companies, up to a total of five new companies per year. At September 30, 2017, the Company's remaining unfunded commitments to certain of the retail companies totaled $15.8 million.
7.Debt Securities
The following table summarizes the Company's investment in debt securities classified as available for saleis composed of available-for-sale N-Star CDO bonds and equitycommercial mortgage-backed securities (“CMBS”) held by a consolidated fund that are accounted for at fair value through earnings.sponsored investment company which is currently in liquidation. The CMBS held by the sponsored investment company were sold and liquidating distributions were made subsequent to June 30, 2020.
|
| | | | | | | | | | | | | | | | |
| | | | Gross Cumulative Unrealized | | |
(in thousands) | | Amortized Cost | | Gains | | Losses | | Fair Value |
September 30, 2017 | | | | | | | | |
Available for sale debt securities: | | | | | | | | |
CRE securities of consolidated N-Star CDOs:(1) | | | | | | | | |
CMBS | | $ | 174,164 |
| | $ | 3,518 |
| | $ | (8,619 | ) | | $ | 169,063 |
|
Other securities (2) | | 59,379 |
| | 6,132 |
| | (71 | ) | | 65,440 |
|
N-Star CDO bonds (3) | | 112,578 |
| | 4,814 |
| | (10,127 | ) | | 107,265 |
|
CMBS and other securities (4) | | 39,796 |
| | 3,046 |
| | (392 | ) | | 42,450 |
|
| | 385,917 |
| | 17,510 |
| | (19,209 | ) | | 384,218 |
|
Equity securities of consolidated fund | | | | | | | | 24,445 |
|
| |
|
|
|
|
|
|
|
|
| $ | 408,663 |
|
December 31, 2016 | | | | | | | | |
Available for sale debt securities: | | | | | | | | |
CMBS | | $ | 24,103 |
| | $ | — |
| | $ | (657 | ) | | $ | 23,446 |
|
__________
(1) As of September 30, 2017, the carrying value ofThe N-Star CDO bonds payable in consolidated N-Starare investment-grade subordinate bonds retained by NRF from its sponsored collateralized debt obligations ("CDOs"), and CDO bonds originally issued by NRF that were subsequently repurchased by NRF at a discount. These CDOs is $189.9 million.
(2) Represents primarily agency debentures, and to a lesser extent, unsecured REIT debt and trust preferred securities.
| |
(3)
| Excludes $140.2 million principal amount of N-Star CDO bonds held by the Company in its consolidated CDOs that are eliminated upon consolidation. |
| |
(4)
| Includes $20.6 million of CMBS held by a sponsored investment company, which as of September 30, 2017, is consolidated by the Company through its seed capital. Other securities include a trust preferred security and certain investments in other third party CDO bonds.
|
N-Star CDOs—The Company acquired, upon the Merger, NRF's legacy CDOs. NRF had sponsored CDOs, collateralized primarily by commercial real estate ("CRE") debt and CRE securities,securities.
The following tables summarize the balance and activities of the sponsored CRE securities CDOs are consolidated. Additionally, NRF had acquiredN-Star CDO bonds.
|
| | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Without Allowance for Credit Loss | | Allowance for Credit Loss | | Gross Cumulative Unrealized | | |
(in thousands) | | | | Gains | | Losses | | Fair Value |
June 30, 2020 | | $ | 46,922 |
| | $ | (22,229 | ) | | $ | 7,578 |
| | $ | — |
| | $ | 32,271 |
|
December 31, 2019 | | 46,002 |
| | NA |
| | 8,857 |
| | — |
| | 54,859 |
|
There were 0 sales of N-Star CDO bonds during the equity interests of CRE debt focused CDOs sponsored by third parties. These CDOs are collectively referred to assix months ended June 30, 2020 and year ended December 31, 2019.
At June 30, 2020, the N-Star CDOs.
At the time of issuance of the sponsored CDOs, NRF retained investment-grade subordinate bonds. NRF also retained equity interests in the form of preferred shares in all of its sponsored CDOs. Additionally, NRF repurchased CDO bonds originally issuedhave contractual maturity ranging from approximately 17 to third parties at discounts to par. These repurchased CDO bonds21 years, and retained investment-grade subordinate bonds are collectively referred to as N-Star CDO bonds. All N-Star CDOs are past their reinvestment period and are amortizing over time as the underlying assets pay down or are sold.
CMBS and Other Securities—These securities are predominantly commercial mortgage-backed securities (“CMBS”), including investments in mezzanine positions.
At September 30, 2017, contractual maturities of CRE securities ranged from ten months to 35 years, with a weighted average expected maturity of 3.9 years.
Equity securities of consolidated fund—These are publicly traded equity securities held by a consolidated open-end fund. At September 30, 2017, these equity securities comprise listed stock predominantly in the U.S. and7 months to a lesser extent, in the United Kingdom, and primarily in the financial, real estate and consumer sectors.
Disposition of Securities
Realized gains (losses) from sale of securities are recorded in other gain (loss), net, as follows:
|
| | | | | | | | |
(In thousands) | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Available for sale debt securities: | | | | |
Proceeds from sale | | $ | — |
| | $ | 24,788 |
|
Gross realized gain | | — |
| | 567 |
|
| | | | |
Equity securities of consolidated fund: | | | | |
Realized loss, net | | (86 | ) | | (86 | ) |
3.5 years based upon expected cash flows.Impairment of AFS Debt Securities
AFS debt securities are considered to be impaired if their fair value is less than their amortized cost basis.
If the Company intends to sell or is more likely than not required to sell the debt security before recovery of its amortized cost, the entire impairment amount is recognized in earnings within other gain (loss) as a write-off of the amortized cost basis of the debt security.
If the Company does not intend to sell or is not more likely than not required to sell the debt security before recovery of its amortized cost:
Upon adoption of CECL effective January 1, 2020, the credit component of the loss is recognized in earnings within other gain (loss) as an allowance for credit loss, which may be subject to reversal for subsequent recoveries in fair value. The following table presents AFS securitiesnon-credit loss component is recognized in other comprehensive income or loss ("OCI"). The allowance is charged off against the amortized cost basis of the security if in a grosssubsequent period, the Company intends to or is more likely than not required to sell the security, or if the Company deems the security to be uncollectible.
Prior to adoption of CECL on January 1, 2020, the Company evaluated if the decline in fair value is other than temporary, in which case, the credit loss component was recognized in earnings as a write-off of the amortized cost basis of the debt security that is not subject to subsequent reversal. The non-credit loss component was recognized in OCI. If the impairment is not other-than-temporary, the entire unrealized loss position:
|
| | | | | | | | | | | | | | | | |
| | Less Than 12 Months |
| | September 30, 2017 | | December 31, 2016 |
(In thousands) | | Fair Value | | Gross Unrealized Loss | | Fair Value | | Gross Unrealized Loss |
CRE securities of consolidated N-Star CDOs: | | | | | | | | |
CMBS | | $ | 76,108 |
| | $ | (8,619 | ) | | $ | — |
| | $ | — |
|
Other securities | | 17 |
| | (71 | ) | | — |
| | — |
|
N-Star CDO bonds | | 70,061 |
| | (10,127 | ) | | — |
| | — |
|
CMBS and other securities | | 19,512 |
| | (392 | ) | | 23,446 |
| | (657 | ) |
There were no AFS securitiesis recognized in a gross unrealized loss position for more than 12 months. Any unrealized losses on securities acquired through the Merger were reset on the Closing Date.OCI.
For the three and ninesix months ended SeptemberJune 30, 2017,2020, the Company recorded $7.2 million and $7.9 million, respectively, of OTTIallowance for credit loss in other gain (loss)loss of $21.4 million and $22.2 million, respectively. The credit loss was determined based upon an analysis of the present value of contractual cash flows expected to be collected from the underlying collateral as compared to the amortized cost basis of the security. At June 30, 2020, there were 0 AFS debt securities in unrealized loss positions without allowance for credit loss.
For both three and six months ended June 30, 2019, the consolidated statementsCompany recorded OTTI loss on AFS debt securities of operations$0.7 million in other loss. The losses were due to an adverse change in expected cash flows primarily on CMBS held by consolidated N-Star CDOs. With the exception of these securities, theCDO bonds. The Company does not intend to sell any of the AFS securities in a loss position andbelieved that it iswas not likely that it would recover the Company will be
required to sellfull amortized cost on these securities, prior to recoveryprimarily based upon the performance and value of their amortized cost, which may be at maturity. The Company believes that the remainingunderlying collateral. At December 31, 2019, there were 0 AFS debt securities with unrealized loss in accumulated other comprehensive income are not other than temporarily impaired at September 30, 2017.AOCI.
Purchased Credit-Impaired Debt Securities
Certain debt securities acquired by the Company through the Merger were considered to be credit impaired at time of acquisition, with the following outstanding balance at September 30, 2017:
|
| | | | |
(In thousands) | | September 30, 2017 |
Outstanding principal | | $ | 440,602 |
|
Amortized cost | | 37,179 |
|
Carrying value | | 37,025 |
|
Information about these PCI debt securities upon acquisition is presented below:
|
| | | | |
(In thousands) | | January 2017 |
Contractually required payments including interest | | $ | 565,755 |
|
Less: Nonaccretable difference | | (433,321 | ) |
Cash flows expected to be collected | | 132,434 |
|
Less: Accretable yield | | (74,848 | ) |
Fair value of PCI debt securities acquired | | $ | 57,586 |
|
The table below presents changes in accretable yield related to these PCI debt securities:
|
| | | | |
(In thousands) | | Nine Months Ended September 30, 2017 |
Beginning accretable yield | | $ | — |
|
Assumed through the Merger | | 74,848 |
|
Accretion recognized in earnings | | (2,321 | ) |
Reduction due to payoffs or disposals | | (8,784 | ) |
Net reclassifications from (to) nonaccretable difference | | (17,503 | ) |
Ending accretable yield | | $ | 46,240 |
|
7. Goodwill, Deferred Leasing Costs and Other Intangibles
Goodwill
GoodwillThe following table presents changes in the carrying value of goodwill.
|
| | | | | | | | |
| | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 |
Beginning balance | | $ | 1,452,891 |
| | $ | 1,514,561 |
|
Business combination (Note 3) (1) | | (7,134 | ) | | — |
|
Impairment | | (594,000 | ) | | — |
|
Ending balance | | $ | 851,757 |
| | $ | 1,514,561 |
|
__________
| |
(1) | Includes the effects of measurement period adjustments within a one year period following the consummation of a business combination. |
In the first quarter of 2020, $51.0 million of goodwill was reassigned from the other investment management segment to the digital reportable segment to reflect the value associated with certain existing investment vehicles that were repurposed to execute an investment strategy focused on the digital sector, as well as a team of professionals dedicated to the strategy. The amount that was reassigned to the digital segment was determined based upon the fair value of this digital strategy platform relative to the overall other investment management goodwill balance prior to the reassignment.
Goodwill balance by reportable segment is as follows. |
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Balance by reportable segment: | | | | |
Digital (1) | | $ | 770,196 |
| | $ | 726,330 |
|
Other investment management | | 81,561 |
| | 726,561 |
|
| | $ | 851,757 |
| | $ | 1,452,891 |
|
__________
| |
(1) | At June 30, 2020 and December 31, 2019, goodwill of $140.5 million related to the DBH acquisition was deductible for income tax purposes. |
Impairment of Goodwill
Digital—The Company believes that the current shift and increased reliance on a digital economy positions the Company's digital real estate and digital investment management business for further growth. Therefore, the Company determined that there were no indicators of impairment on goodwill in the digital reportable segment.
Other Investment Management—In connection with the review and preparation of the financial statements, the Company determined that the deterioration in economic conditions as a result of COVID-19 and the Company's acceleration of its digital transformation in the second quarter of 2020 represent indicators of impairment to its other investment management goodwill. Accordingly, the Company updated its quantitative test of the other investment management goodwill, which indicated that the carrying value of the other investment management reporting unit including goodwill at March 31, 2020 and at June 30, 2020 exceeded its estimated fair value at each balance sheet date. As a result, the Company recognized impairment loss on its other investment management goodwill of $79.0 million and $515.0 million in the first and second quarters of 2020, respectively.
Valuation of the other investment management reporting unit contemplated a transition from certain of the Company's non-digital management business combinations is attributed to the following reportable segments. Goodwill of $1.4 billiona digitally-focused investment management business beginning in the fourth quarter of 2019. As discussed in Note 1, the Company determined in the second quarter of 2020 that it would accelerate the transition and focus on growing its digital investment management business. Consequently, as of June 30, 2020, the Company did not ascribe any value to future capital raising potential of the other investment management reporting unit, which represents the credit and opportunity fund management business, as it is no longer part of the Company's long-term strategy. Regarding the CLNC management contract, the COVID-19 crisis has caused the Company to postpone its plan to sell the contract. At June 30, 2020, the contract is valued based upon its contractual termination value, which the Company believes approximates fair value.
As previously discussed, the acceleration of a digital strategy, combined with the negative economic effects of COVID-19 on property operations and market values in 2020, resulted in significant reduction in value of the Company's non-digital balance sheet. Such reduction in turn translated into a significant decrease in value of the other investment management reporting unit. The Company had previously considered the hypothetical value of its non-digital investment management business in a spinoff that would result in the Company becoming externally managed, and assigned a value
to internally managing the Company's non-digital balance sheet assets. Under current circumstances, the Company determined that as of June 30, 2020, the hypothetical contract would have inconsequential, if any, remaining value to a market participant, and wrote off the value of internally managing its non-digital balance sheet.
The remaining balance of the goodwill in the other investment management segment arose from the Merger (Note 3), of which $0.2 billion$81.6 million as of June 30, 2020 is excluded below as it relates to the Townsend investment management business that is held for sale at September 30, 2017 (Note 9). The total goodwill amount below is not expected to be deductible for income tax purposes.
|
| | | | | | | |
(In thousands) | September 30, 2017 | | December 31, 2016 |
Industrial | $ | 20,000 |
| | $ | 20,000 |
|
Investment management | 1,808,816 |
| | 660,127 |
|
| $ | 1,828,816 |
| | $ | 680,127 |
|
No impairment was recognized on goodwill in connection with the industrial and investment management segments above during the nine months ended September 30, 2017 and 2016. However, impairment was recorded on the Townsend goodwillfully written off in the three months ended September 30, 2017, as discussed in Note 9.
near future when a runoff of the credit management business is substantially completed.
Deferred Leasing Costs, Other Intangible Assets and Intangible Liabilities
The Company's deferredDeferred leasing costs otherand identifiable intangible assets and intangible liabilities, excluding those related to assets held for sale, are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
(In thousands) | Carrying Amount (Net of Impairment)(1) | | Accumulated Amortization | | Net Carrying Amount | | Carrying Amount (Net of Impairment)(1) | | Accumulated Amortization | | Net Carrying Amount |
Deferred Leasing Costs and Intangible Assets | | | | | | | | | | | |
In-place lease values | $ | 240,520 |
| | $ | (79,648 | ) | | $ | 160,872 |
| | $ | 149,301 |
| | $ | (52,489 | ) | | $ | 96,812 |
|
Above-market lease values | 165,705 |
| | (29,564 | ) | | 136,141 |
| | 27,731 |
| | (13,705 | ) | | 14,026 |
|
Below-market ground lease obligations | 32,979 |
| | (345 | ) | | 32,634 |
| | 34,241 |
| | (411 | ) | | 33,830 |
|
Deferred leasing costs | 114,281 |
| | (33,846 | ) | | 80,435 |
| | 88,879 |
| | (25,502 | ) | | 63,377 |
|
Trade name (2) | 79,700 |
| | (2,327 | ) | | 77,373 |
| | 15,500 |
| | NA |
| | 15,500 |
|
Investment management contracts | 397,980 |
| | (57,763 | ) | | 340,217 |
| | 39,646 |
| | (25,400 | ) | | 14,246 |
|
Customer relationships | 59,400 |
| | (9,271 | ) | | 50,129 |
| | 46,800 |
| | (5,850 | ) | | 40,950 |
|
Other (3) | 56,162 |
| | (1,465 | ) | | 54,697 |
| | — |
| | — |
| | — |
|
Total deferred leasing costs and intangible assets | $ | 1,146,727 |
| | $ | (214,229 | ) | | $ | 932,498 |
| | $ | 402,098 |
| | $ | (123,357 | ) | | $ | 278,741 |
|
Intangible Liabilities | | | | | | | | | | | |
Below-market lease values | $ | 224,834 |
| | $ | (31,234 | ) | | $ | 193,600 |
| | $ | 30,507 |
| | $ | (10,690 | ) | | $ | 19,817 |
|
Above-market ground lease obligations | 13,417 |
| | (533 | ) | | 12,884 |
| | 172 |
| | (12 | ) | | 160 |
|
Total intangible liabilities | $ | 238,251 |
| | $ | (31,767 | ) | | $ | 206,484 |
| | $ | 30,679 |
| | $ | (10,702 | ) | | $ | 19,977 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
(In thousands) | Carrying Amount (Net of Impairment)(1) | | Accumulated Amortization (1) | | Net Carrying Amount (1) | | Carrying Amount (Net of Impairment)(1) | | Accumulated Amortization (1) | | Net Carrying Amount (1) |
Deferred Leasing Costs and Intangible Assets | | | | | | | | | | | |
Deferred leasing costs and lease intangible assets (2) | $ | 403,826 |
| | $ | (158,178 | ) | | $ | 245,648 |
| | $ | 425,106 |
| | $ | (123,686 | ) | | $ | 301,420 |
|
Investment management intangibles (3) | 285,233 |
| | (114,393 | ) | | 170,840 |
| | 285,233 |
| | (96,466 | ) | | 188,767 |
|
Customer relationships (4) | 73,400 |
| | (3,296 | ) | | 70,104 |
| | 71,000 |
| | (250 | ) | | 70,750 |
|
Trade names (5) | 39,601 |
| | (2,380 | ) | | 37,221 |
| | 39,600 |
| | (185 | ) | | 39,415 |
|
Other (6) | 48,565 |
| | (7,157 | ) | | 41,408 |
| | 41,211 |
| | (2,710 | ) | | 38,501 |
|
Total deferred leasing costs and intangible assets | $ | 850,625 |
| | $ | (285,404 | ) | | $ | 565,221 |
| | $ | 862,150 |
| | $ | (223,297 | ) | | $ | 638,853 |
|
Intangible Liabilities | | | | | | | | | | | |
Lease intangible liabilities (2) | $ | 158,862 |
| | $ | (71,667 | ) | | $ | 87,195 |
| | $ | 174,208 |
| | $ | (62,724 | ) | | $ | 111,484 |
|
__________
| |
(1) | For intangible assets and intangible liabilities recognized in connection with business combinations, purchase price allocations may be subject to adjustments during the measurement period, not to exceed one year12 months from date of acquisition, based upon new information obtained about facts and circumstances that existed at time of acquisition.acquisition (Note 3). Amounts are presented net of impairments and write-offs. |
| |
(2) | The NSAMLease intangible assets are composed of in-place leases, above-market leases and lease incentives. Lease intangible liabilities are composed of below-market leases. |
| |
(3) | Composed of investment management contracts and investor relationships. |
| |
(4) | Represent DataBank customer relationships. |
| |
(5) | Finite-lived trade name isnames are amortized over itsestimated useful lifelives of 20 years, while5 to 10 years. The Colony trade name with a carrying value of $15.5 million is determined to have an indefinite useful life and is not currently subject to amortization. |
| |
(3)(6)
| Represents primarily DataBank data center service contracts and hotel franchise agreements which are amortized over the term of the respective contracts or agreements, and value of certificates of need associated with certain healthcare portfolios which are not amortized, franchise agreements associated with certain hotel properties which are amortized over 10 to 15 years and the NorthStar Securities broker dealer license which is not amortized. |
Impairment of Identifiable Intangible Assets
An investment management contract that was written down to fair value during the year ended December 31, 2019 had a carrying value of $62.4 million at the time of impairment. The fair value of the intangible asset was based upon revised future net cash flows to be generated over the remaining life of the contract, representing Level 3 fair value.
Other than real estate intangibles which were impaired as part of the real estate asset group as discussed in Note 4, there were 0 impairments of identifiable intangible assets in the three and six months ended June 30, 2020 and 2019.
Amortization of Intangible Assets and Liabilities
The following table summarizes the amortization of deferred leasing costs and finite-lived intangible assets and intangible liabilities:
liabilities, excluding amounts related to discontinued operations (Note 16): |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Above-market lease values | | $ | (6,060 | ) | | $ | (2,145 | ) | | $ | (17,875 | ) | | $ | (6,734 | ) |
Below-market lease values | | 7,539 |
| | 1,874 |
| | 24,734 |
| | 5,407 |
|
Net increase (decrease) to rental income | | $ | 1,479 |
| | $ | (271 | ) | | $ | 6,859 |
| | $ | (1,327 | ) |
| | | | | | | | |
Above-market ground lease obligations | | $ | (209 | ) | | $ | (4 | ) | | $ | (573 | ) | | $ | (7 | ) |
Below-market ground lease obligations | | 300 |
| | 113 |
| | 894 |
| | 373 |
|
Net increase to ground rent expense | | $ | 91 |
| | $ | 109 |
| | $ | 321 |
| | $ | 366 |
|
| | | | | | | | |
In-place lease values | | $ | 18,520 |
| | $ | 8,072 |
| | $ | 58,714 |
| | $ | 23,117 |
|
Deferred leasing costs | | 5,076 |
| | 3,515 |
| | 13,899 |
| | 10,270 |
|
Trade name | | 945 |
| | — |
| | 2,738 |
| | — |
|
Investment management contracts | | 10,013 |
| | 2,966 |
| | 29,227 |
| | 8,598 |
|
Customer relationships | | 3,192 |
| | 836 |
| | 9,323 |
| | 2,507 |
|
Other | | 1,609 |
| | — |
| | 6,223 |
| | — |
|
Amortization expense | | $ | 39,355 |
| | $ | 15,389 |
| | $ | 120,124 |
| | $ | 44,492 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net increase to rental income (1) | | $ | 370 |
| | $ | 1,838 |
| | $ | 3,724 |
| | $ | 3,741 |
|
| | | | | | | | |
Amortization expense | | | | | | | | |
Deferred leasing costs and lease intangibles | | $ | 11,189 |
| | $ | 7,874 |
| | $ | 31,278 |
| | $ | 16,545 |
|
Investment management intangibles | | 8,902 |
| | 6,075 |
| | 17,923 |
| | 13,902 |
|
Customer relationships | | 1,572 |
| | 836 |
| | 3,046 |
| | 1,672 |
|
Trade name | | 1,098 |
| | — |
| | 2,196 |
| | — |
|
Other | | 4,169 |
| | 402 |
| | 4,455 |
| | 654 |
|
| | $ | 26,930 |
| | $ | 15,187 |
| | $ | 58,898 |
| | $ | 32,773 |
|
__________
| |
(1) | Represents the impact of amortizing above- and below-market leases and lease incentives. |
The following table presents the future amortization of deferred leasing costs and finite-lived intangible assets and intangible liabilities, excluding those related to assets and liabilities held for sale:sale.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ending December 31, | | |
(In thousands) | Remaining 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 and Thereafter | | Total |
Net increase (decrease) to rental income | $ | 2,867 |
| | $ | 6,444 |
| | $ | 6,077 |
| | $ | 6,803 |
| | $ | (5,634 | ) | | $ | (10,478 | ) | | $ | 6,079 |
|
Amortization expense | 48,499 |
| | 80,318 |
| | 62,220 |
| | 51,208 |
| | 47,109 |
| | 152,785 |
| | 442,139 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | | | | | | | | | | |
Year Ending December 31, | Remaining 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 and after | | Total |
Above-market lease values | $ | (4,821 | ) | | $ | (19,409 | ) | | $ | (17,591 | ) | | $ | (16,674 | ) | | $ | (15,929 | ) | | $ | (61,717 | ) | | $ | (136,141 | ) |
Below-market lease values | 7,338 |
| | 26,981 |
| | 24,693 |
| | 22,700 |
| | 20,584 |
| | 91,304 |
| | 193,600 |
|
Increase to rental income | $ | 2,517 |
| | $ | 7,572 |
| | $ | 7,102 |
| | $ | 6,026 |
| | $ | 4,655 |
| | $ | 29,587 |
| | $ | 57,459 |
|
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Above-market ground lease obligations | $ | (194 | ) | | $ | (773 | ) | | $ | (773 | ) | | $ | (773 | ) | | $ | (773 | ) | | $ | (9,598 | ) | | $ | (12,884 | ) |
Below-market ground lease obligations | 205 |
| | 741 |
| | 741 |
| | 741 |
| | 744 |
| | 29,462 |
| | 32,634 |
|
Increase to rent expense | $ | 11 |
| | $ | (32 | ) | | $ | (32 | ) | | $ | (32 | ) | | $ | (29 | ) | | $ | 19,864 |
| | $ | 19,750 |
|
| | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
In-place lease values | $ | 9,240 |
| | $ | 27,707 |
| | $ | 22,861 |
| | $ | 16,807 |
| | $ | 12,237 |
| | $ | 72,020 |
| | $ | 160,872 |
|
Deferred leasing costs | 4,627 |
| | 16,239 |
| | 13,515 |
| | 10,714 |
| | 8,031 |
| | 27,309 |
| | 80,435 |
|
Trade name | 803 |
| | 3,210 |
| | 3,210 |
| | 3,210 |
| | 3,210 |
| | 48,230 |
| | 61,873 |
|
Investment management contracts | 9,583 |
| | 34,990 |
| | 33,478 |
| | 32,545 |
| | 31,903 |
| | 197,718 |
| | 340,217 |
|
Customer relationships | 1,151 |
| | 4,572 |
| | 4,572 |
| | 4,572 |
| | 4,572 |
| | 30,690 |
| | 50,129 |
|
Other | 919 |
| | 2,150 |
| | 2,027 |
| | 2,027 |
| | 2,027 |
| | 16,066 |
| | 25,216 |
|
Amortization expense | $ | 26,323 |
| | $ | 88,868 |
| | $ | 79,663 |
| | $ | 69,875 |
| | $ | 61,980 |
| | $ | 392,033 |
| | $ | 718,742 |
|
9.8. Assets and Related Liabilities Held Forfor Sale
The Company's assets and related liabilities held for sale at September 30, 2017 are summarized below: |
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Assets | |
| | |
Cash | | $ | 23,350 |
| | $ | — |
|
Real estate | | 1,004,993 |
| | 223,954 |
|
Loans receivable | | — |
| | 29,353 |
|
Investments in unconsolidated ventures (1) | | 22,773 |
| | — |
|
Goodwill (2) | | 240,734 |
| | — |
|
Intangible assets, net | | 280,915 |
| | 21,239 |
|
Other assets | | 31,168 |
| | 18,378 |
|
Total assets held for sale | | $ | 1,603,933 |
| | $ | 292,924 |
|
| | | | |
Liabilities | | | | |
Secured debt (3) | | $ | 203,129 |
| | $ | — |
|
Lease intangibles and other liabilities | | 125,680 |
| | 14,296 |
|
Total liabilities related to assets held for sale | | $ | 328,809 |
| | $ | 14,296 |
|
|
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Assets | |
| | |
Restricted cash | | $ | 4,921 |
| | $ | 15,585 |
|
Real estate, net | | 652,040 |
| | 799,415 |
|
Deferred leasing costs and intangible assets, net | | 29,899 |
| | 33,236 |
|
Other assets | | 18,357 |
| | 21,816 |
|
Total assets held for sale | | $ | 705,217 |
| | $ | 870,052 |
|
| | | | |
Liabilities | | | | |
Debt, net | | $ | 233,394 |
| | $ | 232,944 |
|
Lease intangibles and other liabilities, net | | 28,397 |
| | 35,208 |
|
Total liabilities related to assets held for sale | | $ | 261,791 |
| | $ | 268,152 |
|
__________Assets and Liabilities Related to Discontinued Operations
| |
(1)
| Represents interests in Townsend-sponsored funds. |
In connection withAt June 30, 2020 and December 31, 2019, the acquisition of approximately 1% GP interests in the Townsend funds, the Company assumed an obligation to the sellers of Townsend under which the sellers are entitled to approximately 84% of the value of these funds at the closing date of the Townsend acquisition, along with any income related to capital contributed prior to closing of the Townsend acquisition by NSAM in January 2016. The Company is obligated to fund all future contributions and is entitled to any income on such contributions. The Company's liability to the Townsend sellers of approximately $12.5 million at September 30, 2017 is included within other liabilities above. Distributions received from these Townsend funds of $4.2 million was applied against the assumed liability to the Townsend sellers in the third quarter of 2017.
| |
(2)
| Associated with Townsend investment management business. Impairment of $9.1 million was recorded in the three months ended September 30, 2017 based on the net asset value of the Townsend business in relation to its contracted selling price. As of September 30, 2017, $147.2 million of the Townsend goodwill is deductible for income tax purposes. |
| |
(3)
| Represents only debt that is expected to be assumed by the buyer upon sale of the related asset. |
Assetsbulk industrial portfolio remained held for sale, at September 30, 2017 did not constitute discontinued operations, other than those acquired through business combinations which qualified as held for sale upon acquisition, as discussed in Note 17.with assets consisting primarily of real estate and related intangibles totaling $370.0 million and $372.0 million, respectively, and liabilities consisting primarily of debt totaling $235.6 million and $235.0 million, respectively.
9. Restricted Cash, Other Assets and Other Liabilities
Restricted Cash
The following table summarizes the Company's restricted cash balance:
| | (In thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | December 31, 2019 |
Capital expenditures reserves (1) | | $ | 109,515 |
| | $ | 1,502 |
| | $ | 36,779 |
| | $ | 89,901 |
|
Real estate escrow reserves (2) | | 55,018 |
| | 13,116 |
| | 33,811 |
| | 38,326 |
|
Borrower escrow deposits | | 54,281 |
| | 61,744 |
| | 7,327 |
| | 8,079 |
|
Working capital and other reserves (3) | | 22,795 |
| | 27,768 |
| |
Tenant lock boxes (4) | | 16,360 |
| | — |
| |
Cash of consolidated N-Star CDOs (5) | | 13,247 |
| | — |
| |
Lender restricted cash (3) | | | 46,722 |
| | 41,591 |
|
Other | | 122,836 |
| | 7,829 |
| | 20,590 |
| | 26,026 |
|
| | $ | 394,052 |
| | $ | 111,959 |
| |
Total restricted cash | | | $ | 145,229 |
| | $ | 203,923 |
|
__________
| |
(1) | Represents primarily cash held by lenders for capital improvements, furniture, fixtures and equipment, tenant improvements, lease renewal and replacement reserves related to real estate assets. |
| |
(2) | Represents primarily insurance, real estate tax, repair and maintenance, tenant security deposits and other escrows related to real estate assets. |
| |
(3) | Represents reserves for working capital and property development expenditures, as well asoperating cash from the Company's investment properties that are restricted by lenders in connectionaccordance with letter of credit provisions, as required in joint venture arrangements with the Federal Deposit Insurance Corporation. |
| |
(4)
| Represents tenant rents held in lock boxes controlled by the lender. The Company receives the monies after application of rent receipts to service its debt. |
| |
(5)
| Represents proceeds from repayments and/or sales ofrespective debt securities which are pending distribution in consolidated N-Star CDOs. agreements. |
Other Assets
The following table summarizes the Company's other assets:
|
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Interest receivable | | $ | 24,662 |
| | $ | 42,296 |
|
Straight-line rents and unbilled rent receivable (1) | | 41,682 |
| | 39,955 |
|
Hotel operating income receivable (1) | | 28,027 |
| | — |
|
Resident fee income receivable (1) | | 10,506 |
| | — |
|
Hotel-related reserves (2) | | 30,929 |
| | — |
|
Investment deposits and pending deal costs | | 3,964 |
| | 66,310 |
|
Deferred financing costs, net (3) | | 11,204 |
| | 10,533 |
|
Contingent consideration escrow account (4) | | 14,157 |
| | 10,836 |
|
Derivative assets (Note 12) | | 10,829 |
| | 36,101 |
|
Prepaid taxes and deferred tax assets | | 64,654 |
| | — |
|
Receivables from resolution of investments (5) | | 26,948 |
| | — |
|
Prepaid expenses | | 39,924 |
| | 6,725 |
|
Accounts receivable and other assets | | 115,679 |
| | 2,374 |
|
Fixed assets, net | | 47,435 |
| | 45,455 |
|
| | $ | 470,600 |
| | $ | 260,585 |
|
|
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Straight-line rents | | $ | 45,061 |
| | $ | 37,352 |
|
Hotel-related deposits and reserves (1) | | 17,718 |
| | 18,065 |
|
Investment deposits and pending deal costs | | 33,876 |
| | 32,994 |
|
Deferred financing costs, net (2) | | 3,158 |
| | 2,794 |
|
Derivative assets (Note 11) | | 4,933 |
| | 21,386 |
|
Prepaid taxes and deferred tax assets, net | | 52,591 |
| | 82,344 |
|
Receivables from resolution of investments (3) | | 3,836 |
| | 63,984 |
|
Operating lease right-of-use asset, net | | 200,854 |
| | 220,560 |
|
Accounts receivable, net (4) | | 72,572 |
| | 83,723 |
|
Prepaid expenses | | 32,004 |
| | 30,761 |
|
Other assets | | 31,148 |
| | 30,413 |
|
Fixed assets, net (5) | | 29,558 |
| | 44,768 |
|
Total other assets | | $ | 527,309 |
| | $ | 669,144 |
|
__________
| |
(1) | Presented net of allowance for bad debt of $13.3 million at September 30, 2017 and $4.1 million at December 31, 2016. |
| |
(2)
| Represents reserves held by the Company's third party managers at certain of the Company's hotel properties to fund furniture, fixtures and equipment expenditures.("FF&E") expenditures and to a lesser extent, working capital deposits. Funding of FF&E reserves is made periodically based on a percentage of hotel operating income. |
| |
(3)(2)
| Deferred financing costs relate to revolving credit arrangements. |
| |
(4)(3)
| Contingent consideration account holds certificates of depositRepresents proceeds from loan repayments and cash for dividends paid on OP unitsreal estate sales held in escrow, for the contingent consideration that may be earned by certain executives in connection with the Company's acquisitionand sales of the investment management business of its former manager (Notes 13 and 15). Upon settlement of the contingent consideration in connection with the Internalization at the end of the earnout period on June 30, 2018, dividends that were paid on OP units earned will be paid to the executives.equity investments pending settlement. |
| |
(4) | Includes receivables from tenants, hotel operating income, resident fees, property level insurance, and asset management fees, net of allowance for doubtful accounts, where applicable, of $6.4 million at June 30, 2020 and $2.8 million at December 31, 2019. |
| |
(5) | Represents primarily proceeds from loan payoffs heldReflects impairment of $12.3 million on the corporate aircraft in escrow at September 30, 2017.the second quarter of 2020 to estimated recoverable value based upon a shortened holding period. |
Deferred Tax Asset
Valuation Allowance—During the six months ended June 30, 2020, there was a net increase in valuation allowance of $42.4 million, primarily as a result of uncertainties in future realization of tax benefit on net operating losses in the hospitality and healthcare segments, taking into consideration the impairment of assets in these segments. At June 30, 2020, total valuation allowance was $70.3 million.
Impact of CARES Act—The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted on March 27, 2020. Among other things, the CARES Act temporarily removed the 80% limitation on the amount of taxable income that can be offset with a net operating loss (“NOL”) for 2019 and 2020, and allowed for a carryback of NOL generated in years 2018 through 2020 to the five taxable years preceding the taxable year of loss. The Company has approximately $28.1 million of NOL available for carryback under the CARES Act and recorded $3.3 million of income tax benefit to reflect the carryback. The Company also reclassified $8.8 million of deferred tax asset to current tax receivable
as of June 30, 2020, which reflects refunds received in July 2020 or expected to be received in the next twelve months as a result of the carryback.
Accrued and Other Liabilities
The following table summarizes the Company's accrued and other liabilities:
| | (In thousands) | | September 30, 2017 | | December 31, 2016 | | June 30, 2020 | | December 31, 2019 |
Tenant security deposits | | $ | 30,343 |
| | $ | 12,105 |
| |
Tenant security deposits and payable | | | $ | 15,719 |
| | $ | 15,293 |
|
Borrower escrow deposits | | 60,229 |
| | 64,118 |
| | 7,327 |
| | 9,903 |
|
Deferred income(1) | | 41,419 |
| | 27,575 |
| | 33,787 |
| | 32,318 |
|
Interest payable | | 34,866 |
| | 19,399 |
| | 63,972 |
| | 38,487 |
|
Derivative liabilities (Note 12) | | 210,150 |
| | 5,448 |
| |
Contingent consideration—THL Hotel Portfolio (Note 3) | | 6,771 |
| | — |
| |
Share repurchase payable (1) | | 6,588 |
| | — |
| |
Derivative liabilities (Note 11) | | | 94,677 |
| | 127,531 |
|
Current and deferred income tax liability | | 263,594 |
| | 41,462 |
| | 195,278 |
| | 222,206 |
|
Operating lease liability | | | 178,000 |
| | 181,297 |
|
Accrued compensation | | 61,650 |
| | 39,697 |
| | 48,115 |
| | 83,351 |
|
Accrued carried interest and incentive fee compensation | | | 230 |
| | 50,360 |
|
Accrued real estate and other taxes | | 110,815 |
| | 23,310 |
| | 42,967 |
| | 39,923 |
|
Other accrued expenses | | 88,558 |
| | 43,975 |
| |
Accounts payable and other liabilities | | 104,833 |
| | 9,863 |
| |
| | $ | 1,019,816 |
| | $ | 286,952 |
| |
Accounts payable and accrued expenses | | | 131,047 |
| | 143,852 |
|
Other liabilities | | | 58,828 |
| | 71,377 |
|
Total accrued and other liabilities | | | $ | 869,947 |
| | $ | 1,015,898 |
|
__________
| |
(1) | Represents settlement payable for 520,422 sharesprimarily prepaid rental income, prepaid interest from borrowers held in reserve accounts, and deferred management fees, primarily from digital investment vehicles. Deferred management fees totaling $17.7 million at June 30, 2020 and $18.3 million at December 31, 2019 will be recognized as fee income over a weighted average period of common stock repurchased by1.5 years and 1.2 years, respectively. Deferred management fees recognized as income of $6.6 million and $0.4 million in the Companythree months ended June 30, 2020 and 2019, respectively, and $8.7 million and $0.7 million in September 2017 that were settled in October 2017 (Note 15).the six months ended June 30, 2020 and 2019, respectively, pertain to the deferred management fee balance at the beginning of each respective period. |
11.10. Debt
The Company's debt is made upconsists of the following components:components, excluding debt associated with the industrial segment, which is included in liabilities related to assets held for sale (Note 8). | | (In thousands) | | Corporate Credit Facility (1) | | Convertible and Exchangeable Senior Notes | | Secured and Unsecured Debt (2) | | Securitization Bonds Payable | | Junior Subordinated Notes | | Total Debt | | Corporate Credit Facility(1) | | Convertible and Exchangeable Senior Notes | | Secured Debt (2) | | Junior Subordinated Notes | | Total Debt |
September 30, 2017 | | | | | | | | | | | | | |
June 30, 2020 | | | | | | | | | | | |
Debt at amortized cost | | | | | | | | | | | |
Principal | | $ | — |
| | $ | 616,405 |
| | $ | 9,701,250 |
| | $ | 534,937 |
| | $ | 280,117 |
| | $ | 11,132,709 |
| | $ | 400,000 |
| | $ | 616,105 |
| | $ | 8,081,302 |
| | $ | 280,117 |
| | $ | 9,377,524 |
|
Premium (discount), net | | NA |
| | 3,260 |
| | (91,206 | ) | | (90,360 | ) | | (83,339 | ) | | (261,645 | ) | | — |
| | 2,011 |
| | (14,569 | ) | | (77,795 | ) | | (90,353 | ) |
Deferred financing costs | | NA |
| | (9,453 | ) | | (68,931 | ) | | (705 | ) | | — |
| | (79,089 | ) | | — |
| | (3,078 | ) | | (72,979 | ) | | — |
| | (76,057 | ) |
| | $ | — |
| | $ | 610,212 |
| | $ | 9,541,113 |
| | $ | 443,872 |
| | $ | 196,778 |
| | $ | 10,791,975 |
| | $ | 400,000 |
| | $ | 615,038 |
| | $ | 7,993,754 |
| | $ | 202,322 |
| | $ | 9,211,114 |
|
December 31, 2016 | | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | |
Debt at amortized cost | | | | | | | | | | | |
Principal | | $ | 422,600 |
| | $ | 602,500 |
| | $ | 2,235,022 |
| | $ | 497,525 |
| | $ | — |
| | $ | 3,757,647 |
| | $ | — |
| | $ | 616,105 |
| | $ | 8,276,620 |
| | $ | 280,117 |
| | $ | 9,172,842 |
|
Premium (discount), net | | NA |
| | 1,385 |
| | (3,560 | ) | | — |
| | — |
| | (2,175 | ) | | — |
| | 2,243 |
| | (17,126 | ) | | (78,927 | ) | | (93,810 | ) |
Deferred financing costs | | NA |
| | (11,059 | ) | | (25,765 | ) | | (3,030 | ) | | — |
| | (39,854 | ) | | — |
| | (4,296 | ) | | (90,828 | ) | | — |
| | (95,124 | ) |
| | $ | 422,600 |
| | $ | 592,826 |
| | $ | 2,205,697 |
| | $ | 494,495 |
| | $ | — |
| | $ | 3,715,618 |
| | $ | — |
| | $ | 614,052 |
| | $ | 8,168,666 |
| | $ | 201,190 |
| | $ | 8,983,908 |
|
__________
| |
(1) | Deferred financing costs related to the corporate credit facility is recordedare included in other assets. |
| |
(2) | At SeptemberDebt principal totaling $449.7 million at June 30, 20172020 and $515.6 million at December 31, 2016, debt with carrying value of $304.1 million and $108.8 million, respectively, was related2019 relates to financing on assets held for sale. Debt associated with assets held for sale that willis expected to be assumed by athe buyer upon theis included in liabilities related to assets held for sale of an asset is presented in Note 9.(Note 8). |
The following table summarizes certain information about debt carried at amortized cost. For information as of June 30, 2020, weighted average years remaining to maturity is based on initial maturity dates or extended maturity dates if the different componentscriteria to extend have been met as of debt:the date of this filing, and the extension option is at the Company’s discretion. The Company is providing the updated information even if extension criteria had been met as of June 30, 2020 given the post period defaults as described below. For information as of December 31, 2019, weighted average years remaining to maturity is based on initial maturity dates or extended maturity dates if the criteria to extend have been met as of December 31, 2019 and the extension option is at the Company’s discretion.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rate | | Variable Rate | | Total |
($ in thousands) | Outstanding Principal | | Weighted Average Interest Rate (Per Annum) | | Weighted Average Years Remaining to Maturity | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum) | | Weighted Average Years Remaining to Maturity | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum) | | Weighted Average Years Remaining to Maturity |
September 30, 2017 | | | | | | | | | | | | | | | | | |
Recourse | | | | | | | | | | | | | | | | | |
Corporate credit facility | $ | — |
| | — | % | | — |
| | $ | — |
| | — | % | | — |
| | $ | — |
| | — | % | | — |
|
Convertible and exchangeable senior notes | 616,405 |
| | 4.27 | % | | 4.3 |
| | — |
| | — | % | | — |
| | 616,405 |
| | 4.27 | % | | 4.3 |
|
Junior subordinated debt | — |
| | — | % | | — |
| | 280,117 |
| | 4.20 | % | | 18.7 |
| | 280,117 |
| | 4.20 | % | | 18.7 |
|
Secured debt (1) | 39,711 |
| | 5.02 | % | | 8.2 |
| | — |
| | — | % | | — |
| | 39,711 |
| | 5.02 | % | | 8.2 |
|
| 656,116 |
| | | | | | 280,117 |
| | | | | | 936,233 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rate | | Variable Rate | | Total |
($ in thousands) | Outstanding Principal | | Weighted Average Interest Rate (Per Annum) | | Weighted Average Years Remaining to Maturity | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum) | | Weighted Average Years Remaining to Maturity | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum) | | Weighted Average Years Remaining to Maturity |
Non-recourse | | | | | | | | | | | | | | | | | |
Securitization bonds payable | 38,131 |
| | 3.28 | % | | 30.6 |
| | 496,806 |
| | 2.93 | % | | 25.7 |
| | 534,937 |
| | 2.95 | % | | 26.0 |
|
Secured and unsecured debt (2) | | | | | | | | | | | | | | | | | |
Healthcare | 2,168,946 |
| | 4.64 | % | | 3.2 |
| | 1,146,627 |
| | 5.43 | % | | 1.9 |
| | 3,315,573 |
| | 4.91 | % | | 2.7 |
|
Industrial | 861,025 |
| | 3.82 | % | | 11.3 |
| | 10,000 |
| | 2.93 | % | | 2.6 |
| | 871,025 |
| | 3.81 | % | | 11.2 |
|
Hospitality | — |
| | — | % | | — |
| | 2,604,243 |
| | 4.34 | % | | 1.1 |
| | 2,604,243 |
| | 4.34 | % | | 1.1 |
|
Other Real Estate Equity (3) | 407,399 |
| | 4.47 | % | | 5.7 |
| | 1,749,475 |
| | 3.86 | % | | 1.7 |
| | 2,156,874 |
| | 3.97 | % | | 2.5 |
|
Real Estate Debt | — |
| | — | % | | — |
| | 713,824 |
| | 3.87 | % | | 2.8 |
| | 713,824 |
| | 3.87 | % | | 2.8 |
|
| 3,475,501 |
| | | | | | 6,720,975 |
| | | | | | 10,196,476 |
| | | | |
Total debt | $ | 4,131,617 |
| | | | | | $ | 7,001,092 |
| | | | | | $ | 11,132,709 |
| | | | |
| | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | | | | | |
Recourse | | | | | | | | | | | | | | | | | |
Corporate credit facility | $ | — |
| | — | % | | — |
| | $ | 422,600 |
| | 3.02 | % | | 3.2 |
| | $ | 422,600 |
| | 3.02 | % | | 3.2 |
|
Convertible senior notes | 602,500 |
| | 4.25 | % | | 4.8 |
| | — |
| | — | % | | — |
| | 602,500 |
| | 4.25 | % | | 4.8 |
|
Secured debt (1) | 41,148 |
| | 5.02 | % | | 8.9 |
| | 45,458 |
| | 3.36 | % | | 0.9 |
| | 86,606 |
| | 4.15 | % | | 4.7 |
|
| 643,648 |
| | | | | | 468,058 |
| | | | | | 1,111,706 |
| | | | |
Non-recourse | | | | | | | | | | | | | | | | | |
Securitization bonds payable | 94,408 |
| | 2.54 | % | | 33.2 |
| | 403,117 |
| | 2.92 | % | | 15.2 |
| | 497,525 |
| | 2.85 | % | | 18.6 |
|
Secured debt (2) | | | | | | | | | | | | | | | | | |
Industrial | 597,502 |
| | 3.77 | % | | 16.7 |
| | 413,012 |
| | 3.02 | % | | 2.9 |
| | 1,010,514 |
| | 3.46 | % | | 11.0 |
|
Other Real Estate Equity | 487,320 |
| | 3.74 | % | | 8.1 |
| | 421,177 |
| | 3.47 | % | | 2.4 |
| | 908,497 |
| | 3.62 | % | | 5.5 |
|
Real Estate Debt | — |
| | — | % | | — |
| | 229,405 |
| | 3.27 | % | | 1.7 |
| | 229,405 |
| | 3.27 | % | | 1.7 |
|
| 1,179,230 |
| | | | | | 1,466,711 |
| | | | | | 2,645,941 |
| | | | |
Total debt | $ | 1,822,878 |
| | | | | | $ | 1,934,769 |
| | | | | | $ | 3,757,647 |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Rate | | Variable Rate | | Total |
($ in thousands) | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(4) | | Weighted Average Years Remaining to Maturity(5) | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(4) | | Weighted Average Years Remaining to Maturity(5) | | Outstanding Principal | | Weighted Average Interest Rate (Per Annum)(4) | | Weighted Average Years Remaining to Maturity(5) |
June 30, 2020 | | | | | | | | | | | | | | | | | |
Recourse | | | | | | | | | | | | | | | | | |
Corporate credit facility | $ | — |
| | N/A |
| | N/A | | $ | 400,000 |
| | 2.69 | % | | 1.5 | | $ | 400,000 |
| | 2.69 | % | | 1.5 |
Convertible and exchangeable senior notes(1) | 616,105 |
| | 4.27 | % | | 1.5 | | — |
| | N/A |
| | N/A | | 616,105 |
| | 4.27 | % | | 1.5 |
Junior subordinated debt (2) | — |
| | N/A |
| | N/A | | 280,117 |
| | 3.17 | % | | 15.9 | | 280,117 |
| | 3.17 | % | | 15.9 |
Secured debt (3) | 33,949 |
| | 5.02 | % | | 5.4 | | — |
| | N/A |
| | N/A | | 33,949 |
| | 5.02 | % | | 5.4 |
| 650,054 |
| | | | | | 680,117 |
| | | | | | 1,330,171 |
| | | | |
Non-recourse | | | | | | | | | | | | | | | | | |
Secured debt | | | | | | | | | | | | | | | | | |
Digital | — |
| | N/A |
| | N/A | | 515,007 |
| | 5.47 | % | | 4.4 | | 515,007 |
| | 5.47 | % | | 4.4 |
Healthcare | 404,423 |
| | 4.55 | % | | 4.6 | | 2,518,019 |
| | 3.78 | % | | 3.7 | | 2,922,442 |
| | 3.88 | % | | 3.9 |
Hospitality | 14,271 |
| | 12.74 | % | | 0.1 | | 2,653,103 |
| | 3.23 | % | | 0.8 | | 2,667,374 |
| | 3.29 | % | | 0.8 |
Other Real Estate Equity | 153,204 |
| | 4.23 | % | | 2.8 | | 1,569,030 |
| | 3.11 | % | | 1.3 | | 1,722,234 |
| | 3.21 | % | | 1.5 |
Real Estate Debt | — |
| | N/A |
| | N/A | | 220,296 |
| | 3.46 | % | | 1.7 | | 220,296 |
| | 3.46 | % | | 1.7 |
| 571,898 |
| | | | | | 7,475,455 |
| | | | | | 8,047,353 |
| | | | |
| $ | 1,221,952 |
| | | | | | $ | 8,155,572 |
| | | | | | $ | 9,377,524 |
| | | | |
December 31, 2019 | | | | | | | | | | | | | | | | | |
Recourse | | | | | | | | | | | | | | | | | |
Corporate credit facility | $ | — |
| | N/A |
| | N/A | | $ | — |
| | N/A |
| | 2.0 | | $ | — |
| | N/A |
| | 2.0 |
Convertible and exchangeable senior notes(1) | 616,105 |
| | 4.27 | % | | 2.0 | | — |
| | N/A |
| | N/A | | 616,105 |
| | 4.27 | % | | 2.0 |
Junior subordinated debt (2) | — |
| | N/A |
| | N/A | | 280,117 |
| | 4.77 | % | | 16.4 | | 280,117 |
| | 4.77 | % | | 16.4 |
Secured debt (3) | 35,072 |
| | 5.02 | % | | 5.9 | | — |
| | N/A |
| | N/A | | 35,072 |
| | 5.02 | % | | 5.9 |
| 651,177 |
| | | | | | 280,117 |
| | | | | | 931,294 |
| | | | |
Non-recourse | | | | | | | | | | | | | | | | | |
Secured debt | | | | | | | | | | | | | | | | | |
Digital | — |
| | N/A |
| | N/A | | 539,155 |
| | 6.98 | % | | 4.8 | | 539,155 |
| | 6.98 | % | | 4.8 |
Healthcare | 405,980 |
| | 4.55 | % | | 5.1 | | 2,547,726 |
| | 5.22 | % | | 4.3 | | 2,953,706 |
| | 5.13 | % | | 4.4 |
Hospitality | 13,494 |
| | 12.71 | % | | 1.6 | | 2,653,853 |
| | 4.83 | % | | 4.6 | | 2,667,347 |
| | 4.87 | % | | 4.6 |
Other Real Estate Equity | 151,777 |
| | 4.26 | % | | 3.4 | | 1,652,870 |
| | 4.08 | % | | 2.8 | | 1,804,647 |
| | 4.09 | % | | 2.9 |
Real Estate Debt | — |
| | N/A |
| | N/A | | 276,693 |
| | 3.72 | % | | 1.8 | | 276,693 |
| | 3.72 | % | | 1.8 |
| 571,251 |
| | | | | | 7,670,297 |
| | | | | | 8,241,548 |
| | | | |
| $ | 1,222,428 |
| | | | | | $ | 7,950,414 |
| | | | | | $ | 9,172,842 |
| | | | |
__________
| |
(1) | The 5.375% exchangeable senior notes represent an obligation of a subsidiary of NRF as the issuer. The exchangeable notes may be exchanged for cash, Colony Capital, Inc.'s common stock or a combination thereof, at the issuer's election, as described further below. |
| |
(2) | Represents an obligation of NRF as the junior subordinated debt was issued by certain subsidiaries of NRF, as described further below. Accordingly, Colony Capital, Inc. and its operating company, Colony Capital Operating Company, LLC, are not guarantors on the junior subordinated debt. |
| |
(3) | The fixed rate recourse debt represents two promissory notesis secured by the Company's aircraft, while the variable rate recourse debt at December 31, 2016 represents outstanding amounts from warehouse facilities, which were terminated upon full payoff in 2017.aircraft. |
| |
(2)(4)
| At September 30, 2017, mortgageCalculated based upon outstanding debt with aggregate outstanding principal of $611.6 million, primarily inat balance sheet date and for variable rate debt, the healthcare and hospitality segments, was either in payment default, including maturity default, or was not in compliance with certain covenants. At December 31, 2016, outstanding principal of $83.0 million on seller-provided financing on a portfolio of properties in the other real estate equity segment was in payment default. The Company is negotiating with the various lenders and seller to restructure the respective financing arrangements, as applicable.applicable index plus spread at balance sheet date. |
| |
(3)(5)
| Includes $2.7 millionCalculated based upon initial maturity dates of outstanding principal of non-recourse unsecured fixed ratethe respective debt, assumed throughor extended maturity dates if extension criteria are met and extension option is at the acquisition of CPI.Company's discretion as described above. |
Non-Recourse Investment-Level Debt in Default
The Company has investment-level debt, which is non-recourse to the Company, with aggregate outstanding principal of $7.5 billion in the hospitality, healthcare and other equity and debt segments at June 30, 2020. Of this amount, $3.28 billion, based on outstanding balance at June 30, 2020, was in default as of the date of this filing.
The majority of the defaulted debt was in the hospitality segment and the THL Hotel Portfolio in the other equity and debt segment for a combined total of $3.03 billion as a result of the economic fallout from COVID-19. The Company received notices of acceleration with respect to defaulted debt of $780.0 million in the hospitality segment and $842.7 million related to the THL Hotel Portfolio. The $780.0 million accelerated debt in the hospitality segment is secured by a portfolio of 48 hotels, and receivers have been or are expected to be appointed for all of these assets. In connection with the remaining defaulted hotel debt, the Company continues to be in active negotiations with the respective lenders or servicers to execute or extend forbearances, execute debt modifications, including extension of upcoming maturities in 2020, or make other arrangements, as appropriate. The remaining $482.4 million of debt in the hospitality segment was not in default.
Other defaulted debt is composed of $203.0 million in the healthcare segment and $51.7 million in the other equity and debt segment based on outstanding balance at June 30, 2020 ($235.6 million in total across both segments at December 31, 2019), the majority of which was in default prior to the COVID-19 crisis. In August 2020, the Company indirectly conveyed the equity of certain of its healthcare borrower subsidiaries, comprising 36 assets in its senior housing operating portfolio and $157.9 million of the aforementioned defaulted healthcare debt (based on outstanding balance at June 30, 2020), to an affiliate of the lender, which released the Company from all rights and obligations with respect to those healthcare assets and corresponding debt. In connection with the remaining defaulted debt in the healthcare segment of $45.1 million and also in the other equity and debt segment, the Company is negotiating with its lenders to restructure the debt or make other arrangements, as appropriate.
There can be no assurance that the Company will be successful in any of the negotiations with its lenders or servicers with respect to the aforementioned non-recourse investment level debt that is in default.
Corporate Credit Facility
On January 10, 2017,June 29, 2020, the OP entered into anthe Fourth Amendment (the “Amendment”) to the Second Amended and Restated Credit Agreement, dated as of January 10, 2017 (as amended, and restated credit agreement (the “JPM Creditsupplemented or otherwise modified from time to time prior to the date hereof, the “Credit Agreement”), with several lenders and JPMorgan Chase Bank, N.A., as administrative agent, and Bankthe several lenders from time to time party thereto.
The Amendment modified the aggregate amount of America, N.A. as syndication agent. The JPMrevolving commitments available under the Credit Agreement provides a secured revolving credit facility in the maximum principal amount of $1.0 billion, with an option to increase up to $1.5 billion, subject to agreement of existing or substitute lenders to provide the additional loan commitment and satisfaction of customary closing conditions.$500 million (previously $750 million). The credit facility maturesis scheduled to mature in January 2021, with two2 6-month extension options (representing no change to the overall term due to the Amendment), each subject to a fee of 0.10% of the commitment amount upon exercise. In the event that the Company exercises its first extension option, the aggregate amount of revolving commitments available under the Credit Agreement will be reduced to $400 million on March 31, 2021.
Pursuant to the Amendment, advances under the Credit Agreement accrue interest at a per annum rate equal to, at the Company’s election, either LIBOR plus a margin of 2.50% (previously 2.25%), or a base rate determined according to a prime rate or federal funds rate plus a margin of 1.50% (previously 1.25%). In the event that the OP exercises the first extension option, the foregoing rates will be permanently increased by 0.25% for periods from and after January 11, 2021. Unused amounts under the credit facility accrue a per annum commitment fee of 0.35%.
The maximum amount available to be drawn at any time under the credit facility is limited by a borrowing base of certain investment assets, with the valuation of such investment assets generally determined according to a percentage of adjusted net book value or a multiple of base management fee EBITDA (as defined in the JPM Credit Agreement). At September 30, 2017,
In connection with the Amendment, the Company paid down $200 million of the $600 million previously drawn and outstanding on the credit facility and in July 2020, fully repaid all outstanding amounts. As of the date of this filing, the full $500 million is available to be drawn under the facility.
The Amendment provided for modifications to the financial covenants and the borrowing base was sufficientincluding, among other things: exclusion of certain non-recourse debt and related assets in the calculation of certain financial ratios (such assets, the “Specified Excluded Assets”), exclusion of EBITDA and fixed charges of Specified Excluded Assets in the calculation of the OP’s fixed charge coverage ratio, which must exceed 1.3 to permit borrowings up1.0, reduction of the minimum tangible net worth covenant from $4.55 billion to $1.74 billion, which must exclude the net worth of Specified Excluded Assets, and modification to the full $1.0 billion commitment.borrowing base to increase capacity for digital investment management and include digital infrastructure investments. As of June 30, 2020 and through the date of this filing, the Company was in compliance with all of the financial covenants.
Advances under the JPMThe Credit Agreement accrue interest atalso contains various additional affirmative and negative covenants, including financial covenants that require the Company to maintain minimum tangible net worth, liquidity levels and financial ratios, as defined in the Credit Agreement.
Further, as a per annum rate equalresult of modifications to the sumpermitted investments and restricted payment provisions in the Amendment, during the term of one-month LIBOR plus 2.25% or a base rate determined according to a prime rate or federal funds rate plus a margin of 1.25%. At September 30, 2017,the Credit Agreement, the Company had no outstanding borrowings. The Company pays a commitment fee of 0.25%is prohibited from, among other things, (i) making any investments other than (A) investments in digital infrastructure assets and (B) pre-existing obligations and protective investments in existing assets to preserve, administer or 0.35% per annumotherwise realize on such investment, (ii) repurchasing capital stock of the unused amount (0.35% at September 30, 2017), depending uponCompany and (iii) paying dividends, other than for (A) paying dividends to maintain the amountCompany’s status as a REIT, (B) reducing the payment of facility utilization.income taxes and (C) paying dividends on the Company’s preferred equity.
SomeCertain of the Company’s subsidiaries guarantee the obligations of the Company under the JPM Credit Agreement. As security for the advances under the JPM Credit Agreement, the Company and some of its affiliates pledged their equity interests in certain subsidiaries through which the Company directly or indirectly owns substantially all of its assets.
The JPM Credit Agreement contains various affirmative and negative covenants, including financial covenants that require the Company to maintain minimum tangible net worth, liquidity levels and financial ratios, as defined in the JPM Credit Agreement. At September 30, 2017, the Company was in compliance with all of the financial covenants.
The JPM Credit Agreement also includes customary events of default, in certain cases subject to reasonable and customary periods to cure. The occurrence of an event of default may result in the termination of the credit facility, accelerate the Company’s repayment obligations, in certain cases limit the Company’s ability to make distributions, and allow the lenders to exercise all rights and remedies available to them with respect to the collateral. There have been no events of default since the inception of the credit facility.
Convertible and Exchangeable Senior Notes
ConvertibleThe convertible senior notes and the 5.375% exchangeable senior notes arewere issued by Colony Capital, Inc. and by a subsidiary of NRF, respectively, representing senior unsecured obligations of the Company andthat are guaranteed by the Company on a senior unsecured basis.
Upon closing of the Merger, the Company assumed NRF's 7.25% exchangeable notes and 5.375% exchangeable notes atbasis by their respective fair values.issuers.
Convertible and exchangeable senior notes issued by the Company and outstanding as of June 30, 2020 are as follows:
| | | | Conversion or Exchange Price (per share of common stock) | | Conversion or Exchange Ratio (2) (In Shares) | | Conversion or Exchange Shares (in thousands) | | Earliest Redemption Date | | Outstanding Principal (in thousands) | |
Description | | | Issuance Date | | Due Date | | Interest Rate | | Conversion or Exchange Price (per share of common stock) | | Conversion or Exchange Ratio (in shares)(1) | | Conversion or Exchange Shares (in thousands) | | Earliest Redemption Date | | Outstanding Principal |
| | | June 30, 2020 | | December 31, 2019 |
| Issuance Date | | Due Date | | Interest Rate | | Conversion or Exchange Price (per share of common stock) | | Conversion or Exchange Ratio (2) (In Shares) | | Conversion or Exchange Shares (in thousands) | | Earliest Redemption Date | | September 30, 2017 | | December 31, 2016 | | |
5.00% Convertible Notes | | April 2013 | | April 15, 2023 | | 5.00 | | $ | 200,000 |
| | $ | 200,000 |
| | April 2013 | | April 15, 2023 | | 5.00 | | $ | 15.76 |
| | 63.4700 |
| | 12,694 |
| | April 22, 2020 | | $ | 200,000 |
| | $ | 200,000 |
|
3.875% Convertible Notes | | January and June 2014 | | January 15, 2021 | | 3.875 | | 16.57 |
| | 60.3431 |
| | 24,288 |
| | January 22, 2019 | | 402,500 |
| | 402,500 |
| | January and June 2014 | | January 15, 2021 | | 3.875 | | 16.57 |
| | 60.3431 |
| | 24,288 |
| | January 22, 2019 | | 402,500 |
| | 402,500 |
|
5.375% Exchangeable Notes | | June 2013 (1) | | June 15, 2033 | | 5.375 | | 12.04 |
| | 83.0837 |
| | 1,155 |
| | June 15, 2023 | | 13,905 |
| | — |
| | June 2013 | | June 15, 2033 | | 5.375 | | 12.04 |
| | 83.0837 |
| | 1,130 |
| | June 15, 2023 | | 13,605 |
| | 13,605 |
|
| | | | | | | | $ | 616,405 |
| | $ | 602,500 |
| | | | | | | | $ | 616,105 |
| | $ | 616,105 |
|
__________
| |
(1) | Represents the initial date of issuance of exchangeable senior notes by NRF prior to the Merger. |
| |
(2)
| The conversion or exchange rate for convertible and exchangeable senior notes is subject to periodic adjustments to reflect the carried-forward adjustments relating to common stock splits, reverse stock splits, common stock adjustments in connection with spin-offs and cumulative cash dividends paid on the Company's common stock since the issuance of the convertible and exchangeable senior notes. The conversion or exchange ratios are presented in shares of common stock per $1,000 principal of each convertible or exchangeable note. |
The convertible and exchangeable senior notes mature on their respective due dates, unless redeemed, repurchased or exchanged prior to such date in accordance with the terms of their respective governing documents. The convertible and exchangeable senior notes are redeemable at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest up to, but excluding, the redemption date.
The Company may redeem the convertible notes for cash at its option at any time on or after their respective redemption dates if the last reported sale price of the Company's common stock has been at least 130% of the conversion price of the convertible notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption.
The exchangeable notes may be exchanged for cash, Colony Capital, Inc's common stock or a combination thereof, at the Company'sissuer's election, upon the occurrence of specified events, and at any time on or after their respective redemption dates, and on the second business day immediately preceding their maturity dates. The holders of the exchangeable notes have the right, at their option, to require the Companyissuer to repurchase the exchangeable notes for cash on certain specific dates in accordance with the terms of their respective governing documents.
Issuance of Exchangeable Notes and Repurchase of Convertible Notes
In June 2017July 2020, the OP issued $300.0 million of exchangeable notes with maturity in July 2025, bearing interest at 5.75% per annum, and July 2017,exchangeable into shares of the Company repurchased all $13.0Company's class A common stock at an initial exchange rate
equal to 434.7826 shares of common stock per $1,000 principal amount of notes, equivalent to an exchange price of approximately $2.30 per share. The initial exchange rate is subject to adjustment upon the occurrence of certain events, but will not be adjusted for any accrued and unpaid interest. Net proceeds from this issuance, after deducting underwriting discounts, commissions and offering expenses, were $291.0 million, which were applied to partially repurchase $289.7 million of the outstanding principal of the 7.25% exchangeable3.875% convertible notes for $13.4total purchase price of $289.2 million, in aggregate, equal to the sum of outstanding principalincluding accrued and accrued interest, upon exercise of the repurchase option by note holders.
In August 2017, the Company exchanged $2.5 million of the outstanding principal of the 5.375% exchangeable notes into 207,739 shares of the Company's class A common stock. The excess of fair value of the class A common stock issued over carrying value of the corresponding notes on the exchange date resulted in an immaterial charge to earnings.unpaid interest.
Secured and Unsecured Debt
These are primarily investment level financing, which are generally subjectnon-recourse to customary non-recourse carve-outs,the Company, and secured by underlying commercial real estate and mortgage loans receivable.
Securitization Bonds Payable
Securitization bonds payable represent debt issued by securitization vehicles consolidated by the Company (Note 14). This includes CMBS debt as well as collateralized loan obligation debt, which were bonds issued by the consolidated N-Star CDO I and CDO IX that were assumed by the Company at fair value upon the Merger.
Senior notes issued by these securitization trusts were generally sold to third parties and subordinated notes retained by the Company. Payments from underlying collateral loans or securities must be applied to repay the notes until fully paid off, irrespective of the contractual maturities of the notes.
Junior Subordinated Debt
TheA subsidiary of the Company (the “Issuer”) assumed certain junior subordinated debt was assumed by the Company through the Merger at fair value. Prior to the Merger, subsidiaries of NRF, which were formed as statutory trusts, NRFNorthStar Realty Finance Trust Financial LLC I through VIII (the “Trusts”), issued trust preferred securities ("TruPS") in private placement offerings. The sole assets of the Trusts consist of a like amount of junior subordinated notes issued by NRF at the time of the offerings (the "Junior Notes"). As Colony Capital, Inc. and its operating company, Colony Capital Operating Company, LLC, are not issuers of the junior subordinated debt, neither are obligors nor guarantors on the junior subordinated debt and TruPS.
The CompanyIssuer may redeem the Junior Notes at par, in whole or in part, for cash, after five years. To the extent the CompanyIssuer redeems the Junior Notes, the Trusts are required to redeem a corresponding amount of TruPS. The ability of the Trusts to pay dividends depends on the receipt of interest payments on the Junior Notes. The CompanyIssuer has the right, pursuant to certain qualifications and covenants, to defer payments of interest on the Junior Notes issued to NorthStar Realty Finance Trust I through III for up to six6 consecutive quarters. If payment of interest on the Junior Notes is deferred, the TrustTrusts will defer the quarterly distributions on the TruPS for a corresponding period. Additional interest accrues on deferred payments at the annual rate payable on the Junior Notes, compounded quarterly.
Future Minimum Principal Payments
The following table summarizes future scheduled minimum principal payments at September 30, 2017 based on current contractual maturity, except for financing on certain loan portfolios, which are based on the Company's expectation of cash flows from underlying loan collateral as principal repayments on the loan financing depend upon net cash flows from collateral assets and ratio of outstanding principal to collateral.
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Convertible and Exchangeable Senior Notes | | Secured and Unsecured Debt | | Securitization Bonds Payable (2) | | Junior Subordinated Notes | | Total |
Year Ending December 31, | | | | | |
Remaining 2017 (1) | | $ | — |
| | $ | 891,120 |
| | $ | — |
| | $ | — |
| | $ | 891,120 |
|
2018 | | — |
| | 2,002,741 |
| | — |
| | — |
| | 2,002,741 |
|
2019 | | — |
| | 3,905,040 |
| | — |
| | — |
| | 3,905,040 |
|
2020 | | — |
| | 142,221 |
| | — |
| | — |
| | 142,221 |
|
2021 | | 402,500 |
| | 873,160 |
| | — |
| | — |
| | 1,275,660 |
|
2022 and after | | 213,905 |
| | 1,886,968 |
| | 534,937 |
| | 280,117 |
| | 2,915,927 |
|
Total | | $ | 616,405 |
| | $ | 9,701,250 |
| | $ | 534,937 |
| | $ | 280,117 |
| | $ | 11,132,709 |
|
__________
| |
(1)
| At September 30, 2017, $635.6 million in outstanding principal of secured and unsecured debt maturing in 2017 have met their respective qualifying conditions for extension of maturity.
|
| |
(2)
| For securitization bonds payable, principal may be repaid earlier if proceeds from underlying loans and securities are repaid by borrowers. Future estimated principal payments on securitization bonds payable at September 30, 2017, if based on reasonable expectations of cash flows from underlying loans and securities, would be as follows: |
|
| | | | |
(In thousands) | | Securitization Bonds Payable |
Year Ending December 31, | |
Remaining 2017 | | $ | 140,378 |
|
2018 | | 245,641 |
|
2019 | | 100,000 |
|
2020 | | 48,918 |
|
Total | | $ | 534,937 |
|
12.11. Derivatives
The Company uses derivative instruments to manage the risk of changes in interest rates and foreign exchange rates, arising from both its business operations and economic conditions. Specifically, the Company enters into derivative instruments to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and cash payments, the values of which are driven by interest rates, principally relating to the Company’s investments and borrowings. Additionally, the Company’s foreign operations expose the Company to fluctuations in foreign interest rates and exchange rates. The Company enters into derivative instruments to protect the value or fix certain of these foreign denominated amounts in terms of its functional currency, the U.S. dollar. Derivative instruments used in the Company’s risk management activities may be designated as qualifying hedge accounting relationships (“designated hedges”) or otherwise used for economic hedging purposes (“non-designated hedges”).
In connection with the Merger, the Company assumed $6.1 billion notional of interest rate contracts, including those held by consolidated N-Star CDOs, all of which are non-designated. This includes a $2.0 billion notional forward starting swap with a 3.39% strike and a maturity date in December 2029, with mandatory settlement at fair value by December 2019. The interest rate swap was intended to hedge the interest rate risk on future refinancing of certain mortgage debt assumed in the Merger. At September 30, 2017, the interest rate swap was out of the money and recorded as a derivative liability of $161.7 million, which was a $14.3 million unfavorable change in fair value from the Closing Date.
Gross fairFair value of derivative assets and derivative liabilities wereare as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
(In thousands) | | Designated Hedges | | Non-Designated Hedges | | Total | | Designated Hedges | | Non-Designated Hedges | | Total |
Derivative Assets | | | | | | | | | | | | |
Foreign exchange contracts | | $ | — |
| | $ | 990 |
| | $ | 990 |
| | $ | 15,307 |
| | $ | 1,271 |
| | $ | 16,578 |
|
Interest rate contracts | | 72 |
| | 309 |
| | 381 |
| | 78 |
| | 237 |
| | 315 |
|
Performance swaps | | — |
| | 3,562 |
| | 3,562 |
| | — |
| | 4,493 |
| | 4,493 |
|
Included in other assets | | $ | 72 |
| | $ | 4,861 |
| | $ | 4,933 |
| | $ | 15,385 |
| | $ | 6,001 |
| | $ | 21,386 |
|
Derivative Liabilities | | | | | | | | | | | | |
Foreign exchange contracts | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 8,134 |
| | $ | 2,482 |
| | $ | 10,616 |
|
Forward contracts | | — |
| | 94,677 |
| | 94,677 |
| | — |
| | 116,915 |
| | 116,915 |
|
Included in accrued and other liabilities | | $ | — |
| | $ | 94,677 |
| | $ | 94,677 |
| | $ | 8,134 |
| | $ | 119,397 |
| | $ | 127,531 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 |
(In thousands) | | Designated Hedges | | Non-Designated Hedges | | Total | | Designated Hedges | | Non-Designated Hedges | | Total |
Derivative Assets | | | | | | | | | | | | |
Foreign exchange contracts | | $ | 9,466 |
| | $ | 939 |
| | $ | 10,405 |
| | $ | 34,715 |
| | $ | 1,103 |
| | $ | 35,818 |
|
Interest rate contracts | | — |
| | 424 |
| | 424 |
| | — |
| | 283 |
| | 283 |
|
Included in other assets | | $ | 9,466 |
| | $ | 1,363 |
| | $ | 10,829 |
| | $ | 34,715 |
| | $ | 1,386 |
| | $ | 36,101 |
|
Derivative Liabilities | | | | | | | | | | | | |
Foreign exchange contracts | | $ | (43,028 | ) | | $ | (5,368 | ) | | $ | (48,396 | ) | | $ | (5,011 | ) | | $ | (437 | ) | | $ | (5,448 | ) |
Interest rate contracts | | — |
| | (161,754 | ) | | (161,754 | ) | | — |
| | — |
| | — |
|
Included in accrued and other liabilities | | $ | (43,028 | ) | | $ | (167,122 | ) | | $ | (210,150 | ) | | $ | (5,011 | ) | | $ | (437 | ) | | $ | (5,448 | ) |
Certain counterparties to the derivative instruments require the Company to deposit cash or other eligible collateral. The Company had $8.8 million of cash collateral on deposit, included in connection with the notional forward starting swapother assets, of $12.8 million and certain foreign currency contracts that were out of the money$10.0 million at SeptemberJune 30, 2017,2020 and none at December 31, 2016.2019, respectively, all of which related to the forward contracts and performance swaps discussed below.
Foreign Exchange Contracts
The following table summarizes the aggregate notional amounts and certain key terms of designated and non-designated foreign exchange contracts in place at SeptemberJune 30, 2017, along with certain key terms:
2020:
|
| | | | | | | | | | |
Hedged Currency | | Instrument Type | | Notional Amount (in thousands) | | FX Rates ($ per unit of foreign currency) | | Range of Expiration Dates |
EUR | | Put options | | € | 336,000 |
| | Min $0.95 / Max $1.00 | | November 2020 to May 2022 |
GBP | | Put options | | £ | 64,000 |
| | Min $1.05 / Max $1.10 | | November 2020 to May 2021 |
|
| | | | | | | | | | | | | | |
Hedged Currency | | Instrument Type | | Notional Amount (in thousands) | |
| | Range of Expiration Dates |
| | Designated | | Non-Designated | | FX Rates ($ per unit of foreign currency) | |
EUR | | FX Collar | | € | 117,963 |
| | € | — |
| | Min $1.06 / Max $1.53 | | December 2018 to January 2021 |
GBP | | FX Collar | | £ | 53,528 |
| | £ | 2,472 |
| | Min $1.45 / Max $1.82 | | December 2018 to December 2019 |
EUR | | FX Forward | | € | 331,429 |
| | € | 4,530 |
| | Range from $1.06 to $1.27 | | October 2017 to January 2022 |
GBP | | FX Forward | | £ | 101,921 |
| | £ | 45,229 |
| | Range from $1.23 to $1.35 | | June 2018 to December 2020 |
NOK | | FX Forward | | NOK | 802,816 |
| | NOK | 120,184 |
| | $0.12 | | November 2017 |
Designated Net Investment Hedges
The Company’s foreign denominated net investments in subsidiaries or joint ventures were €498.2 million, £237.7 million, CHF0.2€491.8 million and NOK802.4£267.6 million, or a total of $1,008.1 million$0.9 billion at SeptemberJune 30, 2017,2020, and €394.4 million, £106.2 million, CHF54.5€517.9 million and NOK842.1£275.5 million, or a total of $697.4 million$0.9 billion at December 31, 2016.2019.
The Company enteredenters into foreign exchange contracts to hedge the foreign currency exposure of certain investments in foreign subsidiaries or equity method joint ventures, designated as net investment hedges, as follows:
forward contracts whereby the Company agrees to sell an amount of foreign currency for an agreed upon amount of U.S. dollars; and
foreign exchange collars (caps and floors) without upfront premium costs, which consist of a combination of currency options with single date expirations, whereby the Company gains protection against foreign currency weakening below a specified level and pays for that protection by giving up gains from foreign currency appreciation above a specified level.
These foreign exchange contracts are used to protect certain of the Company’s foreign denominated investments and receivables from adverse foreign currency fluctuations, with notional amounts and termination dates based upon the anticipated return of capital from the investments. Prior to the second quarter of 2020, the Company utilized primarily (i) forward contracts whereby the Company agreed to sell an amount of foreign currency for an agreed upon amount of U.S. dollars and (ii) costless collars consisting of caps and floors, which consisted of a combination of currency options with single date expirations. Both types of hedging strategies were designated as net investment hedges.
During the second quarter of 2020, the Company unwound all of its existing foreign currency hedges and entered into foreign currency put options with upfront premiums whereby the Company gains protection against foreign currency weakening below a specified level. The put options are set to expire in increments according to the Company's expected monetization timeframe of the hedged investments, but the notional amounts are not identifiable to specific investments. Accordingly, the put options are not designated for hedge accounting purposes.
Designated Net Investment Hedges
Release of accumulated other comprehensive incomeAOCI related to net investment hedges occurs upon losing a controlling financial interest in an investment or obtaining control over an equity method investment. Upon sale, complete or substantially complete liquidation of an investment in a foreign subsidiary, or partial sale of an equity method investment, the gain or loss on the related net investment hedge is reclassified from accumulated other comprehensive incomeAOCI to earnings.
Following the liquidation of underlying investments of foreign subsidiaries, net realized losses on net investment hedges were transferred out of accumulated other comprehensive income into earnings, recorded in other gain (loss), amounting to $5.2 million for the three months ended September 30, 2017, $3.9 million for the nine months ended September 30, 2017 and $0.1 million for the nine months ended September 30, 2016. There were no such transfers in the three months ended September 30, 2016. as summarized below.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Designated net investment hedges: | | | | | | | | |
Realized gain transferred from AOCI to earnings | | $ | — |
| | $ | 786 |
| | $ | — |
| | $ | 1,026 |
|
Non-Designated Hedges
At the end of each quarter, the Company reassesses the effectiveness of its net investment hedges and as appropriate, dedesignates the portion of the derivative notional amount that is in excess of the beginning balance of its net investments as non-designated hedges.investments. Any unrealized gain or loss on the dedesignated portion of net investment hedges is transferred into earnings,and on non-designated foreign exchange contracts are recorded in other gain (loss), which were unrealized losses. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Dedesignated net investment hedges: | | | | | | | | |
Unrealized gain (loss) transferred from AOCI to earnings | | $ | (17 | ) | | $ | 19 |
| | $ | 1,485 |
| | $ | (400 | ) |
Non-designated foreign exchange contracts: | | | | | | | | |
Unrealized gain (loss) in earnings | | (776 | ) | | — |
| | (776 | ) | | — |
|
Interest Rate Contracts
The Company uses various interest rate contracts, some of which may be designated as cash flows hedges, to limit its exposure to changes in interest rates on various floating rate debt obligations.
At September 30, 2017, The following table summarizes the interest rate contracts held by the Company
heldat June 30, 2020. |
| | | | | | | | | | | | | | |
| | Notional Amount (in thousands) | | | | Strike Rate / Forward Rate | | |
Instrument Type | | Designated | | Non-Designated | | Index | | | Range of Expiration Dates |
Interest rate caps | | $ | — |
| | $ | 4,674,004 |
| | 1-Month LIBOR | | 3.0% - 5.70% | | July 2020 to November 2021 |
Interest rate caps | | € | 232,845 |
| | € | 485,405 |
| | 3-Month EURIBOR | | 1.0% - 1.5% | | January 2021 to June 2024 |
Interest rate caps | | £ | — |
| | £ | 355,277 |
| | 3-Month GBP LIBOR | | 1.5% - 2.25% | | November 2020 to October 2022 |
The following table summarizes amounts recorded in the followingincome statements related to interest rate contracts:contracts. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Interest expense on designated interest rate contracts (1) | | $ | 4 |
| | $ | — |
| | $ | 6 |
| | $ | — |
|
Realized and unrealized gain (loss), net on non-designated interest rate contracts (2) | | (105 | ) | | (89,610 | ) | | 74 |
| | (149,136 | ) |
|
| | | | | | | | | | |
| | Notional Amount (in thousands) | | | | Strike Rate / Forward Rate | | |
Instrument Type | | Non-Designated | | Index | | | Expiration |
Interest rate swaps | | $ | 2,000,000 |
| | 3-Month LIBOR | | 3.39% | | December 2029 |
Interest rate swaps | | $ | 3,254 |
| | 1-Month LIBOR | | 4.17% - 5.12% | | July 2018 to July 2023 |
Interest rate caps | | $ | 6,537,135 |
| | 1-Month LIBOR | | 2.50% - 5.63% | | October 2017 to November 2020 |
Interest rate caps | | $ | 336,828 |
| | 3-Month LIBOR | | 2.50% - 3.50% | | December 2017 to March 2019 |
Interest rate caps | | € | 405,759 |
| | 3-Month EURIBOR | | 0.75% - 1.50% | | October 2018 to June 2022 |
Interest rate caps | | £ | 431,278 |
| | 3-Month GBP LIBOR | | 2.00% - 2.50% | | December 2017 to February 2020 |
Basis swap | | $ | 10,000 |
| | (1) | | (1) | | January 2019 |
Deliverable swap futures | | $ | 7,000 |
| | (2) | | (2) | | December 2017 |
__________
| |
(1) | Basis swap is held by a consolidated N-Star CDO, paying 3-month LIBOR plus 1.95% and receiving 1-month LIBOR plus 1.88%, usedRepresents amortization of the cost of designated interest rate caps to economically hedge the timing ofinterest expense based upon expected hedged interest payments between certain underlying securities and corresponding bonds issued by the consolidated N-Star CDO.on variable rate debt. |
| |
(2) | A consolidated sponsored investment company soldFor the three and six months ended June 30, 2019, amounts include unrealized loss of $86.9 million and $146.1 million, respectively, on a 10-year USD deliverable$2.0 billion notional forward starting swap futures contract to economically hedgeassumed through the interest rate exposure on its long dated fixed rate securities.Merger, which was settled at the end of 2019. |
AmountsForward Contracts and Performance Swaps
The Company has an equity investment in a third party managed real estate mutual fund, accounted for as marketable equity securities carried at fair value. The Company had previously entered into a series of forward contracts on its shares in the mutual fund in an aggregate notional amount of $100 million, equal to its initial investment in the fund, and concurrently, entered into a series of swap contracts with the same counterparty to pay the return of the Dow Jones U.S. Select REIT Total Return Index. The Company settled the forwards and swaps in cash upon expiration in January 2020, realizing a gain of $5.8 million. In January 2020, the Company entered into another series of forward and swap contracts with similar terms to the previous transaction. The forward contracts have a combined notional amount of $119 million and expire in January 2021, to be settled in cash or through delivery of the mutual fund shares at the election of the Company. The new forward and swap transactions required an initial combined collateral deposit of $14.3 million, subject to daily net settlements in net fair value changes in excess of a predetermined threshold.
The forwards and swaps are not designated as hedges for accounting purposes. All realized and unrealized gains (losses) are recorded in other gain (loss) were as follows: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Realized and unrealized gain (loss), net on derivatives: | | | | | | | | |
Forward contracts | | $ | (10,807 | ) | | $ | (1,089 | ) | | $ | 22,238 |
| | $ | (12,373 | ) |
Performance swaps | | 3,414 |
| | 948 |
| | 4,874 |
| | 3,570 |
|
Unrealized gain (loss) on marketable equity securities held at period end: | | | | | | | | |
Real estate mutual fund | | 10,842 |
| | 1,084 |
| | (22,273 | ) | | 12,909 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Unrealized gain (loss): | | | | | | | | |
Cash flow hedge ineffectiveness | | $ | — |
| | $ | 114 |
| | $ | — |
| | $ | 215 |
|
Non-designated interest rate contracts | | $ | (8,790 | ) | | $ | (191 | ) | | $ | (15,513 | ) | | $ | (1,565 | ) |
Offsetting Assets and Liabilities
The Company enters into agreements subject to enforceable master netting arrangements with its derivative counterparties that allow the Company to offset the settlement of derivative assets and liabilities in the same currency by derivative instrument type or, in the event of default by the counterparty, to offset all derivative assets and liabilities with the same counterparty. The Company has elected not to net derivative asset and liability positions, notwithstanding the conditions for right of offset may have been met. The Companymet, and presents derivative assets and liabilities with the same counterparty on a gross basis on the consolidated balance sheets.
The following table sets forth derivative positions where the Company has a right of offset under netting arrangements with the same counterparty. |
| | | | | | | | | | | | | | | | |
| | Gross Assets (Liabilities) on Consolidated Balance Sheets | | Gross Amounts Not Offset on Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) |
(In thousands) | | | (Assets) Liabilities | | Cash Collateral Pledged | |
June 30, 2020 | | | | | | | | |
Derivative Assets | | | | | | | | |
Foreign exchange contracts | | $ | 990 |
| | $ | — |
| | $ | — |
| | $ | 990 |
|
Interest rate contracts | | 381 |
| | — |
| | — |
| | 381 |
|
Performance swaps | | 3,562 |
| | (3,562 | ) | | — |
| | — |
|
| | $ | 4,933 |
| | $ | (3,562 | ) | | $ | — |
| | $ | 1,371 |
|
Derivative Liabilities | | | | | | | | |
Forward contracts | | $ | (94,677 | ) | | $ | 3,562 |
| | $ | 12,752 |
| | $ | (78,363 | ) |
| | | | | | | | |
December 31, 2019 | | | | | | | | |
Derivative Assets | | | | | | | | |
Foreign exchange contracts | | $ | 16,578 |
| | $ | (4,385 | ) | | $ | — |
| | $ | 12,193 |
|
Interest rate contracts | | 315 |
| | — |
| | — |
| | 315 |
|
Performance swaps | | 4,493 |
| | (4,493 | ) | | — |
| | — |
|
| | $ | 21,386 |
| | $ | (8,878 | ) | | $ | — |
| | $ | 12,508 |
|
Derivative Liabilities | | | | | | | | |
Foreign exchange contracts | | $ | (10,616 | ) | | $ | 4,385 |
| | $ | — |
| | $ | (6,231 | ) |
Forward contracts | | (116,915 | ) | | 4,493 |
| | 9,981 |
| | (102,441 | ) |
| | $ | (127,531 | ) | | $ | 8,878 |
| | $ | 9,981 |
| | $ | (108,672 | ) |
|
| | | | | | | | | | | | | | | | |
| | Gross Amounts of Assets (Liabilities) Included on Consolidated Balance Sheets | | Gross Amounts Not Offset on Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) |
(In thousands) | | | (Assets) Liabilities | | Cash Collateral Received (Pledged) | |
September 30, 2017 | | | | | | | | |
Derivative Assets | | | | | | | | |
Foreign exchange contracts | | $ | 10,405 |
| | $ | (9,661 | ) | | $ | — |
| | $ | 744 |
|
Interest rate contracts | | 424 |
| | (4 | ) | | — |
| | 420 |
|
| | $ | 10,829 |
| | $ | (9,665 | ) | | $ | — |
| | $ | 1,164 |
|
Derivative Liabilities | | | | | | | | |
Foreign exchange contracts | | $ | (48,396 | ) | | $ | 9,661 |
| | $ | 3,420 |
| | $ | (35,315 | ) |
Interest rate contracts | | (161,754 | ) | | 4 |
| | 5,415 |
| | (156,335 | ) |
| | $ | (210,150 | ) | | $ | 9,665 |
| | $ | 8,835 |
| | $ | (191,650 | ) |
| | | | | | | | |
December 31, 2016 | | | | | | | | |
Derivative Assets | | | | | | | | |
Foreign exchange contracts | | $ | 35,818 |
| | $ | (180 | ) | | $ | — |
| | $ | 35,638 |
|
Interest rate contracts | | 283 |
| | — |
| | — |
| | 283 |
|
| | $ | 36,101 |
| | $ | (180 | ) | | $ | — |
| | $ | 35,921 |
|
Derivative Liabilities | | | | | | | | |
Foreign exchange contracts | | $ | (5,448 | ) | | $ | 180 |
| | $ | — |
| | $ | (5,268 | ) |
Interest rate contracts | | — |
| | — |
| | — |
| | — |
|
| | $ | (5,448 | ) | | $ | 180 |
| | $ | — |
| | $ | (5,268 | ) |
13.12. Fair Value
Recurring Fair Values
AssetsThe table below presents a summary of financial assets and financial liabilities carried at fair value on a recurring fair values includebasis, including financial instruments for which the Companyfair value option was elected, to accountbut excluding financial assets under the NAV practical expedient, categorized into the three tier fair value hierarchy that is prioritized based upon the level of transparency in inputs used in the valuation techniques, as follows:
Level 1—Quoted prices (unadjusted) in active markets for underidentical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full term of the financial instrument.
Level 3—At least one assumption or input is unobservable and it is significant to the fair value option.measurement, requiring significant management judgment or estimate.
Investments
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
June 30, 2020 | | | | | | | | |
Assets | | | | | | | | |
Marketable equity securities | | $ | 116,911 |
| | $ | — |
| | $ | — |
| �� | $ | 116,911 |
|
AFS debt securities | | — |
| | — |
| | 32,271 |
| | 32,271 |
|
CMBS of consolidated fund | | — |
| | 1,678 |
| | — |
| | 1,678 |
|
Other assets—derivative assets | | — |
| | 4,933 |
| | — |
| | 4,933 |
|
Fair Value Option: | | | | | | | | |
Loans receivable | | — |
| | — |
| | 1,398,087 |
| | 1,398,087 |
|
Equity method investments | | — |
| | — |
| | 209,263 |
| | 209,263 |
|
Liabilities | | | | | | | | |
Other liabilities—settlement liability | | — |
| | — |
| | 9,148 |
| | 9,148 |
|
December 31, 2019 | | | | | | | | |
Assets | | | | | | | | |
Marketable equity securities | | $ | 138,586 |
| | $ | — |
| | $ | — |
| | $ | 138,586 |
|
AFS debt securities | | — |
| | — |
| | 54,859 |
| | 54,859 |
|
CMBS of consolidated fund | | — |
| | 2,732 |
| | — |
| | 2,732 |
|
Other assets—derivative assets | | — |
| | 21,386 |
| | — |
| | 21,386 |
|
Fair Value Option: | | | | | | | | |
Equity method investments | | — |
| | — |
| | 222,875 |
| | 222,875 |
|
Liabilities | | | | | | | | |
Other liabilities—derivative liabilities | | — |
| | 127,531 |
| | — |
| | 127,531 |
|
Other liabilities—contingent consideration for THL Hotel Portfolio | | — |
| | — |
| | 9,330 |
| | 9,330 |
|
Marketable Equity Securities
Marketable equity securities consist primarily of investment in Unconsolidated Ventures
The Company elected the fair value option to account for certain investments in unconsolidated ventures, including investments in private funds acquired in connection with the Merger. The Company determined that recording such investmentsa third party managed mutual fund and equity securities held by a consolidated fund. These marketable equity securities are valued based on the changelisted prices in fair value of projected future cash flows better represents the underlying economics of the respective investments in the earnings of the Company.
Fair value of investments in unconsolidated ventures is determined using discounted cash flow models based on expected future cash flows for incomeactive markets and realization events of the underlying assets, classified as Level 31 of the fair value hierarchy, with changes in fair value recorded in earnings from investments in unconsolidated ventures. The Company has not elected the practical expedient to measure the fair value of its investments in private funds using the net asset value of the underlying funds.hierarchy.
Debt Securities
N-Star CDO bonds—Fair value of N-Star CDO bonds isare determined internally based on quotations from financial institutions that generally acted as underwritersrecent trades, if any with such securitizations, the Company's knowledge of the CDO transactions. These quotations are not adjustedunderlying collateral and are generally based on a valuation model using unobservable inputs such as interest rates, expected future cash flows, discount rates, estimated prepayments and projected losses. Fair value of subordinate N-Star CDO bonds is determined using an internal price interpolated based on third-partythird party prices of the senior N-Star CDO bonds of the respective CDOs. All N-Star CDO bonds are classified as Level 3 of the fair value hierarchy.
CMBS and other securities—of consolidated fund—Fair value is determined based on broker quotes or third party pricing services, or an internal price, all of which are generally derived from unobservable inputs, and therefore classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including recent transactions as well as its knowledge of and experience in the market.
The Company relies on the third-party pricing exception with respect to the requirement to provide quantitative disclosures about significant Level 3 inputs being used to determine fair value measurements related to CRE securities (including N-Star CDO bonds). The Company believes such pricing service or broker quotation for such items may be based on a market transaction of comparable securities, inputs including forecasted market rates, contractual terms, observable discount rates for similar securities and credit such as credit support and delinquency rates.
Equity securities of consolidated fund—Fair value of equity securities held by a consolidated open-end fund is based on listed prices in active markets and classified as Level 12 of the fair value hierarchy.
Derivatives
Derivative instruments consist of interest rate contracts and foreign exchange contracts that are generally traded over-the-counter, and are valued using a third-party service provider, except for exchange traded futures contracts which are Level 1 fair values. Quotations on over-the-counter derivatives are not adjusted and are generally valued using observable inputs such as contractual cash flows, yield curve, foreign currency rates and credit spreads, and are classified as Level 2 of the fair value hierarchy. If a significantAlthough credit valuation adjustment is applied to a derivative instrument to account foradjustments, such as the risk of non-performance, such fair value measurement isdefault, rely on Level 3 inputs, these inputs are not significant to the overall valuation of its derivatives. As a result, derivative valuations in their entirety are classified as Level 32 of the fair value hierarchy. For derivatives held in non-recourse CDO financing structures where, by design, the derivative contracts are senior to all the CDO bonds payable, there is no material impact of a credit valuation adjustment.
Due To AffiliatesOther Liabilities—Contingent Consideration for InternalizationTHL Hotel Portfolio
In connection with the Company's acquisitionconsensual foreclosure in July 2017 of the investment management business and operationsa portfolio of its former manager in April 2015 (the "Internalization"limited service hotels ("THL Hotel Portfolio"), contingent consideration is payable to certain senior executives of the Company. Contingent consideration for the Internalization is to be paid in a combination of up to approximately 1.29 million shares of class A common stock, 115,226 shares of class B common stock and approximately 4.40 million OP Units (after giving effect to the Colony exchange ratio of 1.4663), subject to multi-year performance targets for achievement of a contractually-defined funds from operations ("Benchmark FFO") per share target and capital-raising thresholds from the funds management business, adjusted for certain targets that have not been met and that have expired. If the minimum performance target for either of these metrics is not met or exceeded, a portion of the contingent consideration paid in respect of the other metric would not be paid out in full. The contingent consideration is remeasured at fair value each reporting period using a third party valuation service provider and classified as Level 3 of the fair value hierarchy, with changes in fair value recorded in other gain (loss) in the consolidated statement of operations. Fair value of the contingent consideration is measured using a Monte Carlo probability simulation model for the Benchmark FFO component and a discounted payout analysis based on probabilities of achieving prescribed targets for the capital raising component. The Company's class A common stock price and related equity volatilities are applied to convert the contingent consideration payout into shares.
Other Liabilities—Contingent Consideration for THL Hotel Portfolio
In connection with a consensual foreclosure of the THL Hotel Portfolio, contingent consideration is payable to aformer preferred equity holder of the borrower in an amount up to $13.0 million (Note 3). Fair valuebased upon the performance of the THL Hotel Portfolio, subject to meeting certain repayment and return thresholds to the Company and certain investment vehicles managed by the Company. The contingent consideration is measured using a discounted cash flow based onupon the probability of the former preferred equity holder receiving such payment.payment, classified as Level 3 fair value. At June 30, 2020, the contingent consideration liability was determined to have zero value as it was no longer probable that such payment would be made following the adverse effect of COVID-19 on the operations and performance
of the THL Hotel Portfolio. The liability, valued at $9.3 million at December 31, 2019, was written off in the second quarter of 2020 as a gain, recorded in other gain (loss) on the consolidated statements of operations.
Other Liabilities—Settlement Liability
As discussed in Note 1, in connection with the cooperation agreement entered into with Blackwells in March 2020, the Company and Blackwells contemporaneously entered into a joint venture arrangement for the purpose of acquiring, holding and disposing of the Company's class A common stock. Pursuant to the arrangement, the Company contributed its class A common stock, valued at $14.7 million by the venture, and Blackwells contributed $1.47 million of cash that was then distributed to the Company, resulting in a net capital contribution of $13.23 million by the Company in the venture. All of the class A common stock held in the venture had been repurchased by the Company in March 2020 (Note 14). Blackwells may cause the arrangement to be dissolved and all underlying assets distributed at any time, and the Company may do the same after three years. Distributions to be made through the joint venture arrangement effectively represent a settlement of the proxy contest with Blackwells. At the inception of the arrangement, the fair value of future distributions to Blackwells was estimated at $3.9 million, included in other liabilities on the consolidated balance sheet, and as a settlement loss on the consolidated statement of operations, along with $1.2 million reimbursement of legal costs to Blackwells in March 2020.
The table below presentssettlement liability is a summaryfair value measure of assetsthe disproportionate allocation of future profits distribution to Blackwells pursuant to the joint venture arrangement. Such profits will be derived from dividend payments and liabilitiesany appreciation in value of the Company's class A common stock, allocated between the Company and Blackwells based upon specified return hurdles. The profits distribution is payable in cash, the Company's class A common stock or a combination of both at the Company's election. The settlement liability, classified as a Level 3 fair value, is measured using a Monte Carlo simulation under a risk-neutral premise, assuming that the final distribution occurs at the end of the third year in March 2023, and is remeasured at each reporting period. At June 30, 2020, the settlement liability was valued at $9.1 million, applying the following assumptions: (a) expected volatility of the Company's class A common stock of 72.6% based upon a combination of historical and implied volatility of the Company's class A common stock; (b) zero expected dividend yield given the Company's suspension of its common stock dividend for the second quarter of 2020; and (c) risk free rate of 0.17% per annum based upon a compounded zero-coupon U.S. Treasury yield. The settlement liability increased $5.3 million from inception to June 30, 2020, recorded as other loss on the consolidated statement of operations.
Fair Value Option
Loans Receivable
Effective January 1, 2020, the Company elected the fair value option for all of its outstanding loans receivable. Loans receivable consist of mortgage loans, mezzanine loans and non-mortgage loans. Fair values were determined by comparing the current yield to the estimated yield of newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment; or based on discounted cash flow projections of principal and interest expected to be collected, which includes, but is not limited to, consideration of the financial standing of the borrower or sponsor as well as operating results and/or value of the underlying collateral.
Equity Method Investments
Equity method investments for which fair value option was elected are carried at fair value on a recurring basis, including financial instrumentsbasis. Fair values are determined using either discounted cash flow models based on expected future cash flows for income and realization events of the underlying assets, applying revenue multiples, based on transaction price for recently acquired investments, or pending or comparable market sales price on an investment, as applicable. In valuing the Company's investment in third party private equity funds, the Company considers cash flows provided by the general partners of the funds and the implied yields of the funds. The Company has not elected the practical expedient to measure the fair value of its investments in these private equity funds using NAV of the underlying funds. Fair value of equity method investments are classified as Level 3 of the fair value hierarchy, unless investments are valued based on contracted sales prices which are classified as Level 2 of the fair value hierarchy. Changes in fair value of equity method investments under the fair value option was elected.are recorded in equity method earnings.
|
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total |
September 30, 2017 | | | | | | | | |
Assets | | | | | | | | |
Investments in unconsolidated ventures | | $ | — |
| | $ | — |
| | $ | 314,274 |
| | $ | 314,274 |
|
Debt securities available for sale | | | | | | | | |
CRE securities of consolidated N-Star CDOs: | | | | | | | | |
CMBS | | — |
| | — |
| | 169,063 |
| | 169,063 |
|
Other securities | | — |
| | — |
| | 65,440 |
| | 65,440 |
|
N-Star CDO bonds | | — |
| | — |
| | 107,265 |
| | 107,265 |
|
CMBS and other securities | | — |
| | 20,625 |
| | 21,825 |
| | 42,450 |
|
Equity securities of consolidated fund | | 24,445 |
| | — |
| | — |
| | 24,445 |
|
Other assets—derivative assets | | 76 |
| | 10,753 |
| | — |
| | 10,829 |
|
Liabilities | | | | | | | | |
Other liabilities—derivative liabilities | | — |
| | 210,150 |
| | — |
| | 210,150 |
|
Other liabilities—contingent consideration for THL Hotel Portfolio | | — |
| | — |
| | 6,771 |
| | 6,771 |
|
Due to affiliates—contingent consideration for Internalization | | — |
| | — |
| | 26,910 |
| | 26,910 |
|
| | | | | | | | |
December 31, 2016 | | | | | | | | |
Assets | | | | | | | | |
Securities—CMBS | | $ | — |
| | $ | 23,446 |
| | $ | — |
| | $ | 23,446 |
|
Other assets—derivative assets | | — |
| | 36,101 |
| | — |
| | 36,101 |
|
Liabilities | | | | | | | | |
Other liabilities—derivative liabilities | | — |
| | 5,448 |
| | — |
| | 5,448 |
|
Due to affiliates—contingent consideration for Internalization | | — |
| | — |
| | 41,250 |
| | 41,250 |
|
Level 3 Recurring Fair Value Measurements
Quantitative information about recurring levelLevel 3 fair value measurementsassets, for which information about unobservable inputs is reasonably available to the Company, are as follows:follows.
|
| | | | | | | | | | | | |
| | | | Valuation Technique | | Key Unobservable Inputs | | Input Value | | Effect on Fair Value from Increase in Input Value (1) |
Financial Instrument | | Fair Value (In thousands) | | | | Weighted Average (Range) | |
September 30, 2017 | | | | | | | | | | |
Investments in unconsolidated ventures—private funds | | $ | 287,886 |
| | Discounted cash flows | | Discount rate | | 14.2% (11.1% - 20.0%) | | Decrease |
Investments in unconsolidated ventures—others | | 26,388 |
| | Discounted cash flows | | Discount rate | | 18.6% (12.5% - 20.1%) | | Decrease |
Due to affiliates—contingent consideration for Internalization | | 26,910 |
| | Monte Carlo simulation | | Benchmark FFO volatility | | 16.1% | | Increase |
| | | | | | Equity volatility | | 22.0% | | Increase |
| | | | | | Correlation (2) | | 80.0% | | Increase |
Other liabilities—contingent consideration for THL Hotel Portfolio | | 6,771 |
| | Discounted cash flows | | Discount rate | | 20.0% | | Decrease |
December 31, 2016 | | | | | | | | | | |
Due to affiliates—contingent consideration for Internalization
| | $ | 41,250 |
| | Monte Carlo simulation | | Benchmark FFO volatility | | 16.1% | | Increase |
| | | | | | Equity volatility | | 32.5% | | Increase |
| | | | | | Correlation (2) | | 80.0% | | Increase |
|
| | | | | | | | | | | | |
| | | | Valuation Technique | | Key Unobservable Inputs | | Input Value | | Effect on Fair Value from Increase in Input Value (2) |
Financial Instrument | | Fair Value (In thousands) | | | | Weighted Average(1) (Range) | |
June 30, 2020 | | | | | | | | | | |
AFS debt securities | | $ | 32,271 |
| | Discounted cash flows | | Discount rate | | 28.4% (18.3% - 57.8%) | | Decrease |
Fair Value Option: | | | | | | | | | | |
Loans receivable | | 1,368,087 |
| | Discounted cash flows | | Discount rate | | 12.9% (7.3% - 25.7%) | | Decrease |
Loans receivable | | 30,000 |
| | Transaction price(5) | | N/A | | N/A | | N/A |
Equity method investments—third party private equity funds | | 3,144 |
| | NAV(3) | | N/A | | N/A | | N/A |
Equity method investments—other | | 17,816 |
| | Discounted cash flows | | Discount rate | | 13.8% (7.0% - 17.2%) | | Decrease |
Equity method investments—other | | 25,000 |
| | Multiple | | Revenue multiple | | 4.1x | | (4) |
Equity method investments—other | | 163,303 |
| | Transaction price(5) | | N/A | | N/A | | N/A |
| | | | | | | | | | |
December 31, 2019 | | | | | | | | | | |
AFS debt securities | | $ | 54,859 |
| | Discounted cash flows | | Discount rate | | 22.3% (16.8% - 65.0%) | | Decrease |
Fair Value Option: | | | | | | | | | | |
Equity method investments—third party private equity funds | | 5,391 |
| | NAV(3) | | N/A | | N/A | | N/A |
Equity method investments—other | | 18,574 |
| | Discounted cash flows | | Discount rate | | 10.1% (5.1% - 15.8%) | | Decrease |
Equity method investments—other | | 25,000 |
| | Multiple | | Revenue multiple | | 3.7x | | (4) |
Equity method investments—other | | 173,910 |
| | Transaction price(5) | | N/A | | N/A | | N/A |
__________
| |
(1) | Weighted average discount rates are calculated based upon undiscounted cash flows. |
| |
(2) | Represents the directional change in fair value that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the reverse effect. Significant increases or decreases in these inputs in isolation could result in significantly higher or lower fair value measures. |
| |
(2)(3)
| Represents assumed correlation between Benchmark FFO andFair value was estimated based on underlying NAV of the Company's class A common stock price.respective funds on a quarter lag, adjusted as deemed appropriate by management. |
| |
(4) | Fair value is affected by change in revenue multiple relative to change in rate of revenue growth. |
| |
(5) | Valued based upon transaction price of investments recently acquired or offer prices on loans, investments or underlying assets of investee pending sales. Transaction price approximates fair value for investee engaged in real estate development during the development stage. |
The following table presents changes in recurring Level 3 fair value measurements,assets, including realized and unrealized gains (losses) included in earningsother gain (loss) on the consolidated statement of operations and accumulated other comprehensive income. Any transfers in or out of Level 3AOCI.
|
| | | | | | | | | | | | |
| | | | Fair Value Option |
(In thousands) | | AFS Debt Securities | | Loans Receivable | | Equity Method Investments |
Fair value at December 31, 2018 | | $ | 64,127 |
| | $ | — |
| | $ | 81,085 |
|
Purchases, contributions and accretion | | 3,267 |
| | — |
| | 102,273 |
|
Paydowns, distributions and sales | | (5,582 | ) | | — |
| | (8,005 | ) |
Realized and unrealized gains (losses) in earnings, net | | (667 | ) | | — |
| | 1,946 |
|
Other comprehensive income | | 1,297 |
| | — |
| | — |
|
Fair value at June 30, 2019 | | $ | 62,442 |
| | $ | — |
| | $ | 177,299 |
|
| | | | | | |
Net unrealized gains (losses) in earnings on instruments held at June 30, 2019 | | $ | — |
| | $ | — |
| | $ | 1,194 |
|
| | | | | | |
Fair value at December 31, 2019 | | $ | 54,859 |
| | $ | — |
| | $ | 222,875 |
|
Election of fair value option on January 1, 2020 | | — |
| | 1,556,131 |
| | — |
|
Reclassification of accrued interest on January 1, 2020 | | — |
| | 13,504 |
| | — |
|
Purchases, drawdowns, contributions and accretion | | 1,849 |
| | 153,418 |
| | 771 |
|
Paydowns, distributions and sales | | (3,229 | ) | | (62,302 | ) | | (836 | ) |
Interest accrual, including capitalization of paid-in-kind interest | | — |
| | 25,116 |
| | — |
|
Allowance for credit losses | | (22,229 | ) | | — |
| | — |
|
Realized and unrealized gains (losses) in earnings, net | | — |
| | (281,266 | ) | | (12,139 | ) |
Other comprehensive income (loss) (1) | | 1,021 |
| | (6,514 | ) | | (1,408 | ) |
Fair value at June 30, 2020 | | $ | 32,271 |
| | $ | 1,398,087 |
| | $ | 209,263 |
|
| | | | | | |
Net unrealized gains (losses) on instruments held at June 30, 2020: | | | | | | |
In earnings | | $ | — |
| | $ | (281,266 | ) | | $ | (12,139 | ) |
In other comprehensive income (loss) | | $ | 1,021 |
| | $ | — |
| | $ | — |
|
__________
| |
(1) | Amounts recorded in OCI for loans receivable and equity method investments represent foreign currency translation differences on the Company's foreign subsidiaries that hold the respective foreign currency denominated investments. |
Investments Carried at Fair Value Using Net Asset Value
Investments in a Company-sponsored private fund and a non-traded REIT, and limited partnership interest in a third party private fund are assumed to occur at the beginningvalued using NAV of the year.respective vehicles. |
| | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
(In thousands) | | Fair Value | | Unfunded Commitments | | Fair Value | | Unfunded Commitments |
Private fund—real estate | | $ | 14,963 |
| | $ | 9,137 |
| | $ | 16,271 |
| | $ | 11,058 |
|
Non-traded REIT—real estate | | 24,358 |
| | — |
| | 19,358 |
| | — |
|
Private fund—emerging market private equity | | 2,723 |
| | — |
| | 3,012 |
| | — |
|
The Company's interests in the private funds are not subject to redemption, with distributions to be received through liquidation of underlying investments of the funds. The private funds each have eight and ten year lives, respectively, at inception, both of which may be extended in one year increments up to two years.
No secondary market currently exists for shares of the non-traded REIT and the Company does not currently expect to seek liquidity of its shares of the non-traded REIT. Subject to then-existing market conditions, the board of directors of the non-traded REIT, along with the Company, as sponsor, expects to consider alternatives for providing liquidity to the non-traded REIT shares beginning five years from completion of the offering stage in January 2016, but with no definitive date by which it must do so. In addition, the Company has agreed that any right to have its shares redeemed is subordinated to third party stockholders for so long as its advisory agreement is in effect.
|
| | | | | | | | | | | | | | | | |
| | Level 3 Assets | | Level 3 Liabilities |
(In thousands) | | Investments in Unconsolidated Ventures | | Securities | | Due To Affiliates—Contingent Consideration for Internalization | | Other Liabilities—Contingent Consideration for THL Hotel Portfolio |
Fair value at December 31, 2016 | | $ | — |
| | $ | — |
| | $ | (41,250 | ) | | $ | — |
|
Acquired through the Merger | | 405,626 |
| | 433,850 |
| | — |
| | — |
|
Consideration for business combination | | — |
| | — |
| | — |
| | 6,771 |
|
Purchases / borrowings / amortization / contributions | | 29,053 |
| | 35,878 |
| | — |
| | — |
|
Paydowns or distributions | | (125,680 | ) | | (92,266 | ) | | — |
| | — |
|
Realized gains (losses) in earnings | | — |
| | (12,349 | ) | | — |
| | — |
|
Unrealized gains (losses): | | | | | | | | |
In earnings | | 5,275 |
| | — |
| | 14,340 |
| | — |
|
In other comprehensive income | | — |
| | (1,520 | ) | | — |
| | — |
|
Fair value at September 30, 2017 | | $ | 314,274 |
| | $ | 363,593 |
| | $ | (26,910 | ) | | $ | 6,771 |
|
Unrealized gains (losses) related to balance at September 30, 2017: | | | | | | | | |
In earnings | | $ | 5,275 |
| | $ | — |
| | $ | 14,340 |
| | $ | — |
|
In other comprehensive income | | $ | — |
| | $ | (1,520 | ) | | $ | — |
| | $ | — |
|
| | | | | | | | |
Fair value at December 31, 2015 | | $ | — |
| | $ | — |
| | $ | (52,990 | ) | | $ | — |
|
Unrealized gain in earnings | | — |
| | — |
| | 13,640 |
| | — |
|
Fair value at September 30, 2016 | | $ | — |
| | $ | — |
| | $ | (39,350 | ) | | $ | — |
|
Unrealized gain related to balance at September 30, 2016 recorded in earnings | | $ | — |
| | $ | — |
| | $ | 13,640 |
| | $ | — |
|
Nonrecurring Fair Values
The Company holdsmeasures fair value of certain assets carried at fair value on a nonrecurring basis which comprise real estatewhen events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Adjustments to fair value generally result from the application of lower of amortized cost or fair value accounting for assets held for sale carried at the loweror otherwise, write-down of carrying valueasset values due to impairment. Impairments are discussed in Note 4 for real estate, Note 6 for equity method investments, and fair value less estimated costs to sell, as follows. |
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Real estate held for sale | | $ | 70,455 |
| | $ | 67,033 |
|
Real estate held Note 7for sale written down to fair value at September 30, 2017 was estimated based on broker price opinions, bid price or discounted cash flows with a discount rate of 10%, and net of selling costs between 2% to 8% of fair value, classified as level 3 fair value.
investment management intangible assets, including goodwill.
Fair Value Information on Financial Instruments Reported at Cost
Carrying amounts and estimated fair values of financial instruments reported at amortized cost are presented below: |
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | Carrying Value |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | |
September 30, 2017 | | | | | | | | | | |
Assets | | | | | | | | | | |
Loans receivable, net | | $ | — |
| | $ | — |
| | $ | 3,495,661 |
| | $ | 3,495,661 |
| | $ | 3,455,902 |
|
Liabilities | | | | | | | | | | |
Convertible and exchangeable senior notes | | 614,033 |
| | 14,966 |
| | — |
| | 628,999 |
| | 610,212 |
|
Secured and unsecured debt | | — |
| | — |
| | 9,584,988 |
| | 9,584,988 |
| | 9,541,113 |
|
Securitization bonds payable | | — |
| | 444,577 |
| | — |
| | 444,577 |
| | 443,872 |
|
Junior subordinated debt | | — |
| | — |
| | 213,735 |
| | 213,735 |
| | 196,778 |
|
December 31, 2016 | | | | | | | | | | |
Assets | | | | | | | | | | |
Loans receivable, net | | $ | — |
| | $ | — |
| | $ | 3,471,797 |
| | $ | 3,471,797 |
| | $ | 3,430,608 |
|
Liabilities | | | | | | | | | | |
Corporate credit facility | | — |
| | 422,600 |
| | — |
| | 422,600 |
| | 422,600 |
|
Convertible senior notes | | 606,698 |
| | — |
| | — |
| | 606,698 |
| | 592,826 |
|
Secured and unsecured debt | | — |
| | — |
| | 2,163,094 |
| | 2,163,094 |
| | 2,205,697 |
|
Securitization bonds payable | | — |
| | 492,481 |
| | — |
| | 492,481 |
| | 494,495 |
|
Loans Receivable—Loansbelow. The carrying values of cash, accounts receivable, consist of first mortgages, subordinated mortgagesdue from and corporate loans, including such loans held by securitization trusts consolidated by the Company. Fair values were determined by comparing the current yield to the estimated yield of newly originated loans with similaraffiliates, interest payable and accounts payable approximate fair value due to their short term nature and credit risk, orif any, are negligible. There are no loans receivable carried at amortized cost in 2020 as the market yield at which a third party might expect to purchase such investment; or based on discounted cash flow projections of principal and interest expected to be collected, which includes consideration ofCompany elected the financial standing of the borrower or sponsor as well as operating results of the underlying collateral. Carrying values offair value option for all loans held for investment are presented net of allowance for loan losses, where applicable.receivable effective January 1, 2020. |
| | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements | | Carrying Value |
(In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | |
June 30, 2020 | | | | | | | | | | |
Liabilities | | | | | | | | | | |
Debt at amortized cost | | | | | | | | | | |
Corporate credit facility | | $ | — |
| | $ | 400,000 |
| | $ | — |
| | $ | 400,000 |
| | $ | 400,000 |
|
Convertible and exchangeable senior notes | | 549,344 |
| | 13,095 |
| | — |
| | 562,439 |
| | 615,038 |
|
Secured debt | | — |
| | — |
| | 7,674,887 |
| | 7,674,887 |
| | 7,993,754 |
|
Secured debt related to assets held for sale | | — |
| | — |
| | 235,000 |
| | 235,000 |
| | 233,394 |
|
Junior subordinated debt | | — |
| | — |
| | 142,103 |
| | 142,103 |
| | 202,322 |
|
December 31, 2019 | | | | | | | | | | |
Assets | | | | | | | | | | |
Loans at amortized cost | | $ | — |
| | $ | — |
| | $ | 1,557,850 |
| | $ | 1,557,850 |
| | $ | 1,552,824 |
|
Liabilities | | | | | | | | | | |
Debt at amortized cost | | | | | | | | | | |
Convertible and exchangeable senior notes | | 602,000 |
| | 13,095 |
| | — |
| | 615,095 |
| | 614,052 |
|
Secured debt | | — |
| | — |
| | 8,213,550 |
| �� | 8,213,550 |
| | 8,168,666 |
|
Secured debt related to assets held for sale | | — |
| | — |
| | 235,000 |
| | 235,000 |
| | 232,944 |
|
Junior subordinated debt | | — |
| | — |
| | 225,835 |
| | 225,835 |
| | 201,190 |
|
Debt—Fair value of the credit facility approximated carrying value as its prevailing interest rate and applicable terms were renegotiated within the last 12 months. Fair value of convertible notes wasand exchangeable notes were determined using the last trade price in active markets. Fair value of exchangeable notes was determined based onmarkets and unadjusted quoted prices in a non-active market.market, respectively. Fair valuevalues of securedthe corporate credit facility and unsecuredsecured debt were estimated by discounting expected future cash outlays at interest rates currently available to the Company for similar instruments, with similar terms and remaining maturities; and suchwhich fair values approximated carrying value for floating rate debt with credit spreads that approximate market rates. Fair value of securitization bonds payable was based on quotations from brokers or financial institutions that act as underwriters of the securitized bonds. Fair value of junior subordinated debt was based on unadjusted quotations from a third party valuation firm, with such quotes derived using a combination of internal valuation models, comparable trades in non-active markets and other market data. As a reaction to the COVID-19 crisis, the credit market has generally stalled refinancing for most product types except at the lowest leverage levels. While it is difficult to gauge market rates across the Company's portfolio for specific assets, fair value of debt associated with hospitality and healthcare assets presented as of June 30, 2020 incorporate a premium to nominal contractual rates to reflect the increased risk and lack of available financing in the current environment.
Other—The carryingCarrying values of cash, interest receivable, accounts receivable, due from and to affiliates, interest payableother receivables and accounts payableother payables generally approximate fair value due to their short term nature, and credit risk, if any, are negligible.
14.13. Variable Interest Entities
ConsolidatedA VIE is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. The following discusses the Company's involvement with VIEs where the Company is the primary beneficiary and consolidates the VIEs or where the Company is not the primary beneficiary and does not consolidate the VIEs.
Operating Subsidiary
The Company's operating subsidiary, OP, is a limited liability company that has governing provisions that are the functional equivalent of a limited partnership. The Company holds the majority of membership interest in OP, acts as the managing member of OP and exercises full responsibility, discretion and control over the day-to-day management of OP. The noncontrolling interests in OP do not have either substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of noncontrolling interest members (including by such a member unilaterally). The absence of such rights, which represent voting rights in a limited partnership equivalent structure, would render OP to be a VIE. The Company, as managing member, has the power to direct the core activities of OP that most significantly affect OP's performance, and through its majority interest in OP, has
both the right to receive benefits from and the obligation to absorb losses of OP. Accordingly, the Company is the primary beneficiary of OP and consolidates OP. As the Company conducts its business and holds its assets and liabilities through OP, the total assets and liabilities of OP compriserepresent substantially all of the total consolidated assets and liabilities of the Company.
Securitizations
The Company securitizes loans receivable and CRE debt securities using VIEs. The securitization vehicles are structured as pass-through entities that receive principal and interest on the underlying mortgage loans and debt securities and distribute those payments to the holders of the notes, certificates or bonds issued by the securitization vehicles. The loans and debt securities are transferred into securitization vehicles such that these assets are restricted and legally isolated from the creditors of the Company, and therefore are not available to satisfy the Company's obligations but only the obligations of the securitization vehicles. The obligations of the securitization vehicles do not have any recourse to the general credit of any other consolidated entities, nor to the Company.
The Company retains beneficial interests in the securitization vehicles, usually equity tranches or subordinate securities. Affiliates of the Company or appointed third parties act as special servicer of the underlying collateral mortgage loans and the Company acts as collateral manager of two N-Star CDOs. The special servicer has the power to direct activities during the loan workout process on defaulted and delinquent loans as permitted by the underlying contractual agreements, which is subject to the consent of the Company, as the controlling class representative or directing holder who, under certain circumstances, has the right to unilaterally remove the special servicer. The Company, as collateral manager of the two N-Star CDOs, has the power to invest in additional or replacement collateral during the investment period and subsequent to the investment period, has the power to identify an asset as distressed or credit risk and sell certain distressed collateral. As the Company’s rights as the directing holder and controlling class representative or as the collateral manager of the CDOs provide the Company the ability to direct activities that most significantly impact the economic performance of the securitization vehicles, the Company maintains effective control over the loans and debt securities transferred into the securitization vehicles. Considering the interests retained by the Company in the securitization vehicles together with its role as controlling class representative or directing holder or collateral manager of the two N-Star CDOs, the Company is deemed to be the primary beneficiary and consolidates these securitization vehicles. Accordingly, these securitizations did not qualify as sale transactions and are accounted for as secured financing with the underlying mortgage loans and debt securities pledged as collateral.
All of the underlying assets, liabilities, equity, revenues and expenses of the securitization vehicles are consolidated within the Company's consolidated financial statements. The Company’s exposure to the obligations of the securitization vehicles is generally limited to its investment in these entities, which was $511.8 million at September 30, 2017 and $407.0 million at December 31, 2016. The Company is not obligated to provide any financial support to these securitization vehicles, although it may, in its sole discretion, provide support such as protective and other advances as it deems appropriate. The Company did not provide any such financial support in the three months ended September 30, 2017 and 2016.
Company-Sponsored FundPrivate Funds
The Company sponsors certainprivate funds and other investment vehicles as general partner for the purpose of providing investment management services in exchange for management fees and performance-based fees. These private funds are established as limited partnerships or equivalent structures. For certain sponsored private funds, limitedLimited partners of the private funds do not have either substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of limited partners or by a single limited partner. Accordingly, the absence of such rights, in certain sponsored private funds, which represent voting rights in a limited partnership, results in suchthe private funds being considered VIEs. The nature of the Company's involvement with its sponsored funds comprise fee arrangements and equity interests. The fee arrangements are commensurate with the level of management services provided by the Company, and contain terms and conditions that are customary to similar at-market fee arrangements.
Consolidated Company-Sponsored Private Fund—The Company'sCompany currently consolidates a sponsored private fund in which it has more than an insignificant equity interest in one of its sponsored open-end private funds is deemed to absorb more than insignificant variability during the early stages of the fund while additional third party capital is being raised.as general partner. As of September 30, 2017,a result, the Company is considered to be acting in the capacity of a principal of the sponsored private fund and is therefore the Company is the primary beneficiary and currently consolidatesof the fund. The Company’s exposure to the obligation of its consolidated fund is limited to the value of its outstanding investment in the consolidated private fund of $5.2$17.4 million at SeptemberJune 30, 2017.2020 and $18.5 million at December 31, 2019. The Company, as general partner, is not obligated to provide any financial support to the consolidated private fund. At June 30, 2020 and December 31, 2019, the consolidated private fund had total assets of $47.0 million and $24.7 million, respectively, and total liabilities of $0.6 million and $0.1 million, respectively. Assets and liabilities were made up primarily of marketable equity securities and unsettled trades.
Unconsolidated Company-Sponsored Private Funds—The Company does not consolidate its sponsored private funds where it has insignificant direct equity interests or capital commitments to these funds as general partner. The Company may invest alongside certain of its sponsored private funds through joint ventures between the Company and these funds, or the Company may have capital commitments to its sponsored private funds that are satisfied directly through the co-investment joint ventures as an affiliate of the general partner. In these instances, the co-investment joint ventures are consolidated fund.
Unconsolidated VIEsby the Company. As the Company's direct equity interests in its sponsored private funds as general partner absorb insignificant variability, the Company is considered to be acting in the capacity of an agent of these funds and is therefore not the primary beneficiary of these funds. The Company accounts for its equity interests in unconsolidated sponsored private funds under the equity method. The Company's maximum exposure to loss is limited to the carrying value of its investment in the unconsolidated sponsored private funds, totaling $179.7 million at June 30, 2020 and $137.0 million at December 31, 2019, included within equity and debt investments and additionally at December 31, 2019, within assets held for sale, on the consolidated balance sheets.
Securitizations
PriorThe Company previously securitized loans receivable and CRE debt securities using VIEs. Upon securitization, the Company had retained beneficial interests in the securitization vehicles, usually in the form of equity tranches or subordinate securities. The Company also acquired securities issued by securitization trusts that are VIEs. The securitization vehicles were structured as pass-through entities that receive principal and interest on the underlying mortgage loans and debt securities and distribute those payments to the Merger,holders of the notes, certificates or bonds issued by the securitization vehicles. The loans and debt securities were transferred into securitization vehicles such that these assets are restricted and legally isolated from the creditors of the Company, and therefore are not available to satisfy the Company's obligations but only the obligations of the securitization vehicles. The obligations of the securitization vehicles did not have any recourse to the general credit of the Company and its other subsidiaries.
Unconsolidated Securitizations—The Company does not consolidate the assets and liabilities of CDOs in which the Company has an interest but does not retain the collateral management function. NRF had previously delegated the collateral management rights for certain sponsored N-Star CDOs and two third party-sponsored CDOs to a third-partythird party collateral manager or collateral manager delegate who is entitled to a percentage of the senior and subordinate collateral management fees. The Company continues to receive fees as named collateral manager or collateral manager delegate and retained administrative responsibilities. The Company determined that the fees paid to the third-partythird party collateral manager or collateral manager delegate representsrepresent a variable interest in the CDOs and that the third party is acting as a principal. The Company concluded that it does not have the power to direct the activities that most significantly impact the economic performance of these CDOs, which includesinclude but isare not limited to, the ability to sell distressed collateral, and therefore the Company is no longernot the primary beneficiary of such CDOs. As a result, the CompanyCDOs and does not consolidate the assets and liabilities of the CDOs for which the Company does not retain the collateral management function.these CDOs. The Company’s exposure to loss is limited to its investment in these unconsolidated CDOs, comprising CDO equity and CDO bonds, which aggregate to $149.7$24.7 million at SeptemberJune 30, 2017.2020 and $46.0 million at December 31, 2019.
Trusts
The Company, through the Merger, acquired the Trusts, which are wholly-owned subsidiaries of NRF formed as statutory trusts. The Trusts issued preferred securities in private placement offerings, and used the proceeds to purchase junior subordinated notes to evidence loans made to NRF (Note 11)10). The Company owns all of the common stock of the Trusts however, the Company's interests inbut does not consolidate the Trusts do not represent variable interests. The Company determined thatas the holders of the preferred securities issued by the Trusts are the primary beneficiaries of the Trusts, therefore, the Company does not consolidate the Trusts. The Company accounts for its interest in the Trusts under the equity method and its maximum exposure to loss is limited to its investment carrying value of $3.7 million at SeptemberJune 30, 2017,2020 and December 31, 2019, recorded in investments in unconsolidated ventures on the consolidated balance sheet (Note 6).sheet. The junior subordinated notes are recorded as debt on the Company's consolidated balance sheet.
Company-Sponsored Funds
The Company may invest alongside certain of its sponsored funds through joint ventures between the Company and its sponsored funds. These co-investment joint ventures are consolidated by the Company. As general partner, the Company has capital commitments directly to these sponsored funds. The Company may also have capital commitments satisfied directly through the co-investment joint ventures as an affiliate of the general partner. The Company's equity interests in these sponsored funds absorb insignificant variability. As the Company is considered to be acting in the capacity of an agent of these sponsored funds, the Company is not the primary beneficiary and does not consolidate these sponsored funds. The Company accounts for its equity interests in these sponsored funds under the equity method. The Company's maximum exposure to loss is limited to the carrying value of its investment in these sponsored funds, totaling $5.1 million at September 30, 2017 and $1.7 million at December 31, 2016, included within investments in unconsolidated ventures on the consolidated balance sheet.
15.14. Stockholders’ Equity
The table below summarizes the share activities of the Company's preferred and common stock.
As a result of the Merger, each outstanding share of Colony's class A and class B common stock was converted into the right to receive 1.4663 shares of Colony NorthStar's class A and class B common stock, respectively. Accordingly, the Company's common shares outstanding for all prior periods presented have been adjusted to reflect the Colony exchange ratio of 1.4663. |
| | | | | | | | | |
| | Number of Shares |
(In thousands) | | Preferred Stock | | Class A Common Stock | | Class B Common Stock |
Shares outstanding at December 31, 2018 | | 57,464 |
| | 483,347 |
| | 734 |
|
Shares issued upon redemption of OP Units | | — |
| | 187 |
| | — |
|
Repurchase of common stock | | — |
| | (652 | ) | | — |
|
Equity-based compensation, net of forfeitures | | — |
| | 4,713 |
| | — |
|
Shares canceled for tax withholding on vested stock awards | | — |
| | (582 | ) | | — |
|
Shares outstanding at June 30, 2019 | | 57,464 |
| | 487,013 |
| | 734 |
|
| | | | | | |
Shares outstanding at December 31, 2019 | | 41,350 |
| | 487,044 |
| | 734 |
|
Shares issued upon redemption of OP Units | | — |
| | 184 |
| | — |
|
Repurchase of common stock, net (1) | | — |
| | (12,733 | ) | | — |
|
Equity-based compensation, net of forfeitures | | — |
| | 9,273 |
| | — |
|
Shares canceled for tax withholding on vested stock awards | | — |
| | (2,377 | ) | | — |
|
Shares outstanding at June 30, 2020 | | 41,350 |
| | 481,391 |
| | 734 |
|
|
| | | | | | | | | |
| | Number of Shares |
(In thousands) | | Preferred Stock | | Class A Common Stock | | Class B Common Stock |
Shares outstanding at December 31, 2015 | | 25,030 |
| | 163,777 |
| | 801 |
|
Repurchase of preferred stock (1) | | (964 | ) | | — |
| | — |
|
Contribution of preferred stock to an affiliate (1) | | 964 |
| | — |
| | — |
|
Shares issued upon redemption of OP units | | — |
| | 1,186 |
| | — |
|
Conversion of Class B to Class A common stock | | — |
| | 28 |
| | (28 | ) |
Equity-based compensation, net of forfeitures | | — |
| | 1,504 |
| | — |
|
Shares canceled for tax withholding on vested stock awards | | — |
| | (216 | ) | | — |
|
Shares outstanding at September 30, 2016 | | 25,030 |
| | 166,279 |
| | 773 |
|
| | | | | | |
Shares outstanding at December 31, 2016 | | 25,030 |
| | 166,440 |
| | 770 |
|
Consideration for the Merger (2) | | 39,466 |
| | 392,120 |
| | — |
|
Issuance of preferred stock | | 26,400 |
| | — |
| | — |
|
Redemption of preferred stock (3) | | (25,432 | ) | | — |
| | — |
|
Shares canceled (4) | | — |
| | (2,984 | ) | | — |
|
Shares issued upon redemption of OP Units | | — |
| | 1,680 |
| | — |
|
Conversion of Class B to Class A common stock | | — |
| | 28 |
| | (28 | ) |
Repurchase of common stock (5) | | — |
| | (17,296 | ) | | — |
|
Exchange of notes for Class A common stock | | — |
| | 208 |
| | — |
|
Equity-based compensation, net of forfeitures | | — |
| | 8,075 |
| | — |
|
Shares canceled for tax withholding on vested stock awards | | — |
| | (427 | ) | | — |
|
Shares outstanding at September 30, 2017 | | 65,464 |
| | 547,844 |
| | 742 |
|
__________ | |
(1) | In January 2016, the Company repurchased 963,718 shares in aggregateNet of its preferred stock for approximately $20.0 million. In March 2016, the Company contributed the preferred stock at its purchase price to an investment vehicle (the "REIT Securities Venture"), which is a joint venture with a private fund managed by the Company. The Company holds an approximate 4.4% interest in the REIT Securities Venture, accounted for under the equity method. The REIT Securities Venture invests in equityreissuance of publicly traded U.S. REITs, including securities of the Company. |
| |
(2)
| Shares were legally issued by Colony NorthStar, as the surviving combined company, as consideration for the Merger. However, as the Merger is accounted for as a reverse acquisition, the consideration transferred was measured based upon the number of964,160 shares of class A common stock and preferred stock that Colony, as the accounting acquirer, would theoretically have to issue to the shareholders of NSAM and NRF to achieve the same ratio of ownership in Colony NorthStar upon completion of the Merger (Note 3). |
| |
(3)
| Includes 12,884,700 shares of preferred stock for which redemption requests were made in September 2017 and settled in October 2017. |
| |
(4)
| Represents NRF shares held by NSAM that were canceled upon consummation of the Merger, after giving effect to the exchange ratio. |
| |
(5)
| Includes 520,422 shares of common stockhad been repurchased by the Company during March 2020. Refer to discussion of settlement liability in September 2017 and settled in October 2017Note 12. |
Preferred Stock
In the event of a liquidation or dissolution of the Company, preferred stockholders have priority over common stockholders for payment of dividends and distribution of net assets.
The table below summarizes the preferred stock issued and outstanding at SeptemberJune 30, 2017:2020:
|
| | | | | | | | | | | | | | | | | | |
Description | | Dividend Rate Per Annum | | Initial Issuance Date | | Shares Outstanding (in thousands) | | Par Value (in thousands) | | Liquidation Preference (in thousands) | | Earliest Redemption Date |
Series G | | 7.5 | % | | June 2014 | | 3,450 |
| | $ | 35 |
| | $ | 86,250 |
| | Currently redeemable |
Series H | | 7.125 | % | | April 2015 | | 11,500 |
| | 115 |
| | 287,500 |
| | Currently redeemable |
Series I | | 7.15 | % | | June 2017 | | 13,800 |
| | 138 |
| | 345,000 |
| | June 5, 2022 |
Series J | | 7.125 | % | | September 2017 | | 12,600 |
| | 126 |
| | 315,000 |
| | September 22, 2022 |
| | | | | | 41,350 |
| | $ | 414 |
| | $ | 1,033,750 |
| | |
|
| | | | | | | | | | | | | | | | | | |
Description | | Dividend Rate Per Annum | | Initial Issuance Date | | Shares Outstanding (in thousands) | | Par Value (in thousands) | | Liquidation Preference (in thousands) | | Earliest Redemption Date |
Series B | | 8.25 | % | | February 2007(1) | | 6,114 |
| | $ | 61 |
| | $ | 152,855 |
| | Currently redeemable |
Series D | | 8.5 | % | | April 2013(1) | | 8,000 |
| | 80 |
| | 200,000 |
| | April 10, 2018 |
Series E | | 8.75 | % | | May 2014(1) | | 10,000 |
| | 100 |
| | 250,000 |
| | May 15, 2019 |
Series G | | 7.5 | % | | June 2014(1) | | 3,450 |
| | 35 |
| | 86,250 |
| | June 19, 2019 |
Series H | | 7.125 | % | | April 2015(1) | | 11,500 |
| | 115 |
| | 287,500 |
| | April 13, 2020 |
Series I | | 7.15 | % | | June 2017 | | 13,800 |
| | 138 |
| | 345,000 |
| | June 5, 2022 |
Series J | | 7.125 | % | | September 2017 | | 12,600 |
| | 126 |
| | 315,000 |
| | September 22, 2022 |
| | | | | | 65,464 |
| | $ | 655 |
| | $ | 1,636,605 |
| | |
__________
| |
(1)
| Represents initial issuance date pre-Merger by NRF or Colony, as applicable. |
All series of preferred stock are at parity with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up of the Company. Dividends on each seriesSeries G, H, I and J of preferred stock of Colony NorthStar are payable quarterly in arrears in the case of theJanuary, April, July and October. Prior to their full redemption as discussed below, dividends on Series B D and E preferred stock were payable in February, May, August and November, and in the case of Series G, H, I and J preferred stock, in January, April, July and October.November.
Each series of preferred stock is redeemable on or after the earliest redemption date for that series at $25.00 per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option. The redemption period for each series of preferred stock is subject to the Company’s right under limited circumstances to redeem the preferred stock earlier in order to preserve its qualification as a REIT or upon the occurrence of a change of control (as defined in the articles supplementary relating to each series of preferred stock).
Preferred stock generally does not have any voting rights, except if the Company fails to pay the preferred dividends for six or more quarterly periods (whether or not consecutive). Under such circumstances, the preferred stock will be entitled to vote, together as a single class with any other series of parity stock upon which like voting rights have been conferred and are exercisable, to elect two2 additional directors to the Company’s board of directors, until all unpaid dividends have been paid or declared and set aside for payment. In addition, certain changes to the terms of any series of preferred stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of each such series of preferred stock voting separately as a class for each series of preferred stock.
Effect ofIn June 2020, the Merger
Upon consummation of the Merger, each share of Series A, B, C, D and E preferred stock of NRF and each share of Series A, B and C preferred stock of Colony that was issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into the right to receive one share of Series A, B, C, D, E, F, G and H preferred stock of Colony NorthStar, respectively, with substantially identical terms.
The Colony NorthStar preferred stock issued in exchange for NRF preferred stock formed part of the merger consideration and was recorded at fair value upon issuance basedBoard declared dividends on the closing price of the respectiveall series of NRF preferred stock at the Closing Date. While the Colony preferred stock was legally canceled and converted into Colony NorthStar preferred stock upon closing of the Merger, the event was treated, for accounting purposes, as a modification with carryover of existing carrying value, not an extinguishment and reissuance of preferred stock asfor the underlying termssecond quarter of 2020, which was paid in July 2020. In August 2020, the Board declared dividends on all series of preferred stock were substantially identical pre and post Merger.for the third quarter of 2020.
Issuance and Redemption of Preferred Stock
The Company issued 13.8 million shares of Series I preferred stock in June 2017 and 12.6 million shares of Series J preferred stock in September 2017 with dividend rates of 7.15% and 7.125% per annum, respectively. Proceeds received for Series I and Series J preferred stock totaled $637.9 million, net of underwriting discounts and offering costs payable byredeemed the Company. The Company applied the proceeds from the offerings, combined with available cash, to redeem all of the outstanding shares of Series A, Series F and Series C preferred stock and a portion of theremaining outstanding shares of Series B preferred stock and all outstanding shares of Series E preferred stock in December 2019, with settlement in January 2020, for $644.9$402.9 million, in aggregate, based on a redemption priceapplying proceeds from the sale of its light industrial business.
All preferred stock redemptions were at $25.00 per share liquidation preference plus accrued and unpaid dividends prorated to thetheir respective redemption dates. The excess or deficit of the $25.00 per share liquidation preference over the carrying value of the respective preferred stock redeemed results in a decrease or increase to net income attributable to common stockholders, respectively. For the three and nine months ended September 30, 2017, a $0.9 million increase and a $4.5 million decrease to net income available to common stockholders, respectively, was recorded as a result of the redemptions of Series A and Series F preferred stock in June 2017 and Series C and Series B
preferred stock in September 2017. The redemption notices for Series B and Series C preferred stock were issued in September 2017 and settled in October 2017. At September 30, 2017, settlement of the redemptions was pending and presented as preferred stock redemptions payable of $322.1 million on the consolidated balance sheet.
Common Stock
Except with respect to voting rights, class A common stock and class B common stock have the same rights and privileges and rank equally, share ratably in dividends and distributions, and are identical in all respects as to all matters. classClass A common stock has one1 vote per share.
Classshare and class B common stock has thirty-six and one-half votes per share. This gives the holders of class B common stock a right to vote that reflects the aggregate outstanding non-voting economic interest in the Company (in the form of OP Units) attributable to class B common stock holders and therefore, does not provide any disproportionate voting rights. Class B common stock was issued as consideration in the Company's acquisition in April 2015 of the investment management business and operations of its former manager, which was previously controlled by the Company's Executive Chairman. Each share of class B common stock shall convert automatically into one1 share of class A common stock if the Executive Chairman or his beneficiaries directly or indirectly transfer beneficial ownership of class B common stock or OP Units held by them, other than to certain qualified transferees, which generally includes affiliates and employees. In addition, each holder of class B common stock has the right, at the holder’s option, to convert all or a portion of such holder’s class B common stock into an equal number of shares of class A common stock.
AsThe Company suspended dividends on its class A common stock beginning with the Merger was accounted forsecond quarter of 2020. Under the terms of the Company's amended credit facility, the Company is restricted from paying common dividends other than
to maintain the Company’s status as a reverse acquisition, the shares of common stock issued in connection with the Merger represents the number of shares Colony,REIT or to reduce income tax payments. The Company will continue to monitor its financial performance and liquidity position, and as the accounting acquirer, would theoretically have to issue to the shareholders of NSAM and NRF to achieve the same ratio of ownership in Colony NorthStar upon completion of the Merger.
In connection with the consummation of the Merger, on January 20, 2017,economic conditions improve, the Company paid awill reevaluate its dividend of $0.04444 per share of each Colony and NRF common stock to stockholders of record on January 9, 2017, representing a pro rata dividend for the period from January 1, 2017 through January 10, 2017 on a pre-exchange basis (or $0.03 after giving effect to the Colony exchange ratio of 1.4663). Additionally, the Company declared a dividend of $0.24 per share for the period from January 11, 2017 through March 31, 2017. Accordingly, dividends declared for the first quarter of 2017 per common share is equivalent to $0.27 per share after giving effect to the exchange ratio.policy in consultation with its revolver lending group.
On January 27, 2017, the Company paid a one-time special dividend of $1.16 per share of common stock to former NSAM stockholders of record on January 3, 2017.
Common Stock Repurchases
On February 23, 2017,During the Company's board of directors authorized a common stock repurchase program pursuant to whichsix months ended June 30, 2020 and for the year ended December 31, 2019, the Company may repurchase up to $300 million of its outstanding shares of class A common stock over a one-year period, either in the open market or through privately negotiated transactions. During the nine months ended September 30, 2017, the Company repurchased 17,295,914 shares of its class A common stock totaling 12,733,204 shares at an aggregatea cost of approximately $224.6$24.6 million including commissions,and 652,311 shares at a cost of $3.2 million, respectively, or a weighted-averageweighted average price of $12.99$1.93 and $4.84 per share. This included 2,150,120share, respectively.
All share repurchases were made pursuant to a $300 million share repurchase program which expired in May 2020. The Company is restricted from repurchasing additional common shares, of class A common stock repurchased for $29.8 million concurrent withsubject to certain exceptions, under the terminationterms of the Call Spread, as discussed below.
At-The-Market Stock Offering Program ("ATM Program")
In May 2015, the Company entered into separate “at-the-market” equity distribution agreements with certain sales agents to offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $300 million. Sales of the shares may be made in negotiated transactions and/or transactions that are deemed to be "at the market" offerings, including sales made by means of ordinary brokers' transactions, including directly on the NYSE, or sales made to or through a market maker other than on an exchange. The Company pays each sales agent a commission not to exceed 2% of the gross sales proceeds for any common stock sold through such agent. There were no shares offered through the ATM Program in 2017 prior to the Merger and the ATM Program was terminated upon closing of the Merger.amended credit facility.
Dividend Reinvestment and Direct Stock Purchase Plan
Colony’sThe Company's Dividend Reinvestment and Direct Stock Purchase Plan in effect prior to the Merger (the “Colony DRIP“DRIP Plan”) provided Colony'sprovides existing common stockholders and other investors the opportunity to purchase shares (or additional shares, as applicable) of Colony’sthe Company's class A common stock by reinvesting some or all of the cash dividends received on their shares of Colony’sthe Company's class A common stock or making optional cash purchases within specified parameters. The Colony DRIP Plan involvedinvolves the acquisition of Colony'sthe Company's class A common stock either in the open market, directly from Colonythe Company as newly issued common stock, or in privately negotiated transactions with third parties. There were
no shares of Colony's class A common stock acquired under the Colony DRIP Plan in 2017 prior to the Merger and the Colony DRIP Plan was terminated upon closing of the Merger. Concurrent with the closing of the Merger, the Company established a Dividend Reinvestment and Direct Stock Purchase Plan (the "Colony NorthStar DRIP Plan") with substantially the same terms and conditions as the Colony DRIP Plan. There were no 0 shares of class A common stock acquired under the Colony NorthStar DRIP Plan forin the period from January 10, 2017 through,form of new issuances in 2020 and including, September 30, 2017.
Call Spread
In September 2015, NSAM entered into a call spread transaction (the “Call Spread”) with a third-party counterparty related to its share repurchase program. In connection with the Call Spread, certain subsidiaries of NSAM had purchased and sold a call option on NSAM’s common stock with a notional amount of $100.0 million with various expiration dates beginning in December 2018 and a final maturity date in February 2019. At maturity, NSAM can, at its election, exercise the purchased call option on a cash basis, share basis or a net share basis. In the event there is an early unwind of one or more components of the Call Spread, the amount of cash to be received by NSAM will depend upon the market price of its common stock and the remaining term of the Call Spread.
Subsequent to the Merger, the obligation to the counterparty under the sold call option is guaranteed by the Company. In March 2017, the Company terminated the Call Spread and received $21.9 million in settlement, including the release of $15.0 million of cash pledged as collateral. The net settlement was accounted for as a capital transaction.
Accumulated Other Comprehensive Income (Loss) ("AOCI")
The following tables present the changes in each component of AOCI attributable to stockholders and noncontrolling interests in investment entities, net of immaterial tax effect. AOCI attributable to noncontrolling interests in Operating Company is immaterial.
Changes in Components of AOCI—Stockholders
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Company's Share in AOCI of Equity Method Investments | | Unrealized Gain (Loss) on AFS Debt Securities | | Unrealized Gain (Loss) on Cash Flow Hedges | | Foreign Currency Translation Gain (Loss) | | Unrealized Gain (Loss) on Net Investment Hedges | | Total |
AOCI at December 31, 2018 | | $ | 3,629 |
| | $ | (3,175 | ) | | $ | (91 | ) | | $ | 6,618 |
| | $ | 7,018 |
| | $ | 13,999 |
|
Other comprehensive income (loss) before reclassifications | | 8,828 |
| | 591 |
| | (2,063 | ) | | (7,643 | ) | | 14,766 |
| | 14,479 |
|
Amounts reclassified from AOCI | | — |
| | 626 |
| | — |
| | (1,128 | ) | | (1,009 | ) | | (1,511 | ) |
AOCI at June 30, 2019 | | $ | 12,457 |
| | $ | (1,958 | ) | | $ | (2,154 | ) | | $ | (2,153 | ) | | $ | 20,775 |
| | $ | 26,967 |
|
| | | | | | | | | | | | |
AOCI at December 31, 2019 | | $ | 9,281 |
| | $ | 7,823 |
| | $ | (226 | ) | | $ | 139 |
| | $ | 30,651 |
| | $ | 47,668 |
|
Other comprehensive income (loss) before reclassifications | | (898 | ) | | 2,557 |
| | — |
| | (16,929 | ) | | 15,819 |
| | 549 |
|
Amounts reclassified from AOCI | | — |
| | (3,544 | ) | | — |
| | 246 |
| | (552 | ) | | (3,850 | ) |
AOCI at June 30, 2020 | | $ | 8,383 |
| | $ | 6,836 |
| | $ | (226 | ) | | $ | (16,544 | ) | | $ | 45,918 |
| | $ | 44,367 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Company's Share in AOCI of Equity Method Investments | | Unrealized Gain (Loss) on Securities | | Unrealized Gain (Loss) on Cash Flow Hedges | | Foreign Currency Translation Gain (Loss) | | Unrealized Gain (Loss) on Net Investment Hedges | | Total |
AOCI at December 31, 2015 | | $ | — |
| | $ | — |
| | $ | (245 | ) | | $ | (42,125 | ) | | $ | 23,948 |
| | $ | (18,422 | ) |
Other comprehensive income (loss) before reclassifications | | 234 |
| | 21 |
| | 7 |
| | 130 |
| | (5,654 | ) | | (5,262 | ) |
Amounts reclassified from AOCI | | (8 | ) | |
|
| | (162 | ) | | (67 | ) | | 24 |
| | (213 | ) |
AOCI at September 30, 2016 | | $ | 226 |
| | $ | 21 |
| | $ | (400 | ) | | $ | (42,062 | ) | | $ | 18,318 |
| | $ | (23,897 | ) |
| | | | | | | | | | | | |
AOCI at December 31, 2016 | | $ | 85 |
| | $ | (112 | ) | | $ | (41 | ) | | $ | (76,426 | ) | | $ | 44,385 |
| | $ | (32,109 | ) |
Other comprehensive income (loss) before reclassifications | | 3,711 |
| | (1,065 | ) | | 41 |
| | 116,545 |
| | (64,752 | ) | | 54,480 |
|
Amounts reclassified from AOCI | | (29 | ) | | (106 | ) | | — |
| | (2,232 | ) | | 5,827 |
| | 3,460 |
|
AOCI at September 30, 2017 | | $ | 3,767 |
| | $ | (1,283 | ) | | $ | — |
| | $ | 37,887 |
| | $ | (14,540 | ) | | $ | 25,831 |
|
Changes in Components of AOCI—Noncontrolling Interests in Investment Entities
|
| | | | | | | | | | | | | | | | |
(In thousands) | | Unrealized Gain (Loss) on Cash Flow Hedges | | Foreign Currency Translation Gain (Loss) | | Unrealized Gain (Loss) on Net Investment Hedges | | Total |
AOCI at December 31, 2018 | | $ | (390 | ) | | $ | (600 | ) | | $ | 9,644 |
| | $ | 8,654 |
|
Other comprehensive income (loss) before reclassifications | | (4,656 | ) | | (10,840 | ) | | 1,392 |
| | (14,104 | ) |
Amounts reclassified from AOCI | | — |
| | (465 | ) | | 448 |
| | (17 | ) |
AOCI at June 30, 2019 | | $ | (5,046 | ) | | $ | (11,905 | ) | | $ | 11,484 |
| | $ | (5,467 | ) |
| | | | | | | | |
AOCI at December 31, 2019 | | $ | (1,005 | ) | | $ | (17,913 | ) | | $ | 10,659 |
| | $ | (8,259 | ) |
Other comprehensive income (loss) before reclassifications | | (1 | ) | | (11,689 | ) | | 5,313 |
| | (6,377 | ) |
Amounts reclassified from AOCI | | — |
| | — |
| | (873 | ) | | (873 | ) |
AOCI at June 30, 2020 | | $ | (1,006 | ) | | $ | (29,602 | ) | | $ | 15,099 |
| | $ | (15,509 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Unrealized Gain (Loss) on Securities | | Unrealized Gain (Loss) on Cash Flow Hedges | | Foreign Currency Translation Gain (Loss) | | Unrealized Gain (Loss) on Net Investment Hedges | | Total |
AOCI at December 31, 2015 | | $ | — |
| | $ | (149 | ) | | $ | 51 |
| | $ | (1 | ) | | $ | (99 | ) |
Other comprehensive income (loss) before reclassifications | | 100 |
| | — |
| | (12,520 | ) | | 9,143 |
| | (3,277 | ) |
Amounts reclassified from AOCI | | — |
| | (43 | ) | | (785 | ) | | (120 | ) | | (948 | ) |
AOCI at September 30, 2016 | | $ | 100 |
| | $ | (192 | ) | | $ | (13,254 | ) | | $ | 9,022 |
| | $ | (4,324 | ) |
| | | | | | | | | | |
AOCI at December 31, 2016 | | $ | (527 | ) | | $ | — |
| | $ | (57,213 | ) | | $ | 11,798 |
| | $ | (45,942 | ) |
Other comprehensive income (loss) before reclassifications | | 981 |
| | — |
| | 86,501 |
| | (9,018 | ) | | 78,464 |
|
Amounts reclassified from AOCI | | (454 | ) | | — |
| | (1,678 | ) | | 1,730 |
| | (402 | ) |
AOCI at September 30, 2017 | | $ | — |
| | $ | — |
| | $ | 27,610 |
| | $ | 4,510 |
| | $ | 32,120 |
|
Reclassifications out of AOCI—Stockholders
Information about amounts reclassified out of AOCI attributable to stockholders by component is presented below:
|
| | | | | | | | | | | | | | | | | | |
(In thousands) | | Three Months Ended June 30, | | Six Months Ended June 30, | | Affected Line Item in the Consolidated Statements of Operations |
Component of AOCI reclassified into earnings | 2020 | | 2019 | | 2020 | | 2019 | |
Relief of basis of AFS debt securities | | $ | 3,544 |
| | $ | — |
| | $ | 3,544 |
| | $ | — |
| | Other gain (loss), net |
Other-than-temporary impairment | | — |
| | — |
| | — |
| | (626 | ) | | Other gain (loss), net |
Release of foreign currency cumulative translation adjustments | | — |
| | 173 |
| | (246 | ) | | 1,128 |
| | Other gain (loss), net |
Unrealized gain (loss) on dedesignated net investment hedges | | (82 | ) | | 22 |
| | 552 |
| | 46 |
| | Other gain (loss), net |
Realized gain on net investment hedges | | — |
| | 739 |
| | — |
| | 963 |
| | Other gain (loss), net |
|
| | | | | | | | | | | | | | | | | | |
(In thousands) | | Three months ended September 30, | | Nine months ended September 30, | | Affected Line Item in the Consolidated Statements of Operations |
Component of AOCI reclassified into earnings | 2017 | | 2016 | | 2017 | | 2016 | |
Equity in realized gain on sale of marketable securities of unconsolidated ventures | | $ | — |
| | $ | — |
| | $ | 106 |
| | $ | — |
| | Earnings (losses) from investments in unconsolidated ventures |
Unrealized gain on ineffective cash flow hedge | | — |
| | 60 |
| | — |
| | 162 |
| | Other gain (loss), net |
Release of cumulative translation adjustments | | 3,166 |
| | — |
| | 2,232 |
| | 67 |
| | Other gain (loss), net |
Unrealized gain (loss) on dedesignated net investment hedges | | (1,365 | ) | | (122 | ) | | (2,109 | ) | | (76 | ) | | Other gain (loss), net |
Realization of gain (loss) on net investment hedges | | (4,678 | ) | | — |
| | (3,718 | ) | | 52 |
| | Other gain (loss), net |
Release of equity in AOCI of unconsolidated ventures | | 49 |
| | 8 |
| | 29 |
| | 8 |
| | Other gain (loss), net |
16.15. Noncontrolling Interests
Redeemable Noncontrolling Interests
Certain members of Townsend management own interests in the form of class B units in Townsend (which is an investment management subsidiary of the Company that is held for sale at September 30, 2017) where they have the ability to redeem a certain percentage of their interests through December 31, 2020 or upon the occurrence of certain triggering events. Redemptions may be settled in cash, the Company’s common stock, or a combination thereof, at the Company's option, subject to certain conditions, and payable by the end of the fiscal quarter following the exercise of the redemption.
In connection with an open-end fund sponsored and consolidated by the Company, limited partners of the fund have the right to withdraw a portion or all of their interests in the fund for cash.
The following table presents a summary of changesthe activity in redeemable noncontrolling interests:interests in a consolidated open-end fund sponsored by the Company.
|
| | | | | | | | |
| | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 |
Beginning balance | | $ | 6,107 |
| | $ | 9,385 |
|
Contributions | | 25,880 |
| | — |
|
Distributions and redemptions | | (2,763 | ) | | (3,393 | ) |
Net income (loss) | | (158 | ) | | 1,953 |
|
Ending balance | | $ | 29,066 |
| | $ | 7,945 |
|
|
| | | | |
(In thousands) | | |
Balance at December 31, 2016 | | $ | — |
|
Assumed through the Merger | | 78,843 |
|
Assumed through consolidation of sponsored fund | | 24,763 |
|
Contributions | | 4,200 |
|
Distributions | | (1,731 | ) |
Net income | | 3,015 |
|
Currency translation adjustment and other | | (100 | ) |
Balance at September 30, 2017 | | $ | 108,990 |
|
Noncontrolling Interests in Investment Entities
These are interests in consolidated investment entities held by private investment funds managed by the Company, or by third party joint venture parties.partners.
In January 2017, the Company sold an 18.7% noncontrolling interestThe Company's investment in its healthcare real estatelight industrial portfolio, prior to its sale in December 2019, was made alongside third party limited partners through a newly formed joint venture pursuant to a purchase and sale agreement executed in November 2016 based upon terms negotiated prior toconsolidated by the Merger.Company. The net excess of the carrying value of the noncontrolling interest sold over the consideration received resulted in a $41.4 million decrease to additional paid-in capital, including $9.2 million of cost of new capital. Together with existing noncontrolling interests with a 16.4% interest in the healthcare real estate portfolio, noncontrolling interests own approximately 28.7% of the Company's healthcare portfolio.
For the nine months ended September 30, 2017, contributions from new limited partners reduced the Company's ownership interest in its industrial joint venture. The newchanged over time as result of capital contributions from or redemptions of limited partner interests. Limited partners were admitted or redeemed at the net asset value of the joint venture, based upon valuations determined by independent third parties, at the time of contributions. Thetheir contributions or redemptions. For the year ended December 31, 2019, the difference between contributions receivedor redemptions and the noncontrolling interests'respective limited partners' share of the joint venture resulted in ana net increase to additional paid-in capital of $21.9$12.4 million.
Noncontrolling Interests in Operating Company
Certain current and past employees of the Company directly or indirectly own interests in OP, presented as noncontrolling interests in the Operating Company. Noncontrolling interests in OP have the right to require OP to redeem part or all of such member’s OP Units for cash based on the market value of an equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a one-for-one1-for-one basis. At the end of each period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP.
Issuance of OP Units—The Company issued 21,478,515 OP Units in July 2019 and 612,072 OP Units in December 2019 as applicable.
Forpart of the nineconsideration for the acquisitions of DBH, valued at $111.9 million, and DataBank, valued at $3.0 million, based upon the closing price of the Company's class A common stock on July 24, 2019 and December 20, 2019, respectively (Note 3). There were 0 OP Units issued in the six months ended SeptemberJune 30, 2017, the2020.
Redemption of OP Units—The Company redeemed 2,072,957184,395 OP Units of which 1,680,913 ofduring the six months ended June 30, 2020 and 187,995 OP Units were redeemed throughduring the year ended December 31, 2019, with the issuance of an equal number of shares of class A common stock on a one-for-one basis, and 392,044 OP units were redeemed for cash of approximately $5.1 million to satisfy tax obligations.1-for-one basis.
For the year ended December 31, 2016, the Company redeemed 1,594,475 OP Units through the issuance of 1,369,911 shares of class A common stock (adjusted for the Merger exchange ratio) on a one-for-one basis and cash settlement of approximately $2.6 million to satisfy tax obligations.
16. Discontinued Operations
Asset groups acquired in connection with purchase business combinations that meet the criteria to be accounted for as held for sale at the dateIn 2020, discontinued operations represent (i) results of acquisition are reported as discontinued operations.
Discontinued operations consisted primarily of a manufactured housing portfolio acquired through the Merger and certain properties acquired through consensual foreclosure of the THL Hotel Portfolio.
The manufactured housing portfolio was valued at its contracted sale pricebulk industrial portfolio; and (ii) in the second quarter of $2.0 billion upon closing of2020, final adjustments to proceeds from the Merger, with $1.3 billion of related mortgage financing assumed by the buyer. TheDecember 2019 sale of the manufactured housinglight industrial portfolio closedupon release of escrowed funds, which resulted in March 2017, witha net loss of $7.4 million, including a corresponding effect on carried interest and related compensation.
In 2019, discontinued operations encompassed predominantly results of the Company having received approximately $664.4 millionlight industrial portfolio and the related management platform prior to its sale in net proceeds, as adjusted for prorationsDecember 2019, and other reimbursements, for itsincluded (i) direct compensation and administrative expenses of the industrial business, and (ii) associated fee income, equity method earnings from general partner interest in the portfolio.industrial open-end fund, predominantly carried interest, and compensation related to carried interest sharing, all of which were previously reported under the investment management segment. Noncontrolling interests in investment entities in 2019 also included the interests of all limited partners in the industrial closed-end and open-end funds.
Net income generatedIncome (loss) from discontinued operations of these held for sale asset groups for the three and nine months ended September 30, 2017 (or through their disposition dates, if earlier) is presented below. There were no discontinued operations in the three and nine months ended September 30, 2016.
|
| | | | | | | | |
(In thousands) | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Revenues | | | | |
Property operating income | | $ | 6,446 |
| | $ | 40,303 |
|
Other income | | 95 |
| | 2,352 |
|
Expenses | | | | |
Property operating expenses | | (5,056 | ) | | (17,451 | ) |
Interest expense | | — |
| | (9,028 | ) |
Loss on sale of real estate assets | | — |
| | (2,108 | ) |
Other expenses | | (4 | ) | | (27 | ) |
Net income from discontinued operations | | 1,481 |
| | 14,041 |
|
Net income from discontinued operations attributable to: | | | | |
Noncontrolling interests—investments
| | (648 | ) | | (648 | ) |
Noncontrolling interests—Operating Company
| | (46 | ) | | (46 | ) |
Net income from discontinued operations attributable to Colony NorthStar, Inc. | | $ | 787 |
| | $ | 13,347 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Six Months Ended June 30, |
(In thousands) | | 2020 |
| 2019 |
| 2020 |
| 2019 |
Revenues | |
|
|
|
|
|
|
|
Property operating income | | $ | 4,924 |
|
| $ | 91,741 |
|
| $ | 10,303 |
|
| $ | 172,973 |
|
Fee income | | — |
|
| 2,978 |
|
| — |
|
| 5,449 |
|
Interest and other income | | 56 |
|
| 1,228 |
|
| 73 |
|
| 2,368 |
|
Revenues from discontinued operations | | 4,980 |
| | 95,947 |
| | 10,376 |
| | 180,790 |
|
Expenses | | | | | | | | |
Property operating expense | | 1,392 |
|
| 25,669 |
|
| 2,865 |
|
| 48,007 |
|
Interest expense | | 1,718 |
|
| 19,726 |
|
| 4,124 |
|
| 34,352 |
|
Investment and servicing expense | | — |
|
| 8 |
|
| — |
|
| 538 |
|
Depreciation and amortization | | 642 |
|
| 45,360 |
|
| 1,275 |
|
| 84,805 |
|
Compensation expense—cash and equity-based (1) | | — |
|
| 3,680 |
|
| 82 |
|
| 6,339 |
|
Compensation expense—carried interest | | (524 | ) |
| 561 |
|
| (524 | ) |
| 340 |
|
Administrative expenses | | 301 |
|
| 1,386 |
|
| 633 |
|
| 3,016 |
|
Expenses from discontinued operations | | 3,529 |
| | 96,390 |
| | 8,455 |
| | 177,397 |
|
Other income (loss) | | | | | | | | |
Gain (loss) on sale of real estate | | (7,787 | ) |
| 547 |
|
| (7,787 | ) |
| 23,395 |
|
Other gain (loss), net | | (2 | ) | | (49 | ) | | 2 |
| | (57 | ) |
Equity method losses, including carried interest | | (164 | ) |
| (173 | ) |
| (164 | ) |
| (644 | ) |
Income (loss) from discontinued operations before income taxes | | (6,502 | ) |
| (118 | ) |
| (6,028 | ) |
| 26,087 |
|
Income tax expense | | — |
|
| (386 | ) |
| — |
|
| (298 | ) |
Income (loss) from discontinued operations | | (6,502 | ) |
| (504 | ) |
| (6,028 | ) |
| 25,789 |
|
Income (loss) from discontinued operations attributable to: | |
|
|
|
|
|
|
|
Noncontrolling interests in investment entities | | (4,799 | ) |
| 674 |
|
| (4,629 | ) |
| 17,983 |
|
Noncontrolling interests in Operating Company | | (169 | ) |
| (71 | ) |
| (139 | ) |
| 474 |
|
Income (loss) from discontinued operations attributable to Colony Capital, Inc. | | $ | (1,534 | ) |
| $ | (1,107 | ) |
| $ | (1,260 | ) |
| $ | 7,332 |
|
__________
| |
(1) | Included equity-based compensation of $0.7 million and $1.4 million for the three and six months ended June 30, 2019, respectively. |
18.
17. Earnings per Share
The following table provides the basic and diluted earnings per common share computations:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 |
Net income allocated to common stockholders | | | | | | | | |
Net income from continuing operations | | $ | 71,108 |
| | $ | 71,904 |
| | $ | 215,930 |
| | $ | 266,071 |
|
Income from discontinued operations | | 1,481 |
| | — |
| | 14,041 |
| | — |
|
Net income | | 72,589 |
| | 71,904 |
| | 229,971 |
| | 266,071 |
|
Net income attributable to noncontrolling interests: | | | | | | | | |
Redeemable noncontrolling interests | | (1,678 | ) | | — |
| | (3,015 | ) | | — |
|
Investment entities | | (36,906 | ) | | (32,744 | ) | | (87,765 | ) | | (130,508 | ) |
Operating Company | | (97 | ) | | (4,189 | ) | | (1,344 | ) | | (15,528 | ) |
Net income attributable to Colony NorthStar, Inc. | | 33,908 |
| | 34,971 |
| | 137,847 |
| | 120,035 |
|
Preferred stock redemption | | 918 |
| | — |
| | (4,530 | ) | | — |
|
Preferred dividends | | (33,176 | ) | | (12,093 | ) | | (98,328 | ) | | (36,066 | ) |
Net income attributable to common stockholders | | 1,650 |
| | 22,878 |
| | 34,989 |
| | 83,969 |
|
Net income allocated to participating securities | | (2,677 | ) | | (577 | ) | | (7,461 | ) | | (1,723 | ) |
Net income allocated to common stockholders—basic | | (1,027 | ) | | 22,301 |
| | 27,528 |
| | 82,246 |
|
Interest expense attributable to convertible notes (1) | | — |
| | — |
| | — |
| | — |
|
Net income allocated to common stockholders—diluted | | $ | (1,027 | ) | | $ | 22,301 |
| | $ | 27,528 |
| | $ | 82,246 |
|
Weighted average common shares outstanding (2) | | | | | | | | |
Weighted average number of common shares outstanding—basic | | 542,855 |
| | 164,846 |
| | 531,251 |
| | 164,420 |
|
Weighted average effect of dilutive shares (3) | | — |
| | — |
| | — |
| | — |
|
Weighted average number of common shares outstanding—diluted | | 542,855 |
| | 164,846 |
| | 531,251 |
| | 164,420 |
|
| | | | | | | | |
Basic earnings per share | | | | | | | | |
Net income from continuing operations | | $ | 0.00 |
|
| $ | 0.14 |
| | $ | 0.03 |
| | $ | 0.50 |
|
Income from discontinued operations | | 0.00 |
| | 0.00 |
| | 0.02 |
| | 0.00 |
|
Net income per basic common share | | $ | 0.00 |
| | $ | 0.14 |
| | $ | 0.05 |
| | $ | 0.50 |
|
| | | | | | | | |
Diluted earnings per share | | | | | | | | |
Net income from continuing operations | | $ | 0.00 |
| | $ | 0.14 |
| | $ | 0.03 |
| | $ | 0.50 |
|
Income from discontinued operations | | 0.00 |
| | 0.00 |
| | 0.02 |
| | 0.00 |
|
Net income per diluted common share | | $ | 0.00 |
| | $ | 0.14 |
| | $ | 0.05 |
| | $ | 0.50 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands, except per share data) | | 2020 | | 2019 | | 2020 | | 2019 |
Net loss allocated to common stockholders | | | | | | | | |
Loss from continuing operations | | $ | (2,712,491 | ) | | $ | (484,142 | ) | | $ | (3,117,022 | ) | | $ | (540,590 | ) |
Loss from continuing operations attributable to noncontrolling interests | | 689,751 |
| | 43,497 |
| | 751,849 |
| | 16,530 |
|
Loss from continuing operations attributable to Colony Capital, Inc. | | (2,022,740 | ) | | (440,645 | ) | | (2,365,173 | ) | | (524,060 | ) |
Income (loss) from discontinued operations attributable to Colony Capital, Inc. | | (1,534 | ) | | (1,107 | ) | | (1,260 | ) | | 7,332 |
|
Net loss attributable to Colony Capital, Inc. | | (2,024,274 | ) | | (441,752 | ) | | (2,366,433 | ) | | (516,728 | ) |
Preferred dividends | | (18,516 | ) | | (27,138 | ) | | (37,990 | ) | | (54,275 | ) |
Net loss attributable to common stockholders | | (2,042,790 | ) | | (468,890 | ) | | (2,404,423 | ) | | (571,003 | ) |
Net income allocated to participating securities | | — |
| | (953 | ) | | (1,250 | ) | | (1,673 | ) |
Net loss allocated to common stockholders—basic | | (2,042,790 | ) | | (469,843 | ) | | (2,405,673 | ) | | (572,676 | ) |
Interest expense attributable to convertible and exchangeable notes (1) | | — |
| | — |
| | — |
| | — |
|
Net loss allocated to common stockholders—diluted | | $ | (2,042,790 | ) | | $ | (469,843 | ) | | $ | (2,405,673 | ) | | $ | (572,676 | ) |
Weighted average common shares outstanding | | | | | | | | |
Weighted average number of common shares outstanding—basic | | 471,253 |
| | 479,228 |
| | 475,187 |
| | 479,577 |
|
Weighted average effect of dilutive shares (1)(2)(3) | | — |
| | — |
| | — |
| | — |
|
Weighted average number of common shares outstanding—diluted | | 471,253 |
| | 479,228 |
| | 475,187 |
| | 479,577 |
|
Basic loss per share | | | | | | | | |
Loss from continuing operations | | $ | (4.33 | ) |
| $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.21 | ) |
Income from discontinued operations | | — |
| | — |
| | — |
| | 0.02 |
|
Net loss attributable to common stockholders per basic common share | | $ | (4.33 | ) | | $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.19 | ) |
Diluted loss per share | | | | | | | | |
Loss from continuing operations | | $ | (4.33 | ) | | $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.21 | ) |
Income from discontinued operations | | — |
| | — |
| | — |
| | 0.02 |
|
Net loss attributable to common stockholders per diluted common share | | $ | (4.33 | ) | | $ | (0.98 | ) | | $ | (5.06 | ) | | $ | (1.19 | ) |
__________
| |
(1) | For both the three months ended SeptemberJune 30, 20172020 and 2016,2019, excluded from the calculation of diluted earnings per share is the effect of adding back $7.1 million and $6.8 million of interest expense and 38,246,500 and 36,582,70038,112,100 weighted average dilutive common share equivalents respectively, for the assumed conversion or the exchange of the Company's outstanding convertible and exchangeable notes, as applicable, as their inclusion would be antidilutive. For the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, excluded from the calculation of diluted earnings per share is the effect of adding back $21.8$14.2 million and $20.5$14.3 million, of interest expense, respectively, and 38,599,200 and 36,582,70038,112,100 weighted average dilutive common share equivalents respectively, for the assumed conversion or exchange of the Company's outstanding convertible and exchangeable notes, as applicable, as their inclusion would be antidilutive. |
| |
(2) | As a resultThe calculation of the Merger, each outstanding share of common stock of Colony was exchanged for 1.4663 of newly issued common shares of Colony NorthStar. Accordingly, the historical data related to quarterlydiluted earnings per share excludes the effect of weighted average unvested non-participating restricted shares of 92,700 and 115,200 for the periodsthree and six months ended before SeptemberJune 30, 2017 have been adjusted by2019, respectively, as the exchange ratioeffect would be antidilutive. No unvested non-participating restricted shares were outstanding during the six months ended June 30, 2020. The calculation of 1.4663.diluted earnings per share also excludes the effect of weighted average shares of class A common stock that are contingently issuable in relation to PSUs (Note 19) of 6,047,300 and 459,800 for the three months ended June 30, 2020 and 2019, respectively, and 3,784,000 and 755,700 for the six months ended June 30, 2020 and 2019, respectively. |
| |
(3) | OP Units, subject to lock-up agreements, may be redeemed for registered or unregistered class A common sharesstock on a one-for-one1-for-one basis. At SeptemberJune 30, 20172020 and 2016,2019 there were 32,285,70053,076,700 and 30,480,50031,171,300 redeemable OP Units, respectively. These OP Units would not be dilutive and were not included in the computation of diluted earnings per share for all periods presented. |
Additionally, the computation of diluted earnings per share excluded shares of the Company's class A common stock that are contingently issuable pursuant to the contingent consideration arrangement (Note 13) as the pre-defined performance thresholds would not have been met had the measurement period ended at September 30, 2017.
19.18. Fee Income
The Company's real estate investment management platform manages capital on behalf of institutional and retail investors in private funds, non-tradedtraded and tradednon-traded REITs, and other investment companies,vehicles for which the Company earns fee income. For investment vehicles in which the Company co-sponsors with a third party or for which the Company engages a third party sub-advisor, such fee income is shared with the respective co-sponsor or sub-advisor. The Company also owns NorthStar Securities, a captive broker-dealer platform which raises capital in the retail market.
Fee income earned byas presented in 2019 excluded management fees from the Company consistsCompany's open-end light industrial fund which was included in income from discontinued operations (Note 16) prior to the sale of the following:Company's light industrial platform in December 2019.
The Company's fee income is earned from the following sources: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Base management fees ($42,786, $16,450, $123,959 and $47,873 from affiliates, respectively) | | $ | 47,633 |
| | $ | 16,450 |
| | $ | 137,036 |
| | $ | 47,873 |
|
Asset management fees—from affiliates | | 7,440 |
| | 783 |
| | 16,931 |
| | 1,474 |
|
Incentive fees ($69, $0, $93 and $0 from affiliates, respectively) | | 414 |
| | — |
| | 684 |
| | — |
|
Other fee income | | 4,206 |
| | — |
| | 12,611 |
| | — |
|
Total fee income ($50,294, $17,233, $140,983 and $49,347 from affiliates, respectively) | | $ | 59,693 |
| | $ | 17,233 |
| | $ | 167,262 |
| | $ | 49,347 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Institutional funds and other investment vehicles | | $ | 31,337 |
| | $ | 13,033 |
| | $ | 61,813 |
| | $ | 23,671 |
|
Public companies (CLNC, and NRE prior to its sale in September 2019) | | 7,223 |
| | 15,038 |
| | 15,281 |
| | 30,144 |
|
Non-traded REIT | | 4,431 |
| | 4,989 |
| | 8,862 |
| | 10,095 |
|
Other | | 549 |
| | 2,373 |
| | 1,089 |
| | 2,551 |
|
| | $ | 43,540 |
| | $ | 35,433 |
| | $ | 87,045 |
| | $ | 66,461 |
|
The following table presents the Company's fee income by type:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Base management fees ($40,934, $32,418, $82,448 and $62,620 from affiliates, respectively) | | $ | 41,038 |
| | $ | 32,612 |
| | $ | 82,657 |
| | $ | 62,976 |
|
Asset management fees ($727, $601, $1,259 and $1,236 from affiliates, respectively) | | 1,002 |
| | 1,230 |
| | 1,811 |
| | 1,865 |
|
Other fee income ($1,477, $248, $2,531 and $262 from affiliates, respectively) | | 1,500 |
| | 1,591 |
| | 2,577 |
| | 1,620 |
|
Total fee income | | $ | 43,540 |
| | $ | 35,433 |
| | $ | 87,045 |
| | $ | 66,461 |
|
Base Management Fees—The Company earns base management fees for the day-to-day operations and administration of its managed private funds, traded and non-traded REITs, and other investment companies, NRE and Townsend private funds,vehicles, calculated as follows:
Private Funds— and similar investment vehicles—generally (a) 1% per annum of the limited partners' net funded capital;
Non-Traded REITs—1%capital, or (b) 0.9% to 2%1.75% per annum of gross assetsinvestors' committed capital during commitment or equity;investment period and thereafter, of contributed or invested capital;
Investment Companies—1.25% per annum of average net assets;
NRE—a fixed fee of $14.2 million per annum, subject to increase by an amount equal to CLNC—1.5% per annum of certain provisions in accordance with terms set outCLNC's stockholders' equity (as defined in its governing agreement; and
management agreement), with a reduction in fee base to reflect CLNC's reduced book value effective in the beginning of the fourth quarter of 2019;Townsend private funds—Non-Traded REIT—1.5% per annum of most recently published NAV (as may be subsequently adjusted for any special distribution) for NorthStar Healthcare, with $2.5 million per quarter paid in shares of NorthStar Healthcare common stock at a fixed percentageprice per share equal to its most recently published NAV per share (as may be subsequently adjusted for any special distribution); and
NorthStar Realty Europe ("NRE")—prior to termination of assets underthe management net asset value, total assets, committed capital or invested capital.
contract in connection with the sale of NRE on September 30, 2019, a variable fee of 1.5% per annum of NRE's reported European Public Real Estate Association NAV ("EPRA NAV" as defined in its management agreement) for EPRA NAV up to and including $2.0 billion, and 1.25% per annum for EPRA NAV amounts exceeding $2.0 billion.Asset Management Fees—The Company also earns asset management fees including fees related to acquisition and disposition of investments, as follows:
Private Funds—from its managed private funds, which represents a one-time fee upon closing of each investment, calculated as a fixed percentage, generally 0.5% of the limited partners' net funded capital on each investment; and
investment.Non-Traded REITs (except NorthStar/RXR NY Metro)—1% to 2.25% of the amount funded or allocated by the non-traded REITs to originate or acquire an investment, and 1% to 2% of the contractual sales price for disposition of an investment.
Incentive Fees—The Company may earn incentive fees from CLNC, and prior to its sponsored private funds, traded and non-traded REITs, certain investment companies and Townsend private funds. Incentive fees aretermination, from NRE, determined based on the performance of the investment vehicles subject to the achievement of minimum return levels, with such thresholds varying across investment vehicleshurdles in accordance with the terms set out in their respective governing agreements.
Other Fee Income—Other fees include advisory fees from Townsend clients at a fixed annual retainer, advisory fee in connection with real estate acquisitions by a third party client, as well as selling commission and dealer manager fees. The Company, through NorthStar Securities, earns fees for selling equity in certain classes of shares in the retail companies, calculated as a percentage A portion of the gross offering proceeds raised, up to 7% for selling commissions and up to 3% for dealer managerincentive fees depending on the share classes of the retail companies. All or a portion of selling commission and dealer manager fees may be reallowed to participating broker-dealers.
20. Equity-Based Compensation
Upon consummation of the Merger, each outstanding Colony employee award granted under the 2014 Equity Incentive Plan (the “Colony Equity Incentive Plan”) that did not vest and was not forfeited was assumedearned by the Company (generally 40% to 50%) is allocable to senior management, investment professionals and was converted into an equivalent Colony NorthStar equity award, as set forth in the merger agreement. Outstanding
equity awards granted under Colony's 2009 Non-Executive Director Stock Plan (the “Colony Director Stock Plan”) fully vested upon consummation of the Merger, as discussed further below.
Substantially all of the outstanding NSAM and NRF equity awards prior to the Merger, except for certain awards as described below, vested upon consummation of the Merger. The vested equity awards were settled in NSAM and NRF shares respectively and converted into Colony NorthStar class A common stock based on the exchange ratios of one share of Colony NorthStar class A common stock for each share of NSAM common stock and 1.0996 shares of Colony NorthStar class A common stock for each share of NRF common stock, rounded down to the nearest whole share. All of the vested NSAM and NRF equity awards relate to pre-combination services and are part of the merger consideration.
Colony Director Stock Plan
Upon consummation of the Merger, all outstanding restricted share awards granted under the Colony Director Stock Plan vested and were settled through the issuance of 44,464 shares of Colony NorthStar class A common stock based on the exchange ratio of 1.4663 shares of Colony NorthStar class A common stock for each share of Colony class A common stock, rounded down to the nearest whole share. The Colony Director Stock Plan was assumed by Colony NorthStar upon closing of the Merger.
Colony Equity Incentive Plan
As of January 2, 2017, all shares reserved under the Colony Equity Incentive Plan had been issued. Upon consummation of the Merger, the Colony Equity Incentive Plan was assumed by Colony NorthStar. Each outstanding restricted stock award granted under the Colony Equity Incentive Plan that did not vest by its terms in connection with the consummation of the Merger (and was not forfeited) was assumed by Colony NorthStar and was converted into the right to receive an award in the same form for that number of shares of Colony NorthStar restricted common stock (rounded down to the nearest whole share) equal to the product of: (i) the number of shares of the Company's class A common stock subject to such unvested equity award multiplied by (ii) 1.4663. While the Colony Equity Incentive Plan continues to exist following the Merger, no new awards will be granted under this plan.
NSAM 2014 Stock Plan
Upon consummation of the Merger, the Company assumed the following outstanding awards previously issued under NSAM's 2014 Omnibus Stock Incentive Plan ("NSAM 2014 Stock Plan"). Subsequent to the Merger, the Company adopted the NSAM 2014 Stock Plan, as further described below.
Townsend
In connection with NSAM's acquisition of Townsend's investment management business in January 2016, certain members of Townsend’s management team, who areother employees of the Company, included in carried interest and incentive fee compensation expense. There were granted restricted stock awards. These equity awards did not vest by their terms0 incentive fees earned in connection with the Merger. Upon consummation ofthree and six months ended June 30, 2020 and 2019.
Other Fee Income—Other fees include service fees for information technology and operational support services and facilities to portfolio companies, advisory fees, and licensing fee on the Merger, the outstanding restricted stock awards were converted into Colony NorthStar restricted stock awards on a one-for-one basis. These awards have a service condition only and are subject to graded vesting through December 31, 2020.
American Healthcare Investors Joint Venture
In December 2014, NSAM acquired a 43% interest in American Healthcare Investors, LLC (“AHI") and AHI Newco, LLC (“AHI Venture”), a direct wholly owned subsidiary of AHI. NSAM’s investment in AHI Venture was structured as a joint venture between NSAM and the principals of AHI, a healthcare-focusedCompany's proprietary real estate investment management firm, and James F. Flaherty III, former Chief Executive Officer of HCP, Inc.,index, a rules-based strategy that is accounted for as an equity method investment.
In connection with this arrangement, NSAM was obligated to issue $2.0 millioninvests in equity awards over a two year period to certain AHI employees. As the award is for a fixed dollar amount with a variable number of shares, it is classified as a liability award. Equity-based compensation is recorded in earnings from investments in unconsolidated ventures on the consolidated statement of operations as it is a non-employee award granted to an equity method investee, with a corresponding liability on the consolidated balance sheet. At the time of consummation of the Merger, equity awards issued to certain AHI employees for $1.0 million in shares of NSAM's common stock were outstanding and did not accelerate in the Merger. In March 2017, in full satisfaction of this obligation, $1.0 million in sharesU.S. REITs.
Pursuant to a separate contractual arrangement entered into in connection with the investment in AHI Venture, the AHI principals, subject to certain annual performance targets being met, are also entitled to incremental grants of the Company's common stock, which will vest immediately upon issuance. As of September 30, 2017, no incremental awards have been granted.
NRF Incentive Plan19. Equity-Based Compensation
Upon consummation of the Merger, the Company assumed the following outstanding non-employee stock awards that were previously issued under NRF’s Third Amended and Restated 2004 Omnibus Stock Incentive Plan (the "NRF Incentive Plan"), and which continue to be governed by the terms of the NRF Incentive Plan subsequent to the Merger.
Healthcare Strategic Partnership
In January 2014, NRF entered into a strategic partnership with James F. Flaherty, III, focused on expanding the Company’s healthcare business (“Healthcare Strategic Partnership”). In connection with this arrangement, Mr. Flaherty was granted NRF restricted stock units ("RSUs"), which upon the spin-off of NSAM from NRF in July 2014, were adjusted to also relate to an equal number of units of NSAM RSUs, and continue to be governed by the NRF Incentive Plan. These RSUs will cliff vest in five years in January 2019, subject to a service condition, unless certain conditions are met. This RSU award did not vest by its terms in connection with the consummation of the Merger and was converted into the right to receive an award in the same form for that number of units ofThe Colony NorthStar RSU (rounded down to the nearest whole unit) equal to the product of: (i) the number of units of RSUs subject to such unvested equity award multiplied by (ii) (a) 1.0 for NSAM RSUs and (b) 1.0996 for NRF RSUs.
As a non-employee award, the RSUs are remeasured each period end based on the closing price of the Company's class A common stock as of such period end, with related equity-based compensation cost recorded in investment, servicing and commission expense on the consolidated statement of operations and in equity on the consolidated balance sheet.
In September 2017, the RSU award became fully vested upon the occurrence of a vesting event under the terms of the applicable governing agreement.
CLNS Equity Incentive Plan
Following the Merger, the Company adopted the NSAM 2014 Stock Plan as the Company's successor equity incentive plan and renamed such plan the Colony NorthStarCapital, Inc. 2014 Omnibus Stock Incentive Plan (the "CLNS Equity"Equity Incentive Plan"). The CLNS Equity Incentive Plan provides for the grant of restricted stock, performance stock units ("PSUs"), Long Term Incentive Plan ("LTIP") units, RSUs, deferred stock units ("DSUs"), options, warrants or rights to purchase shares of the Company's common stock, cash incentives and other equity-based awards.
LTIP units are designated as profits interests for federal income tax purposes. Each LTIP unit is convertible, atawards to the electionCompany's officers, directors (including non-employee directors), employees, co-employees, consultants or advisors of the holder, into one common OP Unit and upon conversion, subjectCompany or of any parent or subsidiary who provides services to the redemption terms of OP Units (Note 16). Equity-based compensation cost related to LTIP units represents an allocation to noncontrolling interest in the Operating Company.
RSUs may be entitled to dividend equivalents prior to vesting and may be settled either in shares of the Company's class A common stock or in cash at the option of the Company.
Certain non-employee directors may elect to defer the receipt of annual base fees and/or awards of restricted stock, and in lieu of such fees or awards, receive awards of DSUs. DSUs are not shares of the Company’s stock and do not entitle the holders to the rights of a shareholder of common stock. However, a holder of a DSU is entitled to a dividend equivalent, which is the right to receive an additional number of DSUs based on dividends declared and paid on common stock, and any such additional DSUs will also be credited with additional DSUs as cash dividends are subsequently paid, subject to the same restrictions and conditions as the original DSUs with respect to which it was credited, including vesting conditions, if any. DSUs awarded in lieu of annual base director fees are fully vested upon their grant date, while DSUs awarded in lieu of awards of restricted stock vest on the first anniversary of their grant date. Upon separation of service from the Company, DSUs are to be settled in shares of the Company’s class A common stock or cash, at the option of the Company.
Other than awards issued as equity incentives to employees and non-employee directors in the normal course of business in 2017, the Company issued certain awards, which have a service condition only, in connection with the Merger. This included replacement equity awards issued in January 2017 to certain executives of NSAM, consisting of an aggregate of 4,669,518 shares of restricted common stock and 3,506,387 LTIP units. The number of shares and units issued for the replacement awards were generally determined based on the volume-weighted average price of the Company's class A common stock over the first five trading days following the Closing Date, subject to a floor of $15.00 per share, and where applicable, actual number of shares and units issued were determined based on the per share floor of $15.00. The replacement equity awards will vest on the one-year anniversary of the Closing Date. Additional shares of restricted class A common stock were also granted to certain employees as retention awards, which are subject to graded vesting through January 2020. The restricted stock and LTIP units issued for the replacement and retention awards were valued based on the price of the Company's class A common stock on the date of grant.
At September 30, 2017, an aggregate of 20,208,270 shares of the Company’s class A common stock wereShares reserved for the issuance of awards under the CLNS Equity Incentive Plan are subject to equitable adjustment upon the occurrence of certain corporate events, provided that this number automatically increases each January 1st by 2% of the outstanding number of shares of the Company’s class A common stock on the immediately preceding December 31st. At June 30, 2020, an aggregate 64.1 million shares of the Company's class A common stock were reserved for the issuance of awards under the Equity Incentive Plan.
Restricted Stock—Restricted stock awards relating to the Company's class A common stock are granted to senior executives, directors and certain employees, with a service condition only and are generally subject to annual time-based vesting in equal tranches over a three-year period. Restricted stock is entitled to dividends declared and paid on the Company's class A common stock and such dividends are not forfeitable prior to vesting of the award. Restricted stock awards are valued based on the Company's class A common stock price on grant date and equity-based compensation expense is recognized on a straight-line basis over the requisite three-year service period.
Restricted Stock Units ("RSUs")—RSUsrelating to the Company's class A common stock are subject to a performance condition. Vesting of performance-based RSUs occur upon achievement of certain Company-specific metrics over a performance measurement period. Only vested RSUs are entitled to dividends declared and paid on the Company's class A common stock. Fair value of RSUs are based on the Company's class A common stock price on grant date. Equity-based compensation expense is recognized when it becomes probable that the performance condition will be met.
Performance Stock Units ("PSUs")—PSUs are granted to senior executives and certain employees, and are subject to both a service condition and market condition. Following the end of the measurement period for the PSUs, the recipients of PSUs who remain employed will vest in, and be issued a number of shares of the Company's class A common stock, ranging from 0% to 200% of the number of PSUs granted, to be determined based upon the performance of the Company's class A common stock either relative to that of a specified peer group or against a target stock price over a three-year measurement period (such measurement metric the "total shareholder return"). In addition, recipients of PSUs whose employment is terminated after the first anniversary of the PSU grant are eligible to vest in a portion of the PSU award following the end of the measurement period based on achievement of the total shareholder return metric otherwise applicable to the award. PSUs also contain dividend equivalent rights which entitle the recipients to a payment equal to the amount of dividends that would have been paid on the shares that are ultimately issued at the end of the measurement period.
Fair value of PSUs, including dividend equivalent rights, was includeddetermined using a Monte Carlo simulation under a risk-neutral premise, with the following assumptions: |
| | | | | | |
| | 2020 PSU Grants | | 2019 PSU Grants | | 2018 PSU Grant (4) |
Expected volatility of the Company's class A common stock (1) | | 34.1% | | 26.2% | | 29.0% |
Expected annual dividend yield (2) | | 9.3% | | 8.5% - 8.7% | | 7.3% |
Risk-free rate (per annum) (3) | | 0.4% | | 2.2% - 2.4% | | 2.1% |
__________
| |
(1) | Based upon the Company's historical stock volatility or in combination with historical stock volatility of a specified peer group, or a combination of historical volatility and implied volatility on actively traded stock options of a specified peer group. |
| |
(2) | Based upon a combination of historical dividend yields and current annualized dividends. |
| |
(3) | Based upon the continuously compounded zero-coupon U.S. Treasury yield for the term coinciding with the remaining measurement period of the award as of valuation date. |
| |
(4) | Reflects assumptions applied in valuing the award upon modification in February 2019. |
Fair value of PSU awards, excluding dividend equivalent rights, is recognized on a straight-line basis over their measurement period as compensation expense, and is not subject to reversal even if the market condition is not achieved. The dividend equivalent right is accounted for as a liability-classified award. The fair value of the dividend equivalent right is recognized as compensation expense on a straight-line basis over the measurement period, and is subject to adjustment to fair value at each reporting period.
LTIP Units—LTIP units are units in the Operating Company that are designated as profits interests for federal income tax purposes. Unvested LTIP units do not accrue distributions. Each vested LTIP unit is convertible, at the election of the
holder (subject to capital account limitation), into 1 common OP Unit and upon conversion, subject to the redemption terms of OP Units (Note 15).
LTIP units issued to certain employees have a service condition only, and are valued based upon the Company's class A common stock price on grant date.
In connection with the acquisition of DBH in July 2019, the Company granted 10 million LTIP units to Mr. Ganzi, co-founder and CEO of DBH and CEO of the Company, subject to both a service condition and a market condition. The LTIP units will vest based upon achievement of the Company's class A common stock price closing at or above $10.00 over any 90 consecutive trading days prior to the fifth anniversary of the grant date, subject to Mr. Ganzi's continuous employment to the time of such vesting. Fair value of these LTIP units was determined using a Monte Carlo simulation under a risk-neutral premise, with the following line itemsassumptions: |
| | |
Expected volatility of the Company's class A common stock (1) | | 28.3% |
Expected dividend yield (2) | | 8.1% |
Risk-free rate (per annum) (3) | | 1.8% |
__________
| |
(1) | Based upon historical volatility of the Company's stock and those of a specified peer group. |
| |
(2) | Based upon the Company's most recently issued dividend prior to grant date and closing price of the Company's class A common stock on grant date. |
| |
(3) | Based upon the continuously compounded zero-coupon US Treasury yield for the term coinciding with the measurement period of the award as of valuation date. |
Equity-based compensation cost on LTIP units is recognized on a straight-line basis over either the service period for awards with a service condition only, or over the derived service period for awards with both a service condition and a market condition. The derived service period is a service period that is inferred from the application of the simulation technique used in the
consolidated statementsvaluation of
operations:the award, and represents the median of the terms in the simulation in which the market condition is satisfied. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Compensation expense | | $ | 38,184 |
| | $ | 3,484 |
| | $ | 107,173 |
| | $ | 10,326 |
|
Earnings from investments in unconsolidated ventures | | — |
| | — |
| | 61 |
| | — |
|
Investment, servicing and commission expense | | 3,022 |
| | — |
| | 4,070 |
| | — |
|
| | $ | 41,206 |
| | $ | 3,484 |
| | $ | 111,304 |
| | $ | 10,326 |
|
Deferred Stock Units—Certain non-employee directors may elect to defer the receipt of annual base fees and/or restricted stock awards, and in lieu, receive awards of DSUs. DSUs awarded in lieu of annual base fees are fully vested on their grant date, while DSUs awarded in lieu of restricted stock awards vest one year from their grant date. DSUs are entitled to a dividend equivalent, in the form of additional DSUs based on dividends declared and paid on the Company's class A common stock. Any such additional DSUs will also be credited with additional DSUs as cash dividends are paid, subject to the same restrictions and vesting conditions, if any. Upon separation of service from the Company, vested DSUs are to be settled in shares of the Company’s class A common stock. Fair value of DSUs are determined based on the price of the Company's class A common stock on grant date and recognized immediately if fully vested upon grant, or on a straight-line basis over the vesting period as equity based compensation expense and equity.Equity-based compensation expense, excluding amounts related to the industrial segment in 2019 which is presented as discontinued operations (Note 16), is as follows: |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Compensation expense (including $580, $315, $863 and $432 amortization of fair value of dividend equivalent rights) | | $ | 10,422 |
| | $ | 7,577 |
| | $ | 18,671 |
| | $ | 13,491 |
|
Changes in the Company’s unvested equity awards are summarized below:
| | | | Restricted Stock | | RSUs | | LTIP Units | | DSUs | | Total | | Weighted Average Grant Date Fair Value | | | | | | | | | | | | | | Weighted Average Grant Date Fair Value |
Unvested shares at December 31, 2016 (1) | | 2,089,007 |
| | — |
| | — |
| | — |
| | 2,089,007 |
| | $ | 14.44 |
| |
Awards assumed in the Merger | | 592,504 |
| | 774,900 |
| | — |
| | — |
| | 1,367,404 |
| | 14.68 |
| |
| | | Restricted Stock | | LTIP Units | | DSUs | | RSUs (1) | | PSUs (2) | | Total | | PSUs | | All Other Awards |
Unvested shares and units at December 31, 2019 | | | 7,641,708 |
| | 10,000,000 |
| | 265,784 |
| | — |
| | 5,680,195 |
| | 23,587,687 |
| | $ | 3.66 |
| | $ | 3.25 |
|
Granted | | 8,210,647 |
| | — |
| | 3,506,387 |
| | 100,548 |
| | 11,817,582 |
| | 14.38 |
| | 9,736,581 |
| |
|
| | 632,159 |
| | 8,379,888 |
| | 4,324,375 |
| | 23,073,003 |
| | 1.64 |
| | 1.86 |
|
Vested | | (1,124,421 | ) | | (774,900 | ) | | — |
| | (23,940 | ) | | (1,923,261 | ) | | 14.87 |
| | (5,457,749 | ) | |
|
| | (370,019 | ) | | — |
| | — |
| | (5,827,768 | ) | | — |
| | 4.66 |
|
Forfeited | | (135,692 | ) | | — |
| | — |
| | — |
| | (135,692 | ) | | 14.71 |
| | (575,304 | ) | |
|
| | — |
| | — |
| | (53,220 | ) | | (628,524 | ) | | 4.27 |
| | 6.17 |
|
Unvested shares at September 30, 2017 | | 9,632,045 |
| | — |
| | 3,506,387 |
| | 76,608 |
| | 13,215,040 |
| | 14.54 |
| |
Unvested shares and units at June 30, 2020 | | | 11,345,236 |
| | 10,000,000 |
| | 527,924 |
| | 8,379,888 |
| | 9,951,350 |
| | 40,204,398 |
| | 2.78 |
| | 2.06 |
|
__________
| |
(1) | TheRepresents the number of unvested shares at December 31, 2016 and weighted average grant date fair value have been adjustedRSUs granted that are subject to give effect tovesting only upon achievement of performance condition. RSUs that do not meet the Colony exchange ratio of 1.4663performance condition at the individual award level.end of the measurement period will be forfeited. |
| |
(2) | Represents the number of PSUs granted, which does not reflect potential increases or decreases that could result from the final outcome of the total shareholder return measured at the end of the performance period. |
Fair value of equity awards that vested, duringdetermined based on their respective fair values at vesting date, was $3.3 million and $1.3 million for the three months ended SeptemberJune 30, 20172020 and 2016 was $11.12019, respectively, and $13.4 million and $22,000, respectively. Fair value of equity awards that vested during$9.8 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016 was $27.4 million and $9.9 million, respectively. Fair value of vested awards is determined based on the closing price of the Company's class A common stock on the date of grant or date of remeasurement for employee awards, and vesting date for non-employee awards. For awards granted during the nine months ended September 30, 2017 and 2016, the weighted average grant-date fair value per share was $14.38 and $13.14,2019, respectively.
At SeptemberJune 30, 2017,2020, aggregate unrecognized compensation cost for all unvested equity awards was $86.7$58.9 million, which is expected to be recognized over a weighted-averageweighted average period of 1.22.5 years.
Awards Granted by Managed Companies
CLNC and NRE, both managed by the Company prior to termination of NRE's management agreement concurrent with the sale of NRE in September 2019, issued restricted stock and performance stock units to the Company and certain of the Company's employees (collectively, "managed company awards"). CLNC awards are primarily restricted stock grants that typically vest over a three-year period, subject to service conditions. NRE awards generally had similar terms as the Company's stock awards, except that the NRE performance stock units measured NRE's stock performance against either an absolute total shareholder return threshold or relative to the performance of a specified market index. Employees were entitled to receive shares of NRE common stock if service conditions and/or market conditions were met. Generally, the Company grants the managed company awards that it receives in its capacity as manager to its employees with substantially the same terms and service requirements. Such grants are made at the discretion of the Company, and the Company may consult with the board of directors or compensation committees of the respective managed companies as to final allocation of awards to its employees.
Managed company awards granted to the Company, pending grant by the Company to its employees, are recognized based upon their fair value at grant date as other assets and other liabilities on the consolidated balance sheet. The deferred revenue liability is amortized into other income as the awards vest to the Company.
Managed company awards granted to employees, either directly or through the Company, are recorded as other asset and other liability, and amortized on a straight-line basis as equity-based compensation expense and as other income, respectively, as the awards vest to the employees. The other asset and other liability associated with managed company awards granted to employees are subject to adjustment to fair value at each reporting period, with changes reflected in equity-based compensation and other income, respectively.
Equity-based compensation recognized related to managed company awards was $3.0 million and $3.6 million for the three months ended June 30, 2020 and 2019, respectively, and an expense reversal of $0.4 million and an expense of $6.4 million for the six months ended June 30, 2020 and 2019, respectively. A corresponding amount is recognized in other income for managed company awards granted to employees (Note 20). At June 30, 2020, aggregate unrecognized compensation cost for unvested managed company awards of CLNC was $4.3 million, which is expected to be recognized over a weighted average period of 1.3 years.
21.20. Transactions with Affiliates
Affiliates include (i) private funds, traded and non-traded REITs and investment companies in whichthat the Company manages or sponsors, and hasin which the Company may have an equity interest in or co-invests with; (ii) the Company's investments in unconsolidated ventures; as well asand (iii) directors, senior executives and employees of the Company (collectively, "employees").
Amounts due from and due to affiliates consist of the following: |
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Due from Affiliates | | | | |
Investment vehicles, portfolio companies and unconsolidated ventures | | | | |
Fee income | | $ | 31,002 |
| | $ | 36,106 |
|
Cost reimbursements and recoverable expenses | | 11,275 |
| | 14,624 |
|
Loan and interest receivable | | 35,107 |
| | — |
|
Employees and other affiliates | | 513 |
| | 750 |
|
| | $ | 77,897 |
| | $ | 51,480 |
|
Due to Affiliates | | | | |
Employees and other affiliates | | $ | 1,336 |
| | $ | 34,064 |
|
|
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Due from affiliates | | | | |
Investment vehicles and unconsolidated ventures | | | | |
Fee income | | $ | 26,011 |
| | $ | 9,074 |
|
Cost reimbursements and recoverable expenses | | 37,013 |
| | 606 |
|
Advances | | 26,332 |
| | — |
|
N-Star CDOs | | 1,508 |
| | — |
|
Employees and other affiliates | | 375 |
| | 291 |
|
| | $ | 91,239 |
| | $ | 9,971 |
|
Due to affiliates | | | | |
Investment vehicles and unconsolidated ventures | | $ | 5,474 |
| | $ | — |
|
Employees—contingent consideration for Internalization | | 26,910 |
| | 41,250 |
|
| | $ | 32,384 |
| | $ | 41,250 |
|
Transactions with affiliates include the following:
Fee Income—Income—Fee income earned from investment vehicles in whichthat the Company manages and/or sponsors, and hasmay have an equity interest in or co-invests with,co-investment, are presented in Note 19.18.
Cost Reimbursements—The Company received cost reimbursementsreimbursement income related primarily to the following arrangements:
directDirect and indirect operating costs, including but not limited to compensation, overhead and other administrative costs, for managing the operations of the non-traded REITs and CLNC, with reimbursements for non-traded REITs limited to the greater of 2% of average invested assets or 25% of net income (net of 1% to 1.25% of assetbase management fees);
direct and indirect operatingDirect costs including but not limitedof personnel dedicated solely to compensation, professional service costs, overhead and other administrativeNRE (prior to termination of management agreement concurrent with sale of NRE in September 2019) plus 20% of such personnel costs for managingrelated overhead charges, not to exceed, in aggregate, specified thresholds as set out in the operations ofNRE management agreement;
Costs incurred in performing investment due diligence for NorthStar Healthcare and private funds managed by the investment companies;Company;
allocation of indirect costs to NRE relatedEquity awards granted to employees occupancy and other administrative costs, which shall not exceed 20% of the combined total of the general and administrative costs of NRE and of the Company (excluding NRE), as adjusted;
certain expenses incurred on behalfby CLNC and NRE (prior to termination of the clients of Townsend suchNRE management agreement), which are presented gross as legal, due diligenceother income and investment advisory team travel expenses;compensation expense (Note 19);
servicesServices provided to the Company's unconsolidated investment ventures for servicing and managing their loan portfolios, including foreclosed properties;
administrativeproperties, and services provided to an equity method investee (only throughthe Digital Colony Manager joint venture prior to the Company's acquisition of DBH in July 2017);2019; and
administrativeAdministrative services provided to certain senior executives of the Company.
Cost reimbursements, included in other income, wereare as follows:follows. Amounts related to NRE pertain to periods prior to termination of its management agreement in September 2019. |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Retail companies | | $ | 896 |
| | $ | 689 |
| | $ | 1,847 |
| | $ | 1,427 |
|
Public companies (CLNC, NRE) | | 2,028 |
| | 2,663 |
| | 4,528 |
| | 5,295 |
|
Private investment vehicles and other | | 2,288 |
| | 4,344 |
| | 5,234 |
| | 7,879 |
|
Equity awards of CLNC and NRE (Note 19) | | 3,311 |
| | 3,643 |
| | (600 | ) | | 6,583 |
|
| | $ | 8,523 |
| | $ | 11,339 |
| | $ | 11,009 |
| | $ | 21,184 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Retail Companies | | $ | 4,324 |
| | $ | — |
| | $ | 14,994 |
| | $ | — |
|
Townsend | | 693 |
| | — |
| | 1,752 |
| | — |
|
Other | | 949 |
| | 1,441 |
| | 2,896 |
| | 3,502 |
|
| | $ | 5,966 |
| | $ | 1,441 |
| | $ | 19,642 |
| | $ | 3,502 |
|
Recoverable Expenses—In the normal course of business, theThe Company pays certain expenses on behalforganization and offering costs associated with the formation and capital raising of the retail companies and certain private funds that it manages,sponsored by the Company, for which the Company recovers from these investment vehicles, such as:up to specified thresholds for certain private funds and up to 1% of proceeds expected to be raised from the offering of retail companies(excluding shares offered pursuant to distribution reinvestment plans).
cost incurredNorthStar Healthcare Credit Facility—The Company has committed to provide NorthStar Healthcare with an unsecured revolving credit facility at market terms with a maximum principal amount of $35.0 million. The credit facility matures in performing investment due diligence;
costs incurredDecember 2021 (extended to December 2022 in July 2020), with a six-month extension option. Advances under the credit facility accrue interest at LIBOR plus 3.5%. There is 0 commitment fee for the administrationunused portion of the facility. The credit facility is intended to provide additional liquidity to NorthStar Healthcare on an as needed basis. In April 2020, the credit facility was drawn for the full amount of $35.0 million and remained outstanding at June 30, 2020. There were 0 amounts outstanding at December 31, 2019.
Liquidating Trust—As contemplated in the combination agreement, a certain investment companies;loan receivable previously held by NorthStar I was not transferred to CLNC, for which the Company acquired a senior participation interest at par, and
| |
• | organization and offering costs associated with formation and offering of the retail companies, with reimbursement amounts of up to 1% of the proceeds expected to be raised from the offering(excluding shares offered pursuant to distribution reinvestment plans).
|
Advances— the remaining junior participation interest ("NorthStar I Retained Asset") was transferred to a liquidating trust. The balance at September 30, 2017 includes protective advances madeCompany entered into a management services agreement with the liquidating trust to service and assist in the potential sale of the NorthStar I Retained Asset, and to provide administrative services on such terms and conditions as approved by the Company, on behalftrustees for a management fee of noncontrolling interests, to certain senior lenders in order to meet the debt covenant ratios of its investment venture, and bridge financing to an equity method investee.
N-Star CDOs—The Company earns collateral management fees as the collateral manager or collateral manager delegate1.25% per annum of the N-Star CDOs.net assets of the liquidating trust. Such fees are included in other incomefee amount is immaterial.
Acquisition of DBH and are immaterial for the nine months ended September 30, 2017. The Company holds N-Star CDO bonds that it repurchased from the market as well as retained equity interests in the N-Star CDOs. Amounts related to the two consolidated N-Star CDOs, including interest, have been eliminated upon consolidation.
Healthcare Strategic Partnership—The Healthcare Strategic Partnership was formed to expand the Company’s healthcare business (Note 20). DataBank—In connection with this arrangement, the Healthcare Strategic Partnership is entitled to incentive fees ranging from 20% to 25%acquisition of distributions above certain hurdles for new and existing healthcare real estate investments held by the Company andDBH in July 2019, payment of a portion of incentive fees earned from NorthStar Healthcare. For the nine months ended September 30, 2017, there were no incentive fees earned by the Healthcare Strategic Partnership.
American Healthcare Investors Joint Venture—The Company has an equity method investment in AHI Ventures, jointly held withcash consideration to the principals of AHIDBH, including Mr. Ganzi, who became employees or affiliate of the Company post-acquisition, was deferred until the expiration of certain customary seller indemnification obligations (Note 3). The entire deferred consideration of $32.5 million was paid in May 2020.
In connection with the Company's acquisition in December 2019 of interests in DataBank from third parties (Note 3), Mr. Ganzi and Mr. Flaherty (Note 20). AHI provides certain healthcare-focused real estate investment management Jenkins, the Chairman of the Company’s digital realty platform, entered into voting agreements with the Company, which provide the Company with majority voting power over DataBank's board. The Company took a series of steps to mitigate conflicts in the transaction, including receiving a fairness opinion on its purchase price from a nationally recognized third party valuation firm. Additionally, in exchange for incentive units owned by Messrs. Ganzi and related servicesJenkins allocable to the Company and NorthStar Healthcare in order to assist the Company in managing current and future healthcare assets (excluding certain joint venture assets)DataBank stake acquired by the Company, and,the Company issued OP Units with a value of $3 million, which are subject to certain conditions, other managed companies. For the threea multi-year lockup. The value represents consideration paid to Messrs. Ganzi and nine months ended September 30, 2017,Jenkins by the Company incurred property management fees and sub-advisory fees totaling $1.3 million and $3.5 million, respectively.for such incentive units in connection with its investment in DataBank, which was in addition to the cash consideration paid to third parties by the Company for its acquired interests in Databank. As a result, the Company will not be subject to future carried interest payments to the DBH principals with respect to the Company's investment in DataBank. In addition, the DataBank transaction was approved by the Company's board of directors.
Distribution Support—The Company committed up to $10.0 million to invest as distribution support in future sponsored retail companies, as discussed in Note 6.
Arrangements with Company-Sponsored Private Fund—Funds—The Company co-invests alongside a Companyits sponsored private fundfunds through joint ventures between the Company and the sponsored private fund. These co-investment joint ventures are consolidated by the Company. The Company has capital commitments, as general partner, directly into the private fundfunds and as an affiliate of the general partner, capital commitments satisfied through co-investment joint ventures. In connection with the Company's commitments as an affiliate of the general partner, the Company is allocated a proportionate share of the costs of the private fundfunds such as financing and administrative costs. Such costs expensed during the ninethree and six months ended SeptemberJune 30, 20172020 and 20162019 were immaterial and they relate primarily to the Company's share of the fund's operating costs and deferred financing costs on borrowings of the fund.
Contingent Consideration for Internalization—Contingent consideration for Internalization is payable to certain senior executivesEquity Awards of the Company in connection with Colony's acquisition of the real estate investment management businessCLNC and operations of its former manager in April 2015, asNRE—As discussed in Note 13.
Selling Commissions—Certain NorthStar Securities employees earn selling commissions related19, CLNC and NRE (prior to termination of the NRE management agreement) grant equity awards to the saleCompany and certain of equitythe Company's employees, either directly or indirectly through the Company, are recognized as a gross-up of equity-based compensation expense over the vesting period with a corresponding amount in other income.
Investment in Managed Investment Vehicles—Subject to the Company's related party policies and procedures, senior management, investment professionals and certain other employees may invest on a discretionary basis in investment vehicles sponsored by the Company, either directly in the retail companies. Forvehicle or indirectly through the nine months ended Septembergeneral partner entity. These investments are generally not subject to management fees, but otherwise bear their proportionate share of other operating expenses of the investment vehicles. At June 30, 2017, commissions paid or payable to these employees were immaterial.
Advances to Employees—Certain employees are permitted to participate in co-investment vehicles which generally invest in private funds managed by the Company. Additionally, the Company grants loans to certain employees in the form of promissory notes bearing interest at the prime rate with varying terms and repayment conditions. Outstanding advances were immaterial at September 30, 20172020 and December 31, 2016.2019, such investments in consolidated investment vehicles and general partner entities totaled $7.9 million and $4.0 million, respectively, reflected in redeemable noncontrolling interests and noncontrolling interests on the balance sheet. For the three months ended June 30, 2020 and 2019, their share of net income was $0.3 million and $0.5 million, respectively. For the six months ended June 30, 2020 and 2019, their share was a net loss of $0.2 million and net income of $1.0 million, respectively.
Corporate Aircraft—The Company, through its subsidiary, Colony Capital Advisors, LLC, has entered into a time sharing agreement with Thomas J. Barrack, Jr., the Company's corporateExecutive Chairman, under which Mr. Barrack may use the Company’s aircraft may occasionally be used for business purposes by affiliated entities or for personal use by certain senior executives of the Company. Affiliated entities and senior executives reimbursetravel. Under this arrangement, Mr. Barrack pays the Company for theirpersonal usage based on the incremental cost to the Company, of making the aircraft available for such use, and includesincluding direct and indirect variable costs, of operatingbut in no case more than the flights. These reimbursements amounted to $0.6maximum reimbursement permitted by the Federal Aviation Regulations under the agreement. Mr. Barrack has reimbursed the Company $0.4 million and $0.2 million forduring the three months ended SeptemberJune 30, 2017 and 2016, respectively, and $1.5 million2019, and $0.4 million and $0.6 million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
22. Commitments and Contingencies
Lease Commitments
Office Leases—The Company leases office space under noncancellable operating leases with expiration dates through 2028. The lease agreements require minimum rent payments and reimbursement of operating expenses incurred
by the landlord, subject to escalation clauses. Rent expense on office leases, included There were 0 reimbursements in administrative expenses, was $3.9 million and $1.4 million for the three months ended SeptemberJune 30, 20172020.
21. Commitments and 2016, respectively, and $9.9 million and $4.2 million for the nine months ended September 30, 2017 and 2016, respectively. Future contractual minimum rental payments for office leases at September 30, 2017 are as follows: Contingencies
|
| | | | |
Year Ending December 31, | | (In thousands) |
Remaining 2017 | | $ | 2,493 |
|
2018 | | 6,978 |
|
2019 | | 7,983 |
|
2020 | | 7,659 |
|
2021 | | 7,287 |
|
2022 and after | | 43,572 |
|
Total (1) | | $ | 75,972 |
|
__________
| |
(1)
| Excludes contractual minimum rental payments on Townsend office leases. |
Contingent Consideration
The consideration for the Company's acquisition of substantially all of the real estate investment management business and operations of its former manager in April 2015 included a contingent portion payable in shares of class A and class B common stock as well as OP Units, subject to multi-year performance targets, as discussed in Note 13.
In connection with a consensual foreclosure of the THL Hotel Portfolio, contingent consideration is payable to a preferred equity holder of the borrower in an amount up to $13.0 million, as discussed in Notes 3 and 13.
Litigation and Claims
The Company may be involved in litigation and claims in the ordinary course of business. As of SeptemberJune 30, 2017,2020, the Company was not involved in any legal proceedings that are expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.
23.22. Segment Reporting
The Company conducts its business through the following five reportable segments:
Healthcare—The Company's healthcare6 reportable segments are as follows:
| |
• | Digital Real Estate and Investment Management ("Digital")—The Company's digital segment is composed of balance sheet equity interests in digital infrastructure and real estate; and digital infrastructure and real estate investment management business. For digital investments on our balance sheet, these assets earn rental income from providing use of space and/or capacity in or on our digital assets through long-term leases, services and other agreements. In the digital investment management business, we earn management fees, generally based on the |
amount of medical office buildings, senior housing, skilled nursing and other healthcare properties. The Company earns rental income from medical office buildings and properties structured under net leases to healthcare operators, and resident fee income from senior housing operating facilities that operate through management agreements with independent third-party operators.
Industrial—The Company's industrial segment is composed primarily of light industrial assets in infill locations throughout the U.S. that are vital for e-commerce and other tenants that require increasingly quick delivery times.
Hospitality—The Company's hotel portfolio is geographically diverse and is composed of primarily extended stay hotels and premium branded select service hotels primarily located in major metropolitan markets with the majority affiliated with top hotel brands.
Other Equity and Debt—The Company's other equity and debt includes our portfolios of net lease, multifamily and multi-tenant office properties, the THL Hotel Portfolio, our interest in a portfolio of CRE loans and securities, limited partnership interests in real estate private equity funds and various other equity investments.
Investment Management—The Company generates fee income through investment management services, sponsoring numerous investment products across a diverse set of institutional and retail investors.
Following the Merger, the acquired real estate portfolios in healthcare and hotel formed the Company's new healthcare and hospitality segments, respectively, while the acquired investment management business is included within the Company's existing investment management segment. All non-core real estate equity and real estate debt investments of the combined organization is aggregated into the other equity and debt segment.
In the second quarter of 2017, the Company determined that all non-core investments in unconsolidated ventures, previously included in the investment management segment or otherwise not allocated to a business segment, would form part of the other equity and debt segment. This included the Company's nominal interest as sponsor of its variouscapital managed in investment vehicles, except thatand have the Company'spotential to earn carried interest in its industrial fund is attributedbased on the performance of such investment vehicles subject to the industrial segment.
Remaining investments in unconsolidated ventures in the investment management segment represent the Company's interests in third party asset managers. The reclassificationachievement of investments in unconsolidated ventures and corresponding earnings of investments in unconsolidated ventures was applied retrospectively to all prior periods presented, as applicable, and the amounts reclassified in each period were not material.minimum return hurdles.
| |
• | Healthcare—The Company's healthcare segment is composed of a diverse portfolio of senior housing, skilled nursing facilities, medical office buildings, and hospitals. The Company earns rental income from senior housing, skilled nursing facilities and hospital assets that are under net leases to single tenants/operators and from medical office buildings which are both single tenant and multi-tenant. In addition, certain of the Company's senior housing properties are managed by operators under a RIDEA (REIT Investment Diversification and Empowerment Act) structure, which allows the Company to gain financial exposure to underlying operations of the facility in a tax efficient manner versus receiving contractual rent under a net lease arrangement. |
| |
• | Hospitality—The Company's hospitality segment is composed of primarily extended stay and select service hotels located mainly in major metropolitan and high-demand suburban markets in the U.S., with the majority affiliated with top hotel brands such as Marriott and Hilton. |
| |
• | CLNC—This segment is composed of our 36% interest in CLNC, an externally managed commercial real estate credit REIT. CLNC is focused on originating, acquiring, financing and managing a diversified commercial real estate portfolio, consisting primarily of senior mortgageloans, mezzanine loans, preferred equity, debt securities and net leased properties predominantly in the United States. |
| |
• | Other Equity and Debt—This segment is composed of a diversified group of non-digital real estate and real estate-related debt and equity investments, including investments for which the Company acts as a general partner and/or manager ("GP co-investments") and receives various forms of investment management economics on related third-party capital on such investments, other real estate equity and debt investments and other real estate related securities, among other holdings. Over time, the Company expects to monetize the bulk of its existing portfolio as it completes its digital evolution. |
| |
• | Other Investment Management—This segment, which is separate from the digital investment management business that resides in the digital segment, encompasses primarily the Company’s management of private real estate credit funds and related co-investment vehicles, CLNC, and NorthStar Healthcare, a public non-traded healthcare REIT. The Company earns management fees, generally based on the amount of assets or capital managed, and contractual incentive fees or potential carried interest based on the performance of the investment vehicles managed subject to the achievement of minimum return hurdles. |
Amounts not allocated to specific segments generally include corporate level cash and corresponding interest income, fixed assets for administrative use, corporate level financing and related interest expense, income and expense related to cost reimbursement arrangements with certain affiliates, costs in connection with unconsummated investments, compensation expense not directly attributable to reportable segments, corporate level administrative and overhead costs as well as Merger-relatedcorporate level transaction and integration costs.
The chief operating decision maker assesses the performance of the business based on net income (loss) of each of the reportable segments. The various reportable segments generate distinct revenue streams, consisting of property operating income, interest income and fee income. Costs which are directly attributable, or otherwise can be subjected to a reasonable and systematic allocation, have been allocated to each of the reportable segments.
Selected Segment Results of Operations
The results of operations of the Company's digital reportable segment is derived from its equity method investments in the DCP fund and its manager beginning in 2018, the DBH investment management business beginning in July 2019 and the DataBank data center business beginning in December 2019. Effective March 31, 2020, the digital segment also includes operating results from interests in certain existing Colony investment vehicles that were repurposed to execute an investment strategy focused around the digital sector.
Beginning in 2020, the industrial segment no longer constitutes a reportable segment. In December 2019, the Company completed the sale of the light industrial portfolio and its related management platform, which represented the vast majority of the industrial segment. The Company continues to own the bulk industrial assets which remain held for sale. Current and prior period results of the industrial segment and the industrial investment management business which resides in the other investment management segment are presented as discontinued operations on the consolidated statements of operations (Note 16).
The following table presents selected results of operations of the Company's reportable segments:segments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Healthcare | | Industrial | | Hospitality | | Other Equity and Debt | | Investment Management | | Amounts Not Allocated to Segments | | Total |
Three Months Ended September 30, 2017 | | | | | | | | | | | | | | |
Total revenues | | $ | 157,732 |
| | $ | 63,410 |
| | $ | 221,987 |
| | $ | 279,952 |
| | $ | 64,918 |
| | $ | 1,854 |
| | $ | 789,853 |
|
Property operating expenses | | 73,217 |
| | 16,620 |
| | 143,042 |
| | 99,127 |
| | — |
| | — |
| | 332,006 |
|
Interest expense | | 48,586 |
| | 8,803 |
| | 35,351 |
| | 46,333 |
| | — |
| | 12,981 |
| | 152,054 |
|
Depreciation and amortization | | 44,646 |
| | 29,010 |
| | 34,549 |
| | 38,579 |
| | 14,457 |
| | 1,453 |
| | 162,694 |
|
Provision for loan loss | | 1,588 |
| | — |
| | — |
| | 3,528 |
| | — |
| | — |
| | 5,116 |
|
Impairment loss | | 8,250 |
| | 44 |
| | — |
| | 6,718 |
| | 9,061 |
| | — |
| | 24,073 |
|
Gain on sale of real estate | | — |
| | — |
| | — |
| | 72,541 |
| | — |
| | — |
| | 72,541 |
|
Earnings from investments in unconsolidated ventures | | — |
| | 34 |
| | — |
| | 13,071 |
| | 4,342 |
| | — |
| | 17,447 |
|
Income tax benefit (expense) | | 408 |
| | (16 | ) | | (1,262 | ) | | (982 | ) | | 9,552 |
| | 2,913 |
| | 10,613 |
|
Net income (loss) from continuing operations | | (22,318 | ) | | 5,775 |
| | 4,169 |
| | 145,077 |
| | 30,723 |
| | (92,318 | ) | | 71,108 |
|
Income from discontinued operations | | — |
| | — |
| | — |
| | 1,481 |
| | — |
| | — |
| | 1,481 |
|
Net income (loss) | | (22,318 | ) | | 5,775 |
| | 4,169 |
| | 146,558 |
| | 30,723 |
| | (92,318 | ) | | 72,589 |
|
Net income (loss) attributable to Colony NorthStar, Inc. | | (17,219 | ) | | 1,636 |
| | 3,319 |
| | 103,123 |
| | 28,450 |
| | (85,401 | ) | | 33,908 |
|
| | | | | | | | | | | | | | |
Three Months Ended September 30, 2016 | | | | | | | | | | | | | | |
Total revenues | | $ | — |
| | $ | 49,494 |
| | $ | — |
| | $ | 143,874 |
| | $ | 17,233 |
| | $ | 1,466 |
| | $ | 212,067 |
|
Property operating expenses | | — |
| | 13,921 |
| | — |
| | 14,982 |
| | — |
| | — |
| | 28,903 |
|
Interest expense | | — |
| | 11,532 |
| | — |
| | 19,475 |
| | — |
| | 11,189 |
| | 42,196 |
|
Depreciation and amortization | | — |
| | 22,295 |
| | — |
| | 16,332 |
| | 3,779 |
| | 1,187 |
| | 43,593 |
|
Provision for loan loss | | — |
| | — |
| | — |
| | 6,569 |
| | — |
| | — |
| | 6,569 |
|
Impairment loss | | — |
| | — |
| | — |
| | 941 |
| | — |
| | — |
| | 941 |
|
Gain on sale of real estate | | — |
| | 1,949 |
| | — |
| | 9,202 |
| | — |
| | — |
| | 11,151 |
|
Earnings (losses) from investments in unconsolidated ventures | | — |
| | — |
| | — |
| | 12,805 |
| | 3,879 |
| | — |
| | 16,684 |
|
Income tax benefit (expense) | | — |
| | (31 | ) | | — |
| | 1,507 |
| | 1,711 |
| | 222 |
| | 3,409 |
|
Net income (loss) | | — |
| | 439 |
| | — |
| | 100,321 |
| | 8,433 |
| | (37,289 | ) | | 71,904 |
|
Net income (loss) attributable to Colony NorthStar, Inc. | | — |
| | 1,169 |
| | — |
| | 56,326 |
| | 7,128 |
| | (29,652 | ) | | 34,971 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Digital | | Healthcare | | Hospitality | | CLNC | | Other Equity and Debt | | Other Investment Management | | Amounts Not Allocated to Segments | | Total |
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 |
Total revenues | | $ | 63,413 |
| | $ | 142,680 |
| | $ | 57,143 |
| | $ | — |
| | $ | 74,428 |
| | $ | 30,198 |
| | $ | 4,504 |
| | $ | 372,366 |
|
Property operating expenses | | 18,055 |
| | 74,752 |
| | 63,733 |
| | — |
| | 37,103 |
| | — |
| | — |
| | 193,643 |
|
Interest expense | | 8,184 |
| | 34,699 |
| | 29,889 |
| | — |
| | 17,683 |
| | — |
| | 16,331 |
| | 106,786 |
|
Depreciation and amortization | | 35,102 |
| | 36,980 |
| | 35,462 |
| | — |
| | 23,381 |
| | 2,477 |
| | 1,503 |
| | 134,905 |
|
Impairment loss | | — |
| | 661,255 |
| | 660,751 |
| | — |
| | 152,254 |
| | 515,000 |
| | 12,297 |
| | 2,001,557 |
|
Gain on sale of real estate | | — |
| | — |
| | — |
| | — |
| | 2,868 |
| | — |
| | — |
| | 2,868 |
|
Equity method earnings (losses) | | 7,940 |
| | — |
| | — |
| | (350,241 | ) | | (28,525 | ) | | (1,709 | ) | | — |
| | (372,535 | ) |
Equity method losses—carried interest | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,324 | ) | | — |
| | (2,324 | ) |
Income tax benefit (expense) | | 1,714 |
| | (12,136 | ) | | (6,691 | ) | | — |
| | 760 |
| | 8,697 |
| | (64 | ) | | (7,720 | ) |
Loss from continuing operations | | (6,546 | ) | | (680,140 | ) | | (741,621 | ) | | (350,241 | ) | | (370,305 | ) | | (496,361 | ) | | (67,277 | ) | | (2,712,491 | ) |
Net income (loss) attributable to Colony Capital, Inc. from continuing operations | | 8,519 |
| | (434,410 | ) | | (633,863 | ) | | (315,484 | ) | | (141,671 | ) | | (447,068 | ) | | (58,763 | ) | | (2,022,740 | ) |
Net loss attributable to Colony Capital, Inc. from discontinued operations | | | | | | | | | | | | | | | | (1,534 | ) |
Net loss attributable to Colony Capital, Inc. | | | | | | | | | | | | | | | | $ | (2,024,274 | ) |
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 |
Total revenues | | $ | — |
| | $ | 145,896 |
| | $ | 227,080 |
| | $ | — |
| | $ | 152,066 |
| | $ | 43,802 |
| | $ | 4,595 |
| | $ | 573,439 |
|
Property operating expenses | | — |
| | 63,924 |
| | 144,691 |
| | — |
| | 70,625 |
| | — |
| | — |
| | 279,240 |
|
Interest expense | | — |
| | 57,135 |
| | 41,591 |
| | — |
| | 29,216 |
| | — |
| | 13,796 |
| | 141,738 |
|
Depreciation and amortization | | — |
| | 40,778 |
| | 37,008 |
| | — |
| | 23,166 |
| | 6,918 |
| | 1,512 |
| | 109,382 |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | 15,003 |
| | — |
| | — |
| | 15,003 |
|
Impairment loss | | — |
| | 51,324 |
| | 420 |
| | — |
| | 32,302 |
| | — |
| | 649 |
| | 84,695 |
|
Gain on sale of real estate | | — |
| | — |
| | 140 |
| | — |
| | 5,937 |
| | — |
| | — |
| | 6,077 |
|
Equity method earnings (losses) | | 3,147 |
| | — |
| | — |
| | (267,912 | ) | | 25,633 |
| | (20,156 | ) | | — |
| | (259,288 | ) |
Equity method earnings—carried interest | | — |
| | — |
| | — |
| | — |
| | — |
| | 1,836 |
| | — |
| | 1,836 |
|
Income tax benefit (expense) | | — |
| | (596 | ) | | (2,006 | ) | | — |
| | (406 | ) | | 266 |
| | 157 |
| | (2,585 | ) |
Income (loss) from continuing operations | | 1,957 |
| | (81,520 | ) | | (3,505 | ) | | (267,912 | ) | | (128 | ) | | 17 |
| | (133,051 | ) | | (484,142 | ) |
Net income (loss) attributable to Colony Capital, Inc. from continuing operations | | 1,839 |
| | (58,616 | ) | | (3,330 | ) | | (251,792 | ) | | (5,957 | ) | | 600 |
| | (123,389 | ) | | (440,645 | ) |
Net loss attributable to Colony Capital, Inc. from discontinued operations | | | | | | | | | | | | | | | | (1,107 | ) |
Net loss attributable to Colony Capital, Inc. | | | | | | | | | | | | | | | | $ | (441,752 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Healthcare | | Industrial | | Hospitality | | Other Equity and Debt | | Investment Management | | Amounts Not Allocated to Segments | | Total |
Nine Months Ended September 30, 2017 | | | | | | | | | | | | | | |
Total revenues | | $ | 455,902 |
| | $ | 176,577 |
| | $ | 619,222 |
| | $ | 635,011 |
| | $ | 185,089 |
| | $ | 4,589 |
| | $ | 2,076,390 |
|
Property operating expenses | | 206,363 |
| | 49,312 |
| | 401,351 |
| | 145,046 |
| | — |
| | — |
| | 802,072 |
|
Interest expense | | 137,522 |
| | 29,163 |
| | 98,484 |
| | 112,782 |
| | — |
| | 40,641 |
| | 418,592 |
|
Depreciation and amortization | | 135,104 |
| | 79,453 |
| | 98,098 |
| | 93,691 |
| | 42,534 |
| | 4,345 |
| | 453,225 |
|
Provision for loan losses | | 1,588 |
| | — |
| | — |
| | 11,319 |
| | — |
| | — |
| | 12,907 |
|
Impairment loss | | 8,250 |
| | 44 |
| | — |
| | 27,998 |
| | 9,061 |
| | — |
| | 45,353 |
|
Gain on sale of real estate | | — |
| | 8,695 |
| | — |
| | 88,006 |
| | — |
| | — |
| | 96,701 |
|
Earnings (losses) from investments in unconsolidated ventures | | — |
| | 62 |
| | — |
| | 241,462 |
| | 12,309 |
| | — |
| | 253,833 |
|
Income tax benefit (expense) | | (1,624 | ) | | (2,164 | ) | | (2,209 | ) | | (3,020 | ) | | 13,762 |
| | 2,245 |
| | 6,990 |
|
Net income (loss) from continuing operations | | (42,978 | ) | | 15,394 |
| | 6,303 |
| | 510,615 |
| | 76,796 |
| | (350,200 | ) | | 215,930 |
|
Income from discontinued operations | | — |
| | — |
| | — |
| | 1,481 |
| | — |
| | 12,560 |
| | 14,041 |
|
Net income (loss) | | (42,978 | ) | | 15,394 |
| | 6,303 |
| | 512,096 |
| | 76,796 |
| | (337,640 | ) | | 229,971 |
|
Net income (loss) attributable to Colony NorthStar, Inc. | | (33,728 | ) | | 4,877 |
| | 5,122 |
| | 403,046 |
| | 70,672 |
| | (312,142 | ) | | 137,847 |
|
| | | | | | | | | | | | | | |
Nine Months Ended September 30, 2016 | | | | | | | | | | | | | | |
Total revenues | | $ | — |
| | $ | 143,956 |
| | $ | — |
| | $ | 433,646 |
| | $ | 49,347 |
| | $ | 3,435 |
| | $ | 630,384 |
|
Property operating expenses | | — |
| | 41,636 |
| | — |
| | 47,833 |
| | — |
| | — |
| | 89,469 |
|
Interest expense | | — |
| | 30,906 |
| | — |
| | 62,103 |
| | — |
| | 33,626 |
| | 126,635 |
|
Depreciation and amortization | | — |
| | 65,461 |
| | — |
| | 49,333 |
| | 11,083 |
| | 3,399 |
| | 129,276 |
|
Provision for loan losses | | — |
| | — |
| | — |
| | 17,412 |
| | — |
| | — |
| | 17,412 |
|
Impairment loss | | — |
| | 137 |
| | — |
| | 5,004 |
| | 320 |
| | — |
| | 5,461 |
|
Gain on sale of real estate | | — |
| | 2,749 |
| | — |
| | 65,365 |
| | — |
| | — |
| | 68,114 |
|
Earnings (losses) from investments in unconsolidated ventures | | — |
| | — |
| | — |
| | 69,189 |
| | 3,037 |
| | — |
| | 72,226 |
|
Income tax benefit (expense) | | — |
| | (37 | ) | | — |
| | (4,400 | ) | | 5,364 |
| | (62 | ) | | 865 |
|
Net income (loss) | | — |
| | 652 |
| | — |
| | 349,928 |
| | 17,040 |
| | (101,549 | ) | | 266,071 |
|
Net income (loss) attributable to Colony NorthStar, Inc. | | — |
| | 4,304 |
| | — |
| | 181,712 |
| | 14,375 |
| | (80,356 | ) | | 120,035 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Digital | | Healthcare | | Hospitality | | CLNC | | Other Equity and Debt | | Other Investment Management | | Amounts Not Allocated to Segments | | Total |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2020 |
Total revenues | | $ | 127,919 |
| | $ | 281,862 |
| | $ | 210,669 |
| | $ | — |
| | $ | 195,547 |
| | $ | 54,497 |
| | $ | 9,385 |
| | $ | 879,879 |
|
Property operating expenses | | 34,961 |
| | 141,319 |
| | 184,728 |
| | — |
| | 96,268 |
| | — |
| | — |
| | 457,276 |
|
Interest expense | | 17,586 |
| | 74,565 |
| | 69,678 |
| | — |
| | 38,271 |
| | — |
| | 30,099 |
| | 230,199 |
|
Depreciation and amortization | | 71,735 |
| | 74,440 |
| | 71,906 |
| | — |
| | 45,601 |
| | 5,068 |
| | 3,013 |
| | 271,763 |
|
Impairment loss | | — |
| | 709,787 |
| | 910,913 |
| | — |
| | 161,828 |
| | 594,000 |
| | 12,297 |
| | 2,388,825 |
|
Gain on sale of real estate | | — |
| | — |
| | — |
| | — |
| | 10,800 |
| | — |
| | — |
| | 10,800 |
|
Equity method earnings (losses) | | 8,408 |
| | — |
| | — |
| | (360,310 | ) | | (10,824 | ) | | 105,893 |
| | — |
| | (256,833 | ) |
Equity method losses—carried interest | | — |
| | — |
| | — |
| | — |
| | — |
| | (20,735 | ) | | — |
| | (20,735 | ) |
Income tax benefit (expense) | | 7,051 |
| | (12,006 | ) | | (4,812 | ) | | — |
| | (583 | ) | | (5,785 | ) | | 91 |
| | (16,044 | ) |
Loss from continuing operations | | (25,766 | ) | | (744,285 | ) | | (1,037,378 | ) | | (360,310 | ) | | (340,328 | ) | | (478,231 | ) | | (130,724 | ) | | (3,117,022 | ) |
Net income (loss) attributable to Colony Capital, Inc. from continuing operations | | 4,761 |
| | (482,422 | ) | | (875,095 | ) | | (324,559 | ) | | (143,123 | ) | | (430,709 | ) | | (114,026 | ) | | (2,365,173 | ) |
Net loss attributable to Colony Capital, Inc. from discontinued operations | | | | | | | | | | | | | | | | (1,260 | ) |
Net loss attributable to Colony Capital, Inc. | | | | | | | | | | | | | | | | $ | (2,366,433 | ) |
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 |
Total revenues | | $ | — |
| | $ | 291,670 |
| | $ | 423,695 |
| | $ | — |
| | $ | 314,754 |
| | $ | 83,807 |
| | $ | 7,572 |
| | $ | 1,121,498 |
|
Property operating expenses | | — |
| | 128,226 |
| | 281,036 |
| | — |
| | 140,720 |
| | — |
| | — |
| | 549,982 |
|
Interest expense | | — |
| | 104,662 |
| | 83,656 |
| | — |
| | 61,069 |
| | — |
| | 27,240 |
| | 276,627 |
|
Depreciation and amortization | | — |
| | 80,909 |
| | 73,256 |
| | — |
| | 47,949 |
| | 15,587 |
| | 3,033 |
| | 220,734 |
|
Provision for loan losses | | — |
| | — |
| | — |
| | — |
| | 18,614 |
| | — |
| | — |
| | 18,614 |
|
Impairment loss | | — |
| | 51,324 |
| | 4,270 |
| | — |
| | 54,074 |
| | — |
| | 649 |
| | 110,317 |
|
Gain on sale of real estate | | — |
| | — |
| | 279 |
| | — |
| | 35,251 |
| | — |
| | — |
| | 35,530 |
|
Equity method earnings (losses) | | 6,423 |
| | — |
| | — |
| | (262,399 | ) | | 50,206 |
| | (19,455 | ) | | — |
| | (225,225 | ) |
Equity method earnings—carried interest | | — |
| | — |
| | — |
| | — |
| | — |
| | 6,732 |
| | — |
| | 6,732 |
|
Income tax benefit (expense) | | — |
| | 1,278 |
| | (2,842 | ) | | — |
| | (2,480 | ) | | 360 |
| | (99 | ) | | (3,783 | ) |
Income (loss) from continuing operations | | 4,973 |
| | (88,726 | ) | | (29,582 | ) | | (262,399 | ) | | 59,400 |
| | 17,674 |
| | (241,930 | ) | | (540,590 | ) |
Net income (loss) attributable to Colony Capital, Inc. from continuing operations | | 4,672 |
| | (66,078 | ) | | (26,311 | ) | | (246,614 | ) | | 17,932 |
| | 16,337 |
| | (223,998 | ) | | (524,060 | ) |
Net income attributable to Colony Capital, Inc. from discontinued operations | | | | | | | | | | | | | | | | 7,332 |
|
Net loss attributable to Colony Capital, Inc. | | | | | | | | | | | | | | | | $ | (516,728 | ) |
Total assets and equity method investments excluding investments held for sale (Note 8) of the reportable segments are summarized as follows: |
| | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
(In thousands) | | Total Assets | | Equity Method Investments | | Total Assets | | Equity Method Investments |
Digital | | $ | 2,354,689 |
| | $ | 124,624 |
| | $ | 2,160,402 |
| | $ | 47,891 |
|
Healthcare | | 4,073,281 |
| | — |
| | 4,886,374 |
| | — |
|
Hospitality | | 2,781,311 |
| | — |
| | 3,789,098 |
| | — |
|
CLNC | | 336,513 |
| | 336,513 |
| | 725,443 |
| | 725,443 |
|
Other Equity and Debt | | 5,098,852 |
| | 1,142,366 |
| | 5,749,455 |
| | 1,070,462 |
|
Other Investment Management | | 274,646 |
| | 23,631 |
| | 1,085,234 |
| | 139,977 |
|
Amounts not allocated to segments | | 894,210 |
| | 3,742 |
| | 977,505 |
| | 3,742 |
|
Assets held for sale related to discontinued operations | | 370,032 |
| | — |
| | 458,673 |
| | — |
|
| | $ | 16,183,534 |
| | $ | 1,630,876 |
| | $ | 19,832,184 |
| | $ | 1,987,515 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Healthcare | | Industrial | | Hospitality | | Other Equity and Debt | �� | Investment Management | | Amounts Not Allocated to Segments | | Total |
September 30, 2017 | | | | | | | | | | | | | | |
Total assets | | $ | 5,839,055 |
| | $ | 2,676,964 |
| | $ | 4,131,809 |
| | $ | 9,676,262 |
| | $ | 3,163,848 |
| | $ | 502,826 |
| | $ | 25,990,764 |
|
Equity method investments | | — |
| | 1,073 |
| | — |
| | 946,382 |
| | 190,978 |
| | 3,742 |
| | 1,142,175 |
|
December 31, 2016 | | | | | | | | | | | | | | |
Total assets | | $ | — |
| | $ | 2,268,699 |
| | $ | — |
| | $ | 6,640,377 |
| | $ | 781,852 |
| | $ | 70,064 |
| | $ | 9,760,992 |
|
Equity method investments | | — |
| | 1,027 |
| | — |
| | 939,045 |
| | 13,187 |
| | — |
| | 953,259 |
|
Geography
Geographic information about the Company's total income and long-lived assets are as follows. Geography is generally presented as the location in which the income producing assets reside or the location in which income generating services are performed.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Total income by geography: | | | | | | | | |
United States | | $ | 236,647 |
| | $ | 469,237 |
| | $ | 794,468 |
| | $ | 962,774 |
|
Europe | | 47,447 |
| | 81,245 |
| | 91,818 |
| | 167,503 |
|
Other | | 1,932 |
| | 1,978 |
| | 2,809 |
| | 1,978 |
|
Total (1) | | $ | 286,026 |
| | $ | 552,460 |
| | $ | 889,095 |
| | $ | 1,132,255 |
|
|
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Long-lived assets by geography: | | | | |
United States | | $ | 8,093,889 |
| | $ | 9,956,282 |
|
Europe | | 1,410,584 |
| | 1,508,347 |
|
Total (2) | | $ | 9,504,473 |
| | $ | 11,464,629 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Total income by geography: | | | | | | | | |
United States | | $ | 714,518 |
| | $ | 177,898 |
| | $ | 2,072,950 |
| | $ | 550,488 |
|
Europe | | 85,909 |
| | 47,622 |
| | 234,922 |
| | 143,764 |
|
Other | | 907 |
| | 1,790 |
| | 2,709 |
| | 4,856 |
|
Total (1) | | $ | 801,334 |
| | $ | 227,310 |
| | $ | 2,310,581 |
| | $ | 699,108 |
|
|
| | | | | | | | |
(In thousands) | | September 30, 2017 | | December 31, 2016 |
Long-lived assets by geography: | | | | |
United States | | $ | 14,990,692 |
| | $ | 2,951,290 |
|
Europe | | 1,782,251 |
| | 1,242,272 |
|
Total (2) | | $ | 16,772,943 |
| | $ | 4,193,562 |
|
__________
| |
(1) | Total income includes the Company's share of earnings (loss) from its equity method investments in unconsolidated ventures(but excludes the Company's impairment of its equity method investments of $297.0 million and $247.8 million for the three months ended June 30, 2020 and 2019, respectively, and $297.8 million and $250.4 million for the six months ended June 30, 2020 and 2019, respectively); and excludes cost reimbursement income from affiliates.affiliates and income from discontinued operations. All income from discontinued operations is generated in the United States. |
| |
(2) | Long-lived assets comprise real estate held for investment, real estate related intangible assets, other than investment management contracts and customer relationships, goodwilloperating lease right-of-use assets and fixed assets;assets, and exclude financial instruments, and assets held for sale.sale and investment management related intangible assets. Long-lived assets that are held for sale at June 30, 2020 and December 31, 2019 included $431 million and $522 million located in the United States, respectively, and $252 million and $283 million located in Europe, respectively. |
23. Supplemental Disclosure of Cash Flow Information
|
| | | | | | | | |
| | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 |
Supplemental Disclosure of Cash Flow Information | | | | |
Cash paid for interest, net of amounts capitalized of $428 and $1,588 | | $ | 182,062 |
| | $ | 263,096 |
|
Cash received (paid) for income tax refunds (liabilities), net | | (8,099 | ) | | 14,960 |
|
Cash paid for operating leases | | 13,860 |
| | 7,652 |
|
Supplemental Disclosure of Cash Flows from Discontinued Operations | | | | |
Net cash provided by (used in) operating activities of discontinued operations | | $ | (36,445 | ) | | $ | 95,142 |
|
Net cash provided by (used in) investing activities of discontinued operations | | 37,337 |
| | (1,315,308 | ) |
Net cash provided by (used in) financing activities of discontinued operations | | (34,546 | ) | | 1,165,015 |
|
Supplemental Disclosure of Cash Flows from Investing and Financing Activities | | | | |
Dividends and distributions payable | | $ | 18,516 |
| | $ | 84,221 |
|
Improvements in operating real estate in accrued and other liabilities | | 15,030 |
| | 17,049 |
|
Proceeds from loan repayments and asset sales held in escrow | | 3,836 |
| | 1,392 |
|
Right-of-use assets and operating lease liabilities established | | 4,973 |
| | 129,488 |
|
Redemption of OP Units for common stock | | 1,423 |
| | 2,096 |
|
24. Subsequent Events
Common Stock RepurchasesPath To Digital
Between October 1, 2017 and November 8, 2017,Strategic Partnership in the Company's Digital Investment Management Business
On July 17, 2020, the Company repurchased 3,498,278formed a strategic partnership with affiliates of Wafra, Inc. (collectively, "Wafra"), a private investment firm and a global partner for alternative asset managers, in which Wafra made a minority investment in the Company's digital investment management business (the "Digital IM Business"). Wafra, through its investment, will participate in approximately 31.5% of the net management fees and carried interest generated by the Digital IM Business.
Wafra has agreed to assume certain of the Company's existing commitments made to DCP and to make commitments to the successor fund to DCP and to the Company’s initial digital credit fund, in an aggregate amount of up to $150.0 million. Wafra has also agreed to make commitments to the Company's future digital funds and investment vehicles on a pro rata basis with the Company based on Wafra's percentage interest in the Digital IM Business, subject to certain caps.
In addition, the Company issued Wafra 5 warrants to purchase up to an aggregate of 5% (on a fully-diluted, post-transaction basis) of the Company’s class A common stock. Each warrant entitles Wafra to purchase up to 5,352,000 shares of itsthe Company's class A common stock, with staggered strike prices between $2.43 and $6.00 for each warrant, exercisable until July 17, 2026.
Consideration paid by Wafra in exchange for its investment in the Digital IM Business and for the warrants is composed of: (i) cash consideration of $253.6 million paid at an aggregate costclosing; and (ii) contingent consideration of $43.8approximately $29.9 million including commissions, or a weighted average priceto be paid if the run-rate of $12.53 per share. As of November 8, 2017, $31.6 millionearnings before interest, tax, depreciation and amortization ("EBITDA") of the previously authorized $300.0digital investment management business, as defined, is equal to or greater than $72.0 million was remaining in its stock repurchase program.as of December 31, 2020.
Exchangeable Senior Notes
On November 2, 2017,Under certain circumstances following such time as the Digital IM Business comprises 90% or more of the Company's assets, the Company exchanged $0.3 millionagreed to use commercially reasonable efforts to facilitate the conversion of the outstanding principal of the 5.375% exchangeable notesWafra's interest into 24,930 shares of the Company's class A common stock. There can be no assurances that such conversion would occur or on what terms and conditions such conversion would occur, including whether such conversion, if it did occur in the future, would have any adverse impact on the Company, the Company’s stock price, governance and other matters.
NRE Management AgreementIn connection with Wafra's investment, the Company also entered into an amended and restated restrictive covenant agreement with each of Marc Ganzi, the Company’s CEO, and Ben Jenkins, the chairman and chief investment officer of the Company’s digital segment, pursuant to which each of Messrs. Ganzi and Jenkins agreed to certain enhanced non-solicitation provisions and the extension of the term of existing non-competition agreements.
In the event that certain post-closing regulatory approvals are not received within 12 months following the consummation of Wafra's investment (which period may be extended for up to an additional three months under certain circumstances), the Company has the right to cause Wafra’s investment in the Digital IM Business to be redeemed, in which case Wafra's carried interest participation rights will terminate and the warrants will be canceled. If such redemption right is exercised, Wafra will have a redemption right with respect to limited partnership commitments previously made in any of the digital funds or investment vehicles.
Wafra’s investment provides the Company with permanent capital to pursue strategic digital infrastructure investments and grow the Digital IM Business.
Investment in Hyperscale Data Centers
On November 9, 2017,July 22, 2020, the Company, agreedalongside an approximate $1 billion of fee bearing third party capital that the Company raised, invested $1.21 billion for an approximate 80% equity stake in Vantage Data Center Holdings, LLC's ("Vantage") portfolio of 12 stabilized hyperscale data centers in North America (the “Stabilized VDC” and the related transactions, the “Investment Transactions”). The Company's balance sheet investment is $185.1 million, representing a 12.3% interest. The management team of Vantage will continue to amend and restate itsmanage the day-to-day operations of these data centers in exchange for management agreement with NRE effective January 1, 2018. Key terms of the amendment include, among other terms: 1) the restructuring of the base management fee, which will change from a fixed base fee to a variable fee based on the European Public Real Estate Association Net Asset Value ("EPRA NAV" as defined in the agreement); 2) modification of the incentive fee, which will change from being based on Cash Available for Distribution ("CAD" as defined in the agreement) per share to 20% over the excess of the total stockholder return (defined as dividends and stock price appreciation,fees, and subject to a high water mark established when a prior incentive is realized) over a cumulative 10% annual hurdle rate; and 3) reduction of term from an initial twenty year term to a five year term. Under the terms of the amended and restated management agreement, beginning with NRE's 2018 annual stockholders' meeting,certain approval rights held by the Company will haveand the right to nominate one director (who is expected to be one of NRE's current directors employed by the Company) to NRE's Board of Directors. In addition, NRE provided the Companyinvestor group in connection with an ownership waiver under NRE’s charter, which allows the Company to purchase up to 45% of NRE’s common stock. material actions.
In connection with the waiver,Investment Transactions, the Company agreed that for all matters submittedentered into a series of agreements with Marc Ganzi, the Company’s CEO, and Ben Jenkins, the Chairman and Chief Investment Officer of the Company’s digital segment, and their respective affiliates, pursuant to a vote of NRE’s stockholders, towhich Messrs. Ganzi and Jenkins invested approximately $8 million and $2 million, respectively, in the extentStabilized VDC alongside the Company owns more than 25% of NRE’s common stock,and the Company will vote the excess shares inco-investors on the same proportion thateconomic terms. Such amounts invested represented 40% of carried interest payments received by each of Messrs. Ganzi and Jenkins as a result of the remaining NRE shares not owned by the Company are voted. The amendments to NRE’s management agreement and the ownership waiver were approved by a strategic review committee formed earlier this year by NRE's BoardInvestment Transactions.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Quarterly Report on Form 10-Q (this “Quarterly Report”"Quarterly Report") constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend such statements to be covered by the safe harbor provisions contained therein. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements contained in this Quarterly Report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
the duration and severity of the current novel coronavirus (COVID-19) pandemic, and its impact on the global market, economic and environmental conditions generally and in the digital and communications technology, healthcare hospitality and industrialhospitality real estate, other commercial real estate equity and debt, and investment management sectors;
the impact of COVID-19 on the Company's operating cash flows, debt service obligations and covenants, liquidity position and valuations of its real estate investments, as well as the increased risk of claims, litigation and regulatory proceedings and uncertainty that may adversely affect the Company;
whether we will successfully execute our strategic transition to become a digital real estate and infrastructure focused company within the timeframe contemplated or at all, and the impact of such transition on the Company's legacy portfolios and assets, including whether such transition will result in significant further impairments to certain of our investments, including healthcare and hospitality assets and whether such transition and any decrease in our net income and funds from operations as a result ofresulting impairments will be consistent with the Merger, or our other acquisition activity;Company’s REIT status;
our ability to manageobtain and integrate following the Mergermaintain financing arrangements, including securitizations, on favorable or comparable terms or at all, including our ability to obtain forbearances and/or debt modifications on our corporate credit facility and our non-recourse mortgage debt;
the Company's ability to complete anticipated monetizations of non-core assets within the timeframe and on the terms contemplated, if at all;
the impact of completed or anticipated initiatives related to our strategic shift to the digital industry, including the acquisitions of Digital Bridge Holdings, LLC and an ownership interest in Data Bridge Holdings, LLC, the strategic investment by Wafra, and the formation of certain other acquisitions effectivelyinvestment management platforms, on our company's growth and earnings profile;
whether we will realize any of the anticipated benefits of our strategic partnership with Wafra, including whether Wafra will make additional investments to our digital investment management business;
our ability to integrate and maintain consistent standards and controls, including our ability to manage our acquisitions in the digital industry effectively (such as Digital Bridge Holdings, LLC and realize Data Bridge Holdings, LLC);
the impact to our business operations and financial condition of realized or anticipated benefits of the acquisitions;compensation and administrative cost reductions in connection with corporate restructuring;
our exposureability to risks to which we have not historically been exposed, including liabilities with respect toredeploy any proceeds received from the sale of our non-digital or other legacy assets acquired throughwithin the Mergertimeframe and our other acquisitions;manner contemplated or at all;
our business and investment strategy, including the ability of the businesses in which we have a significant investment (such as Colony Credit Real Estate, Inc. (NYSE:CLNC)) to execute their business strategies;
CLNC's trading price and its impact on the carrying value of the Company's investment in CLNC, including whether the Company will recognize further other-than-temporary impairments on such CLNC investment;
performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;
our ability to grow our business by raising capital for the companies that we manage;
our ability to deploy capital into new investments consistent with our digital business strategies, including the earnings profile of such new investments;
the impact of adverse conditions affecting a specific asset class in which we have investments;
the availability of attractive investment opportunities;
our ability to achieve any of the anticipated benefits of certain joint ventures, including any ability for such ventures to create and/or distribute new investment products;
our ability to satisfy and manage our capital requirements;
our expected holding period for our assets and the impact of any changes in our expectations on the carrying value of such assets;
the general volatility of the securities markets in which we participate;
stability of the capital structure of our ability to obtainhealthcare and maintain financing arrangements, including securitizations;hospitality portfolios;
changes in interest rates and the market value of our assets;
interest rate mismatches between our assets and any borrowings used to fund such assets;
effects of hedging instruments on our assets;
the impact of economic conditions on third parties on which we rely;
any litigation and contractual claims against us and our affiliates, including potential settlement and litigation of such claims;
our levels of leverage;
adverse domestic or international economic conditions, including the COVID-19 pandemic, and the impact on the commercial real estate or real-estate related sectors;
our ability to realize substantial efficiencies and synergies as well as anticipated strategic and financial benefits, and the impact of legislative, regulatory and competitive changes;
actions, initiatives and policies of the U.S. and non-U.S. governments and changes to U.S. or non-U.S. government policies and the execution and impact of these actions, initiatives and policies;
policies, including regulations permitting or requiring forbearance of rent obligations and inhibiting the ability to pursue evictions and obtain late fees from non-paying tenants;
our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes;
our ability to maintain our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”);
changes in our board of directors or management team, including Chief Executive Officer succession plans and availability of qualified personnel;
the performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;
our ability to make or maintain distributions to our stockholders; and
our understanding of our competition.
While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. Moreover, because we operate in a very competitive and rapidly changing environment, new risk factors are likely to emerge from time to time. We caution investors not to place undue reliance on these forward-looking statements and urge you to carefully review the disclosures we make concerning risks in sections entitled “Risk Factors”Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and in Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”Operations” and Part II, Item 1A. “Risk Factors” in this
Quarterly Report. Readers of this Quarterly Report should also read our other periodic filings made with the Securities and Exchange Commission and other publicly filed documents for further discussion regarding such factors.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes thereto, which are included in Item 1 of this Quarterly Report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, which is accessible on the SEC's website at www.sec.gov.
Overview
We are a global investment firm with a focus on becoming the leading globaldigital real estate provider and investment management firm, principally locatedfunding source for the occupancy, infrastructure, equity and credit needs of the world’s mobile communications and data-driven companies. We are headquartered in Los Angeles, California andwith key offices in Boca Raton, New York, New York, with more than 500Paris and London, and have over 350 employees across 20 locations in offices across 18 cities in ten12 countries. We have significant property holdings in the healthcare, industrial and hospitality sectors, other equity and debt investments, as well as an embedded institutional and retail investment management business. We currently have assets under management, including both our balance sheet investments and third party managed investments, of $57 billion, and manage capital on behalf of our stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies. We also own NorthStar Securities, LLC, a captive broker-dealer platform that raises capital in the retail market.
We were organized on May 31, 2016 as a Maryland corporation, and intend to electwere formed through a tri-party merger (the "Merger") among Colony Capital, Inc. ("Colony"), NorthStar Asset Management Group Inc. ("NSAM") and NorthStar Realty Finance Corp. ("NRF").
We elected to be taxed as a REITreal estate investment trust ("REIT") for U.S. federal income tax purposes commencing with ourits initial taxable year endingended December 31, 2017. We conduct our operations as a REIT, and generally are not subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our taxable income to stockholders and maintain qualification as a REIT, although we are subject to U.S. federal income tax on income earned through our taxable subsidiaries. We also operate our business in a manner that will permit us to maintain our exemption from registration as an investment company under the 1940 Act.
We conduct substantially all of our activities and hold substantially all of our assets and liabilities through the OP, the Company's operating subsidiary. As of Septemberour Operating Company. At June 30, 2017, certain of our employees2020, we owned a 5.6% noncontrolling interest in the OP.
Merger
On January 10, 2017, the Merger among NSAM, Colony and NRF to form Colony NorthStar was completed in an all-stock exchange.
The Merger created a significantly larger, more scalable and diversified, internally-managed equity REIT that includes an established institutional and retail investment management platform.
The senior executives of Colony make up predominantly the senior management of Colony NorthStar with Thomas J. Barrack, Jr. as the Executive Chairman and Richard B. Saltzman as the Chief Executive Officer. David Hamamoto, previously the Executive Chairman of NSAM, serves as Vice Chairman of Colony NorthStar. The board of directors of Colony NorthStar consists of ten members, eight of whom are independent.
Refer to Note 3 to the Consolidated Financial Statements for further details. Additional information about the Merger and the merger agreement are set forth in Colony's Current Reports on Form 8-K filed with the SEC on June 8, 2016 and October 17, 2016, the joint proxy statement/prospectus on Form S-4 initially filed by Colony NorthStar with the SEC on July 29, 2016, as amended from time to time and the Current Report on Form 8-K12B filed by Colony NorthStar on January 10, 2017.
Commercial Real Estate Credit REIT
On August 25, 2017, certain subsidiaries90% of the Company entered into a combination agreement with NorthStar Income I, NorthStar Income II and certain other subsidiaries of the foregoing. Pursuant to the combination agreement, certain subsidiaries of the Company will contribute the CLNS Contributed Portfolio to Colony NorthStar Credit and its operating company, and NorthStar Income I and NorthStar Income II will merge in all-stock mergers into Colony NorthStar Credit. The closing of the Combination is conditioned upon a listing of Colony NorthStar Credit's class A common stock on a national securities exchange (through an initial public offering or otherwise), which may be effected up to nine months following the later of the approval of the transaction by the stockholders of NorthStar Income I and NorthStar Income II.
The CLNS Contributed Portfolio comprises the Company's interests in certain of its commercial real estate loans, net lease properties and limited partnership interests in third party sponsored funds, which represent a select portfolio of U.S. investments within the Company’s Other Equity and Debt segment that are transferable assets consistent with Colony NorthStar Credit's strategy.
The contribution of the CLNS Contributed Portfolio is intended to be tax-free to the Company and the mergers of NorthStar Income I and NorthStar Income II are intended to qualify as tax-free reorganizations.
Upon closing of the Combination, the Company and its affiliates, NorthStar Income I stockholders and NorthStar Income II stockholders will each own approximately 37%, 32% and 31%, respectively, of Colony NorthStar Credit in the Combination on a fully diluted basis, subject to certain adjustments as set forth in the combination agreement.
The Combination will create a prominent publicly-listed commercial real estate credit REIT. It is expected that Kevin Traenkle, the Company’s Chief Investment Officer, and Sujan Patel, the Company's Co-Head of U.S. Investment Management, will be Chief Executive Officer and Chief Financial Officer, respectively, of Colony NorthStar Credit. The board of directors of Colony NorthStar Credit will be comprised of seven directors, four of whom will be independent.
The Combination has been approved by the board of directors of theOperating Company, as well as the special committees and boards of directors of NorthStar Income I and NorthStar Income II.its sole managing member.
The Combination is expected to close in the first quarter of 2018, conditioned upon, among other things, approval by NorthStar Income I and NorthStar Income II stockholders, and an initial public offering of Colony NorthStar Credit's class A common stock or a listing without an initial public offering of Colony NorthStar Credit's class A common stock on a national securities exchange.
Refer to Note 1 to the Consolidated Financial Statements for further information related to the Combination. Additional details about the Combination is set forth in the Company's Current Report on Form 8-K filed with the SEC on August 28, 2017.
Our Business
Our vision is to establish the Company as a leading owner, operator and investment manager of digital infrastructure and real estate. We are currently the only global REIT that owns, manages, and/or operates across all major infrastructure components of the digital ecosystem including data centers, cell towers, fiber networks and small cells.
To execute this vision, the Company combined with Digital Bridge Holdings, LLC (“DBH”) in July 2019. DBH is an investment manager dedicated to digital real estate and infrastructure, managing approximately $14 billion of assets under management (“AUM”) and approximately $7 billion of fee earning equity under management (“FEEUM”) across six separately capitalized and managed portfolio companies and the $4 billion Digital Colony NorthStarPartners fund (“DCP”). As previously disclosed, Marc C. Ganzi, who co-founded DBH, became the Chief Executive Officer ("CEO") of the Company effective July 1, 2020. In connection with Mr. Ganzi’s appointment as the Company’s CEO, on June 30, 2020, the Board of Directors of the Company (the "Board") appointed Mr. Ganzi to the Board and to serve as President of the Company (in addition to his role as CEO), also effective as of July 1, 2020. Mr. Ganzi is poised to lead the Company’s strategic repositioning in becoming the leading global equity REIT,platform for digital infrastructure and real estate. Further, the combination with a uniqueDBH brings its world-class team of investment professionals and powerful embedded investment management platform, resultingof the DBH portfolio of high performing assets under the combined Digital Colony franchise. Thomas J. Barrack, Jr., who, prior to July 1, 2020, served as the Company’s CEO and President, continues to serve in multiple avenues to drive growthhis role as Executive Chairman of the Company and create value for stockholders. We believe our deep understanding of commercial real estate provides us a significant advantage in identifying relative value throughout real estate cycles. Through our prudent sector or subsector capital allocation and operational capabilities, we aim to generate outsized total returns to stockholders.the Board. In addition, we haveJacky Wu was appointed as the Company’s Chief Financial Officer and Treasurer, effective July 1, 2020. Mark M. Hedstrom, who prior to July 1, 2020 served as the Company’s Chief Financial Officer and Treasurer, continues to serve in his role as Executive Vice President and Chief Operating Officer of the Company.
At June 30, 2020, the Company has approximately $46 billion of assets under management, of which $36 billion is capital managed on behalf of third-party investor participationinvestors and the remainder represents investment interests on the Company's own balance sheet managed on behalf of its stockholders. With respect to investment interests, the Company owns (a) a 20% controlling interest in sponsored investment vehicles that serve asData Bridge Holdings, LLC and its wholly-owned subsidiary, DataBank Holdings, Ltd. (collectively, "DataBank"), a potential enhancement to stockholder returns through fee incomeleading provider of enterprise-class data center, cloud, and as an additional source of liquidity and growth. We expect our embedded investment management platform to allow us to scale our core segments while providing revenue diversification.
We conduct our business through the following five segments:
Healthcare—Our healthcare segment is composed ofconnectivity services, (b) a diverse portfolio of medical office buildings, senior housing, skilled nursing and other healthcare properties. We earn rental income from medical office buildings and properties structured under net leases to healthcare operators, and resident fee income from senior housing operating facilities that operate through management agreements with independent third-party operators.
Industrial—Our industrial segment is composed primarily of light industrial assets in infill locations throughout the U.S. that are vital for e-commerce and other tenants that require increasingly quick delivery times.
Hospitality—Our hotel portfolio is geographically diverse and is composed of primarily extended stay hotels and premium branded select service hotels primarily located in major metropolitan markets with the majority affiliated with top hotel brands.
Other Equity and Debt—Our other equity and debt segment includes our portfolios of net lease, multifamily and multi-tenant office properties, the THL Hotel Portfolio, our70% interest in a portfolio of CRE loans357 healthcare properties, (c) a 97% interest in a portfolio of 157 hospitality properties, (d) a 36.4% interest in Colony Credit Real Estate, Inc. (NYSE: CLNC), and securities, limited partnership(e) interests in real estate private equity funds and various other equity investments.
Investment Management—We generate fee income throughand debt investments, including general partner (“GP”) interests in funds sponsored by the Company, commercial real estate equity and debt investments and other real estate related securities. The Company also owns and operates an investment management services, sponsoring numerous investment productsbusiness with $16.3 billion of FEEUM, including $7.8 billion in digital real estate investments and the remainder in traditional commercial real estate debt and equity investments. The Company continues to operate its non-digital business units to maximize cash flows and value over time.
The Company's six reportable segments are as follows:
| |
• | Digital Real Estate and Investment Management ("Digital")—The Company's digital segment is composed of balance sheet equity interests in digital infrastructure and real estate; and digital infrastructure and real estate investment management business. For digital investments on our balance sheet, these assets earn rental income from providing use of space and/or capacity in or on our digital assets through long-term leases, services and other agreements. In the digital investment management business, we earn management fees, generally based on the amount of assets or capital managed in investment vehicles, and have the potential to earn carried interest based on the performance of such investment vehicles subject to the achievement of minimum return hurdles. |
| |
• | Healthcare—The Company's healthcare segment is composed of a diverse portfolio of senior housing, skilled nursing facilities, medical office buildings, and hospitals. The Company earns rental income from senior housing, skilled nursing facilities and hospital assets that are under net leases to single tenants/operators and from medical office buildings which are both single tenant and multi-tenant. In addition, certain of the Company's senior housing properties are managed by operators under a RIDEA (REIT Investment Diversification and Empowerment Act) structure, which allows the Company to gain financial exposure to underlying operations of the facility in a tax efficient manner versus receiving contractual rent under a net lease arrangement. |
| |
• | Hospitality—The Company's hospitality segment is composed of primarily extended stay and select service hotels located mainly in major metropolitan and high-demand suburban markets in the U.S., with the majority affiliated with top hotel brands such as Marriott and Hilton. |
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• | CLNC—This segment is composed of our 36% interest in CLNC, an externally managed commercial real estate credit REIT. CLNC is focused on originating, acquiring, financing and managing a diversified commercial real estate portfolio, consisting primarily of senior mortgageloans, mezzanine loans, preferred equity, debt securities and net leased properties predominantly in the United States. |
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• | Other Equity and Debt—This segment is composed of a diversified group of non-digital real estate and real estate-related debt and equity investments, including investments for which the Company acts as a general partner and/or manager ("GP co-investments") and receives various forms of investment management economics on related third-party capital on such investments, other real estate equity and debt investments and other real estate related securities, among other holdings. Over time, the Company expects to monetize the bulk of its existing portfolio as it completes its digital evolution. |
| |
• | Other Investment Management—This segment, which is separate from the digital investment management business that resides in the digital segment, encompasses primarily the Company’s management of private real estate credit funds and related co-investment vehicles, CLNC, and NorthStar Healthcare, a public non-traded healthcare REIT. The Company earns management fees, generally based on the amount of assets or capital managed, and contractual incentive fees or potential carried interest based on the performance of the investment vehicles managed subject to the achievement of minimum return hurdles. |
Acceleration of Digital Transformation and COVID-19 Considerations
The world continues to face significant healthcare and economic challenges arising from the coronavirus disease 2019, or COVID-19, global pandemic. Efforts to address the pandemic, such as social distancing, closures or reduced capacity of retail and service outlets, hotels, factories and public venues, often mandated by governments, are having a significant impact on the global economy and financial markets across a diverse setmajor industries, including many sectors of institutionalreal estate. In particular, the Company's real estate investments in the hospitality, healthcare and retail investors.sectors have experienced a myriad of challenges, including, but not limited to: significant declines in operating cash flows at the Company's hotel and healthcare properties, which in turn, affect their ability to meet debt service and covenant requirements on investment-level debt (non-recourse to the Company) and ability to refinance or extend upcoming maturities (Note 10); flexible lease payment terms sought by tenants; incremental property operating costs such as labor and supplies in response to COVID-19; potential payment defaults on the Company's loans receivable; and a distressed market affecting real estate values in general. Such adverse impact may continue well beyond the containment of the COVID-19 pandemic. Furthermore, the COVID-19 crisis may also lead to heightened risk of litigation at the investment and corporate level, with an ensuing increase in litigation and related costs.
The sharp decline and volatility in equity and debt markets, and the economic recession due to COVID-19 have adversely affected the valuation of certain of the Company's financial assets carried at fair value, and also resulted in impairment on certain non-financial assets. Such effects include the determination that the Company's equity method investment in CLNC was other-than-temporarily impaired at June 30, 2020 (Note 6), decreases in fair value of debt
Highlights
Significantsecurities (Note 6) and loans receivable (Note 12), and impairment of real estate assets in the Company's healthcare, hospitality and other equity and debt segments (Note 4).
Additionally, the COVID-19 crisis has reinforced the critical role and the resilience of the digital real estate and infrastructure sector in a global economy that is increasingly reliant on digital infrastructure. Accordingly, in the second quarter of 2020, the Company determined that it would accelerate its shift to a digitally-focused strategy in order to better position the Company for growth. This digital transformation would require a rotation of the Company's non-digital assets into digital-focused investments. As a result, the Company shortened its assumptions of holding periods on its non-digital assets, in particular its hotel and healthcare assets, which significantly reduced the undiscounted future net cash flows to be generated by these assets below their carrying values at June 30, 2020. The shortfall in estimated future net cash flows from these assets was further exacerbated by the negative effects of COVID-19 on property operations and market values, as noted above. As a result, significant impairment was recognized in the second quarter of 2020 on the Company's hotel and healthcare assets. The acceleration of the Company's digital transformation and the overall reduction in value of the Company's non-digital balance sheet also caused a shortfall in the fair value of the Company's other investment management reporting unit over its carrying value, resulting in significant impairment to the other investment management goodwill in the second quarter of 2020 (Note 7).
The various impairment and fair value decreases collectively accounted for $2.6 billion of charges in the second quarter of 2020, in addition to an approximately $0.4 billion charge in the first quarter of 2020, of which $2.1 billion and $0.3 billion, respectively, were attributable to the OP. These amounts are reflected within impairment loss, other loss and equity method losses on the statement of operations.
The Company believes that it has materially addressed overall recoverability in value across all of its non-digital assets as of June 30, 2020, applying the Company's best estimates and assumptions at this time based upon external factors known to date and the Company's expected digital transformation timeline. If the extent and duration of the economic effects of COVID-19 negatively affect the Company's financial condition and results of operations beyond the Company's current projections, the estimates and assumptions currently applied by the Company may change, which may lead to further impairment and fair value decreases in its non-digital assets that could be material in the future.
Cooperation Agreement with Blackwells Capital
In March 2020, the Company entered into a cooperation agreement with Blackwells Capital LLC ("Blackwells"), a stockholder of the Company. Pursuant to the cooperation agreement, the Company nominated Jeannie Diefenderfer for election to its board of directors (the "Board") at the 2020 Annual Meeting of Stockholders (the “Annual Meeting”) on May 5, 2020, at which Ms. Diefenderfer was elected to the Board. In addition to withdrawing its previously submitted director nominees for election at the Annual Meeting, Blackwells agreed to vote its and its affiliates shares of the Company’s stock in accordance with the Board’s voting recommendations on all proposals (including in favor of the Board’s director nominees), subject to certain limited exceptions, prior to the third anniversary of the agreement. Furthermore, Blackwells agreed to a standstill with respect to the Company until the expiration of the cooperation agreement in March 2030.
Contemporaneously, the Company and Blackwells entered into a joint venture arrangement for the purpose of acquiring, holding and disposing of CLNY common stock. Distributions to be made through the joint venture arrangement effectively represent a settlement of the proxy contest with Blackwells. At the inception of the arrangement, the fair value of future distributions to Blackwells was estimated at $3.9 million, included in other liabilities on the consolidated balance sheet, and as a settlement loss on the consolidated statement of operations, along with $1.2 million reimbursement of legal costs to Blackwells in March 2020. The settlement liability is subject to remeasurement at the end of each quarter. Refer to Note 12 of the consolidated financial statements for further description of the settlement liability.
Developments in 2020
During the six months ended June 30, 2020 and through this filing, significant developments affecting our business and results of operations forincluded the nine months ended September 30, 2017 include:
Consummated the Merger with NSAM and NRF on January 10, 2017following, in an all stock transaction valued at $6.7 billion at closing;
Entered into a definitive agreement in August 2017 with NorthStar Income I and Northstar Income II to create Colony NorthStar Credit, a publicly traded commercial real estate credit REIT to be externally managed by us, with the proposed transaction subjectaddition to the approvaleffects of NorthStar Income ICOVID-19 as discussed throughout this Quarterly Report.
Liquidity
We addressed near-term corporate maturities and Northstar Income II stockholders;enhanced our long-term capital structure and liquidity profile as follows:
Amended our Credit Agreement in June 2020, which reduced aggregate revolving commitments from $750 million to $500 million and increased the interest rate on borrowings from LIBOR plus 2.25% to LIBOR plus 2.5% per annum. The amended terms provide for greater financial covenant flexibility and more borrowing base credit for
Increased the borrowing capacity
digital investments. The credit facility from $850 millionis still scheduled to $1 billion and extended its maturity toexpire in January 2021, with two six-month6-month extension options,options. During the extension term(s), the interest rate would increase by 0.25%, and effective March 31, 2021, credit availability would be reduced to $400 million.
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• | In July 2020, the OP issued $300.0 million of exchangeable notes maturing in July 2025 and bearing interest at 5.75% per annum. Net proceeds from this issuance of $291.0 million were applied to repurchase $289.7 million of the outstanding principal of the 3.875% convertible notes for total purchase price of $289.2 million, including accrued interest. This substantially addresses the January 2021 maturity of the 3.875% convertible notes, with $112.8 million principal outstanding as of the date of this filing, which we expect to address through cash on hand and/or proceeds from future asset monetizations. |
Path To Digital
Strategic Partnership in Our Digital Investment Management Business
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• | In July 2020, formed a strategic partnership with affiliates of Wafra, Inc. (collectively, "Wafra") in which Wafra made a minority investment representing an approximate 31.5% interest in our digital investment management business (the “Digital IM Business”). Wafra paid a consideration of $254 million for its investment in the Digital IM Business and for warrants issued by the Company to Wafra (assuming the consideration excludes the warrants, this implies an approximately $805 million valuation of the Digital IM Business). Wafra has agreed to assume certain of the Company's existing commitments made to DCP and to make commitments to the successor fund to DCP and to the Company’s initial digital credit fund, in an aggregate amount of up to $150 million. Wafra has also agreed to make commitments to the Company's future digital funds and investment vehicles on a pro rata basis with the Company based on Wafra's percentage interest in the Digital IM Business, subject to certain caps. Wafra's investment provides us with permanent capital to pursue strategic digital infrastructure investments and grow the Digital IM Business. Refer to Note 24 to the consolidated financial statements for further discussion of the Wafra transaction. |
Investment in Hyperscale Data Centers
In July 2020, alongside an approximate $1 billion of fee bearing third party capital that we raised, we invested $1.21 billion for an approximate 80% equity stake in Vantage Data Center Holdings, LLC's ("Vantage") portfolio of 12 stabilized hyperscale data centers in North America. Our balance sheet investment is $185 million, which represents a 12.3% interest. This investment is our election;
Closedsecond significant balance sheet investment in a digital operating business and achieves our transformation goals on two strategic asset sales initiated by NRF pre-Merger: (i) sale of an 18.7% minority interest in our healthcare platform for $350 million (including $20 million of pre-funded capital items); and (ii) salefronts, that is the rotation of our manufactured housing portfoliobalance sheet to digital assets and growing our digital investment management business.
Non-Digital Assets
In February 2020, sold our equity investment in RXR Realty, LLC for $2.0 billion with proceeds of $664$179 million, net of financing assumed by the buyer;
Acquired a controlling interest in CPI, a real estate investment group in Europe, through a restructuring of our loan receivable, resulting in the assumption of $566 million of real estate with underlying debt of $278 million;
Sold all of our interest in SFR, generating net proceeds of $501 million andtax, recording a gain of $191 million;$97 million, net of tax.
Acquired an additional 4.7In April 2020, recapitalized a co-investment venture which holds common equity in the Albertsons supermarket chain, generating $72.7 million shares of NRE common stock, increasingproceeds to us and realizing our ownership interestshare of gain of $29.7 million.
Recognized approximately $3.0 billion ($2.4 billion attributable to OP) of impairment charges and unrealized fair value losses on our non-digital assets in NREthe first six months of 2020, recorded in impairment loss, other losses and equity method losses on the statement of operations, primarily:
$1.78 billion ($1.46 billion attributable to approximately 9%;OP) impairment on real estate and related asset group, primarily hotel and healthcare properties, to reflect shortened holding periods on the assets, attributed primarily to the Company's accelerated digital transformation and further exacerbated by a decline in property operating performance and market values as a result of the economic effects of COVID-19;
Acquired$594 million impairment on goodwill in the THL Hotel Portfolio consistingother investment management segment, driven by acceleration of 148 limited service hotels across the SouthwestCompany's digital transformation and Midwest U.S.significant reduction in July 2017 through a consensual foreclosurethe value of its non-digital balance sheet assets;
$275 million impairment on our equity investment in CLNC as the shortfall in market value over carrying value of our loan receivable, resultingCLNC investment is not expected to recover in the assumptionnear term; and
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• | $281 million ($54 million attributable to OP) of net unrealized losses on loans receivable carried at fair value as recoverability is affected by increasing uncertainty and deterioration in the economic environment arising from the effects of COVID-19. |
Sold two net lease properties in Switzerland that were acquired in January 2015 for a gain of $68 million;
Entered into a definitive agreement to sell the Townsend business for $475 million (subject to certain purchase price adjustments), with net proceeds for our 84% interest after transaction and other expenses estimated to be approximately $379 million. The sale is expected to close in the fourth quarter of 2017 or first quarter of 2018;
Repurchased approximately 17.3 million shares of our class A common stock at an aggregate cost of $225 million under our stock repurchase program;
Refinanced debt with outstanding principal of $1.6 billion in our hotel portfolio at a moderately reduced interest rate and extended their maturity dates;
Repurchased all $13 million of outstanding principal of our 7.25% exchangeable notes and exchanged $2.5 million of outstanding principal of our 5.375% exchangeable notes into 0.2 million shares of our class A common stock;
Issued 13.8 million shares of our new Series I preferred stock and 12.6 million shares of our new Series J preferred stock with dividend rates of 7.15% and 7.125% per annum, respectively, for total net proceeds of $637.9 million. A portion of the proceeds was used to redeem all of the outstanding shares of our Series A, Series F and Series C preferred stock and some of the outstanding shares of our Series B preferred stock for $645 million in aggregate; and
Closed on approximately $1.7 billion of additional third party institutional and retail capital commitments, including our pro rata share from equity method investments in third party asset managers.
Results of Operations
As a result of the Merger, comparisons of the period to period financial information of Colony NorthStar as set forth herein may not be meaningful. The historical financial information included herein as of any date, or for any periods, on or prior to January 10, 2017, represents the pre-merger financial information of Colony on a stand-alone basis. The results of operations of NSAM and NRF are incorporated into Colony NorthStar effective from January 11, 2017.
The following table summarizes our results from continuing operations by reportable segment.
Beginning in 2020, the industrial segment no longer constitutes a reportable segment. In December 2019, the Company completed the sale of the light industrial portfolio and its related management platform, which represented the vast majority of the industrial segment. The Company continues to own the bulk industrial assets which remain held for sale. Current and prior period results of the industrial segment and the industrial investment management business which resides in the other investment management segment are presented as discontinued operations on the consolidated statements of operations
by segment: |
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Total Revenue | | Net Income (Loss) | | Net Income (Loss) Attributable to Colony NorthStar, Inc. |
Three Months Ended September 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
Healthcare | | $ | 157,732 |
| | $ | — |
| | $ | (22,318 | ) | | $ | — |
| | $ | (17,219 | ) | | $ | — |
|
Industrial | | 63,410 |
| | 49,494 |
| | 5,775 |
| | 439 |
| | 1,636 |
| | 1,169 |
|
Hospitality | | 221,987 |
| | — |
| | 4,169 |
| | — |
| | 3,319 |
| | — |
|
Other Equity and Debt | | 279,952 |
| | 143,874 |
| | 146,558 |
| | 100,321 |
| | 103,123 |
| | 56,326 |
|
Investment Management | | 64,918 |
| | 17,233 |
| | 30,723 |
| | 8,433 |
| | 28,450 |
| | 7,128 |
|
Amounts not allocated to segments | | 1,854 |
| | 1,466 |
| | (92,318 | ) | | (37,289 | ) | | (85,401 | ) | | (29,652 | ) |
| | $ | 789,853 |
| | $ | 212,067 |
| | $ | 72,589 |
| | $ | 71,904 |
| | $ | 33,908 |
| | $ | 34,971 |
|
(Note 16). Discontinued operations generated a net loss attributable to Colony Capital, Inc. of $1.5 million and $1.1 million for the three months ended June 30, 2020 and 2019, respectively, and $1.3 million for the six months ended June 30, 2020, while generating net income attributable to Colony Capital, Inc. of $7.3 million for the six months ended June 30, 2019. | | (in thousands) | | Total Revenue | | Net Income (Loss) | | Net Income (Loss) Attributable to Colony NorthStar, Inc. | |
Nine Months Ended September 30, | | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 | |
(In thousands) | | | Total Revenues | | Income (Loss) from Continuing Operations | | Net Income (Loss) Attributable to Colony Capital, Inc. from Continuing Operations |
Three Months Ended June 30, | | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Digital | | | $ | 63,413 |
| | $ | — |
| | $ | (6,546 | ) | | $ | 1,957 |
| | $ | 8,519 |
| | $ | 1,839 |
|
Healthcare | | $ | 455,902 |
| | $ | — |
| | $ | (42,978 | ) | | $ | — |
| | $ | (33,728 | ) | | $ | — |
| | 142,680 |
| | 145,896 |
| | (680,140 | ) | | (81,520 | ) | | (434,410 | ) | | (58,616 | ) |
Industrial | | 176,577 |
| | 143,956 |
| | 15,394 |
| | 652 |
| | 4,877 |
| | 4,304 |
| |
Hospitality | | 619,222 |
| | — |
| | 6,303 |
| | — |
| | 5,122 |
| | — |
| | 57,143 |
| | 227,080 |
| | (741,621 | ) | | (3,505 | ) | | (633,863 | ) | | (3,330 | ) |
CLNC | | | — |
| | — |
| | (350,241 | ) | | (267,912 | ) | | (315,484 | ) | | (251,792 | ) |
Other Equity and Debt | | 635,011 |
| | 433,646 |
| | 512,096 |
| | 349,928 |
| | 403,046 |
| | 181,712 |
| | 74,428 |
| | 152,066 |
| | (370,305 | ) | | (128 | ) | | (141,671 | ) | | (5,957 | ) |
Investment Management | | 185,089 |
| | 49,347 |
| | 76,796 |
| | 17,040 |
| | 70,672 |
| | 14,375 |
| |
Other Investment Management | | | 30,198 |
| | 43,802 |
| | (496,361 | ) | | 17 |
| | (447,068 | ) | | 600 |
|
Amounts not allocated to segments | | 4,589 |
| | 3,435 |
| | (337,640 | ) | | (101,549 | ) | | (312,142 | ) | | (80,356 | ) | | 4,504 |
| | 4,595 |
| | (67,277 | ) | | (133,051 | ) | | (58,763 | ) | | (123,389 | ) |
| | $ | 2,076,390 |
| | $ | 630,384 |
| | $ | 229,971 |
| | $ | 266,071 |
| | $ | 137,847 |
| | $ | 120,035 |
| | $ | 372,366 |
| | $ | 573,439 |
| | $ | (2,712,491 | ) | | $ | (484,142 | ) | | $ | (2,022,740 | ) | | $ | (440,645 | ) |
Six Months Ended June 30, | | | | | | | | | | | | | |
Digital | | | $ | 127,919 |
| | $ | — |
| | $ | (25,766 | ) | | $ | 4,973 |
| | $ | 4,761 |
| | $ | 4,672 |
|
Healthcare | | | 281,862 |
| | 291,670 |
| | (744,285 | ) | | (88,726 | ) | | (482,422 | ) | | (66,078 | ) |
Hospitality | | | 210,669 |
| | 423,695 |
| | (1,037,378 | ) | | (29,582 | ) | | (875,095 | ) | | (26,311 | ) |
CLNC | | | — |
| | — |
| | (360,310 | ) | | (262,399 | ) | | (324,559 | ) | | (246,614 | ) |
Other Equity and Debt | | | 195,547 |
| | 314,754 |
| | (340,328 | ) | | 59,400 |
| | (143,123 | ) | | 17,932 |
|
Other Investment Management | | | 54,497 |
| | 83,807 |
| | (477,870 | ) | | 17,674 |
| | (430,709 | ) | | 16,337 |
|
Amounts not allocated to segments | | | 9,385 |
| | 7,572 |
| | (130,724 | ) | | (241,930 | ) | | (114,026 | ) | | (223,998 | ) |
| | | $ | 879,879 |
| | $ | 1,121,498 |
| | $ | (3,116,661 | ) | | $ | (540,590 | ) | | $ | (2,365,173 | ) | | $ | (524,060 | ) |
Selected Balance Sheet Data
The following table summarizes key balance sheet data by reportable segment, excluding assets and related liabilities held for sale.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Real Estate, net | | Loans Receivable (1) | | Equity and Debt Investments | | Debt, net |
(In thousands) | | June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 | | June 30, 2020 | | December 31, 2019 |
Digital | | $ | 845,146 |
| | $ | 846,393 |
| | $ | — |
| | $ | — |
| | $ | 241,535 |
| | $ | 47,891 |
| | $ | 515,007 |
| | $ | 539,155 |
|
Healthcare | | 3,638,987 |
| | 4,433,825 |
| | 48,984 |
| | 48,270 |
| | — |
| | — |
| | 2,884,765 |
| | 2,910,032 |
|
Hospitality | | 2,635,718 |
| | 3,544,264 |
| | — |
| | — |
| | — |
| | — |
| | 2,635,393 |
| | 2,623,306 |
|
CLNC | | — |
| | — |
| | — |
| | — |
| | 336,513 |
| | 725,443 |
| | — |
| | — |
|
Other Equity and Debt | | 1,868,051 |
| | 2,036,036 |
| | 1,349,103 |
| | 1,518,058 |
| | 1,220,027 |
| | 1,396,752 |
| | 1,924,639 |
| | 2,061,101 |
|
Other Investment Management | | — |
| | — |
| | — |
| | — |
| | 23,631 |
| | 139,977 |
| | — |
| | — |
|
Amounts not allocated to segments | | — |
| | — |
| | — |
| | — |
| | 3,742 |
| | 3,742 |
| | 1,251,310 |
| | 850,314 |
|
Total | | $ | 8,987,902 |
| | $ | 10,860,518 |
| | $ | 1,398,087 |
| | $ | 1,566,328 |
| | $ | 1,825,448 |
| | $ | 2,313,805 |
| | $ | 9,211,114 |
| | $ | 8,983,908 |
|
_________ | |
(1) | Carried at fair value upon adoption of fair value option on January 1, 2020. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Healthcare | | Industrial | | Hospitality | | Other Equity and Debt | | Investment Management | | Amounts Not Allocated to Segments | | Total |
September 30, 2017 | | | | | | | | | | | | | | |
Real estate, net | | $ | 5,162,548 |
| | $ | 2,439,209 |
| | $ | 3,892,081 |
| | $ | 2,860,703 |
| | $ | — |
| | $ | — |
| | $ | 14,354,541 |
|
Loans receivable, net | | 72,763 |
| | — |
| | — |
| | 3,383,139 |
| | — |
| | — |
| | 3,455,902 |
|
Investments in unconsolidated ventures | | — |
| | 1,073 |
| | — |
| | 1,376,799 |
| | 190,978 |
| | 3,742 |
| | 1,572,592 |
|
Securities, at fair value | | — |
| | — |
| | — |
| | 408,663 |
| | — |
| | — |
| | 408,663 |
|
Debt, net | | 3,263,901 |
| | 860,413 |
| | 2,551,882 |
| | 3,269,078 |
| | — |
| | 846,701 |
| | 10,791,975 |
|
December 31, 2016 | | | | | | | | | | | | | | |
Real estate, net | | $ | — |
| | $ | 1,969,247 |
| | $ | — |
| | $ | 1,274,384 |
| | $ | — |
| | $ | — |
| | $ | 3,243,631 |
|
Loans receivable, net | | — |
| | — |
| | — |
| | 3,430,608 |
| | — |
| | — |
| | 3,430,608 |
|
Investments in unconsolidated ventures | | — |
| | 1,027 |
| | — |
| | 1,038,781 |
| | 13,187 |
| | — |
| | 1,052,995 |
|
Securities, at fair value | | — |
| | — |
| | — |
| | 23,446 |
| | — |
| | — |
| | 23,446 |
|
Debt, net | | — |
| | 999,560 |
| | — |
| | 1,659,484 |
| | — |
| | 1,056,574 |
| | 3,715,618 |
|
Consolidated Results of Operations
Our consolidated resultsComparison of operations for the three and nine months ended September 30, 2017 and 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Revenues | | | | | | | | | | | | |
Property operating income | | $ | 613,665 |
| | $ | 92,505 |
| | $ | 521,160 |
| | $ | 1,541,050 |
| | $ | 279,470 |
| | $ | 1,261,580 |
|
Interest income | | 106,479 |
| | 98,275 |
| | 8,204 |
| | 333,286 |
| | 291,496 |
| | 41,790 |
|
Fee income | | 59,693 |
| | 17,233 |
| | 42,460 |
| | 167,262 |
| | 49,347 |
| | 117,915 |
|
Other income | | 10,016 |
| | 4,054 |
| | 5,962 |
| | 34,792 |
| | 10,071 |
| | 24,721 |
|
Total revenues | | 789,853 |
| | 212,067 |
| | 577,786 |
| | 2,076,390 |
| | 630,384 |
| | 1,446,006 |
|
Expenses | | | | | | | | | | | | |
Property operating expense | | 332,006 |
| | 28,903 |
| | 303,103 |
| | 802,072 |
| | 89,469 |
| | 712,603 |
|
Interest expense | | 152,054 |
| | 42,196 |
| | 109,858 |
| | 418,592 |
| | 126,635 |
| | 291,957 |
|
Investment, servicing and commission expense | | 18,421 |
| | 5,115 |
| | 13,306 |
| | 43,968 |
| | 17,448 |
| | 26,520 |
|
Transaction costs | | 4,636 |
| | 6,190 |
| | (1,554 | ) | | 94,416 |
| | 18,638 |
| | 75,778 |
|
Depreciation and amortization | | 162,694 |
| | 43,593 |
| | 119,101 |
| | 453,225 |
| | 129,276 |
| | 323,949 |
|
Provision for loan loss | | 5,116 |
| | 6,569 |
| | (1,453 | ) | | 12,907 |
| | 17,412 |
| | (4,505 | ) |
Impairment loss | | 24,073 |
| | 941 |
| | 23,132 |
| | 45,353 |
| | 5,461 |
| | 39,892 |
|
Compensation expense | | 85,022 |
| | 29,582 |
| | 55,440 |
| | 257,599 |
| | 80,689 |
| | 176,910 |
|
Administrative expenses | | 26,502 |
| | 12,891 |
| | 13,611 |
| | 82,561 |
| | 38,760 |
| | 43,801 |
|
Total expenses | | 810,524 |
| | 175,980 |
| | 634,544 |
| | 2,210,693 |
| | 523,788 |
| | 1,686,905 |
|
Other income | | | | | | | | | | | | |
Gain on sale of real estate | | 72,541 |
| | 11,151 |
| | 61,390 |
| | 96,701 |
| | 68,114 |
| | 28,587 |
|
Other gain (loss), net | | (8,822 | ) | | 4,573 |
| | (13,395 | ) | | (7,291 | ) | | 18,270 |
| | (25,561 | ) |
Earnings from investments in unconsolidated ventures | | 17,447 |
| | 16,684 |
| | 763 |
| | 253,833 |
| | 72,226 |
| | 181,607 |
|
Income before income taxes | | 60,495 |
| | 68,495 |
| | (8,000 | ) | | 208,940 |
| | 265,206 |
| | (56,266 | ) |
Income tax benefit (expense) | | 10,613 |
| | 3,409 |
| | 7,204 |
| | 6,990 |
| | 865 |
| | 6,125 |
|
Net income from continuing operations | | 71,108 |
| | 71,904 |
| | (796 | ) | | 215,930 |
| | 266,071 |
| | (50,141 | ) |
Income from discontinued operations | | 1,481 |
| | — |
| | 1,481 |
| | 14,041 |
| | — |
| | 14,041 |
|
Net income | | 72,589 |
| | 71,904 |
| | 685 |
| | 229,971 |
| | 266,071 |
| | (36,100 | ) |
Net income attributable to noncontrolling interests: | | | | | | | | | | | | |
Redeemable noncontrolling interests | | 1,678 |
| | — |
| | 1,678 |
| | 3,015 |
| | — |
| | 3,015 |
|
Investment entities | | 36,906 |
| | 32,744 |
| | 4,162 |
| | 87,765 |
| | 130,508 |
| | (42,743 | ) |
Operating Company | | 97 |
| | 4,189 |
| | (4,092 | ) | | 1,344 |
| | 15,528 |
| | (14,184 | ) |
Net income (loss) attributable to Colony NorthStar, Inc. | | 33,908 |
| | 34,971 |
| | (1,063 | ) | | 137,847 |
| | 120,035 |
| | 17,812 |
|
Preferred stock redemption | | (918 | ) | | — |
| | (918 | ) | | 4,530 |
| | — |
| | 4,530 |
|
Preferred stock dividends | | 33,176 |
| | 12,093 |
| | 21,083 |
| | 98,328 |
| | 36,066 |
| | 62,262 |
|
Net income attributable to common stockholders | | $ | 1,650 |
| | $ | 22,878 |
| | $ | (21,228 | ) | | $ | 34,989 |
| | $ | 83,969 |
| | $ | (48,980 | ) |
Three Months Ended
SeptemberJune 30,
2017 and 20162020 to Three Months Ended June 30, 2019 |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Revenues | | | | | | |
Property operating income | | $ | 293,816 |
| | $ | 488,788 |
| | $ | (194,972 | ) |
Interest income | | 22,376 |
| | 35,055 |
| | (12,679 | ) |
Fee income | | 43,540 |
| | 35,433 |
| | 8,107 |
|
Other income | | 12,634 |
| | 14,163 |
| | (1,529 | ) |
Total revenues | | 372,366 |
| | 573,439 |
| | (201,073 | ) |
Expenses | | | | | | |
Property operating expense | | 193,643 |
| | 279,240 |
| | (85,597 | ) |
Interest expense | | 106,786 |
| | 141,738 |
| | (34,952 | ) |
Investment and servicing expense | | 11,394 |
| | 20,017 |
| | (8,623 | ) |
Transaction costs | | 75 |
| | 318 |
| | (243 | ) |
Depreciation and amortization | | 134,905 |
| | 109,382 |
| | 25,523 |
|
Provision for loan loss | | — |
| | 15,003 |
| | (15,003 | ) |
Impairment loss | | 2,001,557 |
| | 84,695 |
| | 1,916,862 |
|
Compensation expense—cash and equity-based | | 64,513 |
| | 42,430 |
| | 22,083 |
|
Compensation expense—carried interest and incentive fee | | (1,162 | ) | | 1,146 |
| | (2,308 | ) |
Administrative expenses | | 20,405 |
| | 20,146 |
| | 259 |
|
Total expenses | | 2,532,116 |
| | 714,115 |
| | 1,818,001 |
|
Other income (loss) | | | | | | |
Gain on sale of real estate | | 2,868 |
| | 6,077 |
| | (3,209 | ) |
Other loss, net | | (173,030 | ) | | (89,506 | ) | | (83,524 | ) |
Equity method losses | | (372,535 | ) | | (259,288 | ) | | (113,247 | ) |
Equity method earnings (losses)—carried interest | | (2,324 | ) | | 1,836 |
| | (4,160 | ) |
Loss before income taxes | | (2,704,771 | ) | | (481,557 | ) | | (2,223,214 | ) |
Income tax expense | | (7,720 | ) | | (2,585 | ) | | (5,135 | ) |
Loss from continuing operations | | (2,712,491 | ) | | (484,142 | ) | | (2,228,349 | ) |
Loss from discontinued operations | | (6,502 | ) | | (504 | ) | | (5,998 | ) |
Net loss | | (2,718,993 | ) | | (484,646 | ) | | (2,234,347 | ) |
Net income (loss) attributable to noncontrolling interests: | | | | | | |
Redeemable noncontrolling interests | | 390 |
| | 509 |
| | (119 | ) |
Investment entities | | (470,052 | ) | | (13,414 | ) | | (456,638 | ) |
Operating Company | | (225,057 | ) | | (29,989 | ) | | (195,068 | ) |
Net loss attributable to Colony Capital, Inc. | | (2,024,274 | ) | | (441,752 | ) | | (1,582,522 | ) |
Preferred stock dividends | | 18,516 |
| | 27,138 |
| | (8,622 | ) |
Net loss attributable to common stockholders | | $ | (2,042,790 | ) | | $ | (468,890 | ) | | (1,573,900 | ) |
Property Operating Income and Property Operating Expenses
| | | | Three Months Ended September 30, | | | | Three Months Ended June 30, | | |
(In thousands) | | 2017 | | 2016 | | Change | | 2020 | | 2019 | | Change |
Property operating income: | | | | | | | | | | | | |
Digital | | | $ | 42,017 |
| | $ | — |
| | $ | 42,017 |
|
Healthcare | | $ | 156,107 |
| | $ | — |
| | $ | 156,107 |
| | 139,983 |
| | 144,863 |
| | (4,880 | ) |
Industrial | | 62,711 |
| | 49,256 |
| | 13,455 |
| |
Hospitality | | 221,965 |
| | — |
| | 221,965 |
| | 57,136 |
| | 227,016 |
| | (169,880 | ) |
Other Equity and Debt | | 172,882 |
| | 43,249 |
| | 129,633 |
| | 54,680 |
| | 116,909 |
| | (62,229 | ) |
| | $ | 613,665 |
| | $ | 92,505 |
| | 521,160 |
| | $ | 293,816 |
| | $ | 488,788 |
| | (194,972 | ) |
Property operating expenses: | | | | | | | | | | | | |
Digital | | | $ | 18,055 |
| | $ | — |
| | $ | 18,055 |
|
Healthcare | | $ | 73,217 |
| | $ | — |
| | $ | 73,217 |
| | 74,752 |
| | 63,924 |
| | 10,828 |
|
Industrial | | 16,620 |
| | 13,921 |
| | 2,699 |
| |
Hospitality | | 143,042 |
| | — |
| | 143,042 |
| | 63,733 |
| | 144,691 |
| | (80,958 | ) |
Other Equity and Debt | | 99,127 |
| | 14,982 |
| | 84,145 |
| | 37,103 |
| | 70,625 |
| | (33,522 | ) |
| | $ | 332,006 |
| | $ | 28,903 |
| | 303,103 |
| | $ | 193,643 |
| | $ | 279,240 |
| | (85,597 | ) |
SubsequentDigital—Amounts represent income and related operating expenses from our DataBank subsidiary that was acquired in December 2019, primarily in connection with colocation rent and data center services.
Healthcare—Property operating income decreased $4.9 million, driven by sales of 25 net lease properties in 2019 and one in the first quarter of 2020, and to the Merger, we earna lesser extent, lower resident fee income as senior housing occupancy declined due to restrictions on new admissions in an effort to contain COVID-19. Property operating expenses increased $10.8 million, primarily due to $7.7 million of incremental costs incurred in our senior housing facilities in response to COVID-19. The incremental costs were abated by $1.6 million of government stimulus funding under the CARES Act Provider Relief Fund, which partially offset the decrease in property operating income. Refer to further discussion in "—Segment Results—Healthcare."
Hospitality—Property operating income and rentalexpense decreased $169.9 million and $81.0 million, respectively. On a same store basis (excluding the effects of ten select service hotels sold in 2019), property operating income and expense decreased $159.2 million, or 74%, and $73.1 million, or 53%, respectively. The decrease in income reflects the effects of COVID-19 with a significant decline in room demand with an average occupancy of 30.2%, a decrease of 62% compared to the same period last year. This was further compounded by lower average daily rate ("ADR"), resulting in revenue per available room, or RevPAR, falling 72% compared to the same period last year. Although we have taken various steps to minimize non-essential operating expenses during this time, the decrease in operating expenses, as expected, was less pronounced as we continue to incur fixed operating costs. Notwithstanding the overall negative results for the second quarter of 2020, operations have recovered from the trough in April 2020 and have since trended positively through July 2020. Refer to further discussion in "—Segment Results—Hospitality."
Other Equity and Debt—Property operating income and expenses decreased $62.2 million and $33.5 million, respectively, driven by sales of limited service hotels in our healthcareTHL Hotel Portfolio, U.S. multi-tenant offices and other properties in our European portfolio, as well as the effects of COVID-19 on the operating results of our THL Hotel Portfolio and a hotel operatingin Spain.
Interest Income
Interest income decreased $12.7 million, attributed primarily to loans placed on nonaccrual in the second quarter of 2020 as the COVID-19 crisis has led to increased uncertainty over collectability.
Fee Income
Fee income is earned from the following sources: |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | |
|
(In thousands) | | 2020 | | 2019 | | Change |
Institutional funds and other investment vehicles | | $ | 31,337 |
| | $ | 13,033 |
| | $ | 18,304 |
|
Public companies (CLNC, NRE prior to its sale in September 2019) | | 7,223 |
| | 15,038 |
| | (7,815 | ) |
Non-traded REITs | | 4,431 |
| | 4,989 |
| | (558 | ) |
Other | | 549 |
| | 2,373 |
| | (1,824 | ) |
| | $ | 43,540 |
| | $ | 35,433 |
| | 8,107 |
|
Total fee income increased $8.1 million resulting from:
net increase of $18.3 million in fees from institutional funds and investment vehicles, driven by $19.9 million of fees from DBH (50% of fees from DCP was recognized as equity method income prior to acquisition of DBH), which was acquired in July 2019, partially offset by decreases in fees from liquidating funds.
The increase in fees from institutional funds and investment vehicles was partially offset by:
$3.2 million decrease in fees from Colony Credit due to a lower stockholders' equity fee base;
$3.8 million of fees from NorthStar Realty Europe ("NRE") in 2019 prior to its sale in September 2019; and
$0.6 million decrease in fees from NorthStar Healthcare Income, Inc. ("NorthStar Healthcare") following a decrease in its NAV fee basis effective December 2019; and
$1.8 million decrease in other fees related to advisory fees and higher asset management fees in the second quarter of 2019.
Other Income
Other income was $1.5 million lower, attributed primarily to lower cost reimbursement from affiliates.
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Investment-level financing: | | | | | | |
Digital | | $ | 8,184 |
| | $ | — |
| | $ | 8,184 |
|
Healthcare | | 34,699 |
| | 57,135 |
| | (22,436 | ) |
Hospitality | | 29,889 |
| | 41,591 |
| | (11,702 | ) |
Other Equity and Debt | | 17,683 |
| | 29,216 |
| | (11,533 | ) |
Corporate-level debt | | 16,331 |
| | 13,796 |
| | 2,535 |
|
| | $ | 106,786 |
| | $ | 141,738 |
| | (34,952 | ) |
Net decrease in interest expense of $35.0 million is attributed to the following:
Digital—Amount represents interest expense on debt assumed from our DataBank subsidiary that was acquired in December 2019.
Healthcare—Interest expense was $22.4 million lower as a result of: (i) decrease in LIBOR on predominantly variable rate debt; (ii) interest expense recognized in the second quarter of 2019 from the write-off of debt discount in connection with a June 2019 refinancing; and (iii) debt repayment upon sale of non-core properties in 2019. These decreases were partially offset by interest expense recognized from amortization of deferred financing costs incurred in connection with the June 2019 refinancing.
Hospitality—Interest expense decreased $11.7 million, driven by a decline in LIBOR on predominantly variable rate debt on our hotel portfolioportfolio.
Other Equity and Debt—Interest expense decreased $11.5 million due to a decline in LIBOR and debt payoffs from sale of properties and resolution of loans receivable.
Corporate-level Debt—Interest expense increased $2.5 million as a result of writing off a portion of deferred financing costs on our corporate credit facility to reflect a reduction in the facility amount in June 2020, along with a higher average outstanding balance on the facility in 2020. This increase was partially offset by the effect of a decline in LIBOR on our junior subordinated debt and lower unused fees on our credit facility.
Investment and Servicing Expense
Investment and servicing costs were lower by $8.6 million, attributed primarily to costs related to refinancing of our healthcare debt in 2019 and lower hotel asset management and incentive fees in 2020, which corresponds to the decline in hotel revenues, partially offset by additional bad debt allowance on property level insurance receivable.
Depreciation and Amortization
Higher depreciation and amortization expense is attributed to real estate and intangible assets acquired from NRF,DataBank in December 2019 and incur correspondingDBH in July 2019, as well as capital improvements and fixed asset additions to our hotel properties that were completed throughout 2019 and beginning of 2020. These increases were partially offset by
sales of non-core properties, lower real estate basis after impairment charges in 2019, termination of NRE management contract in September 2019 and write-down of NorthStar Healthcare management contract in December 2019.
Impairment Loss
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Healthcare | | $ | 661,255 |
| | $ | 51,324 |
| | $ | 609,931 |
|
Hospitality | | 660,751 |
| | 420 |
| | 660,331 |
|
Other Equity and Debt | | 152,254 |
| | 32,302 |
| | 119,952 |
|
Other Investment Management | | 515,000 |
| | — |
| | 515,000 |
|
Unallocated | | 12,297 |
| | 649 |
| | 11,648 |
|
| | $ | 2,001,557 |
| | $ | 84,695 |
| | 1,916,862 |
|
| | | | | | |
Impairment loss attributable to noncontrolling interests in investment entities | | $ | 279,840 |
| | $ | 37,195 |
| |
|
|
Impairment loss on real estate and goodwill are discussed further in Notes 4 and 7, respectively, to the consolidated financial statements.
Healthcare and Hospitality—In 2020, we recognized impairment of $661.3 million on healthcare assets and $660.8 million on hotel assets, resulting from shortened holding period assumptions, attributable to both the Company's accelerated digital transformation, and the risk that the Company is unable to obtain accommodation from lenders on non-recourse mortgage debt that is in default or at risk of default. This resulted in a shortfall in projected future cash flows, which was further exacerbated by a decline in property operating expenses. performance and market values as a result of the economic effects of COVID-19, such that the carrying value of these assets would not be recoverable.
In 2019, impairment of (i) $51.3 million on healthcare assets was based upon a negotiated purchase option exercised by a tenant on three hospitals and preliminary offers received on certain net lease properties, all of which have since been sold; and (ii) $0.4 million on a hotel was based upon final net proceeds from sale.
Other Equity and Debt—Impairment was $120.0 million higher, primarily on the THL Hotel Portfolio, various office properties, and a hotel in Spain. The higher impairment was driven by shortened holding period assumptions due to the Company's accelerated digital transformation or risk of default on non-recourse investment level debt; and/or the economic effects of COVID-19 on property operating cash flows and market values.
Other Investment Management—Goodwill in the other investment management segment was written down by $515.0 million, driven by acceleration of the Company's digital transformation and significant reduction in the value of its non-digital balance sheet assets.
Unallocated—Impairment was recorded on the corporate aircraft in 2020 to reflect recoverable value based upon a shortened holding period and on an office operating lease asset in 2019.
Compensation Expense
The following table provides the components of compensation expense: |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Cash compensation and benefits | | $ | 51,050 |
| | $ | 31,294 |
| | $ | 19,756 |
|
Equity-based compensation | | 10,422 |
| | 7,577 |
| | 2,845 |
|
Incentive and carried interest compensation | | (1,162 | ) | | 1,146 |
| | (2,308 | ) |
| | 60,310 |
| | 40,017 |
| | 20,293 |
|
Compensation grossed up in income and expense | | | | | | |
Equity-based compensation—CLNC and NRE (prior to September 2019) awards | | 3,041 |
| | 3,559 |
| | (518 | ) |
Total compensation expense | | $ | 63,351 |
| | $ | 43,576 |
| | 19,775 |
|
Total compensation expense increased $19.8 million, attributed primarily to (i) additional compensation cost following the consolidation of DBH and DataBank, acquired in July and December 2019, respectively; and (ii) $6.6 million of severance related costs incurred in the second quarter of 2020 in connection with our new cost reduction initiative. These increases were partially offset by a decrease in compensation cost following the cost reduction initiative, sales of NRE in September 2019 and our industrial business in December 2019, and reversal of carried interest compensation in 2020.
Administrative Expenses
There was a marginal increase in administrative expense of $0.3 million as higher professional service costs and additional expenses in connection with businesses acquired in 2019 were largely offset by savings in business travel and office costs resulting from efforts to reduce the spread of COVID-19.
Gain on Sale of Real Estate
The higher gains in 2019 were from sales of our European properties. The pace of dispositions has slowed considerably in 2020 given the current global economic downturn resulting from efforts to contain COVID-19.
Equity Method Earnings (Losses)
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Digital | | $ | 7,940 |
| | $ | 3,147 |
| | $ | 4,793 |
|
CLNC | | (350,241 | ) | | (267,912 | ) | | (82,329 | ) |
Other Equity and Debt | | (28,525 | ) | | 25,633 |
| | (54,158 | ) |
Other Investment Management (including carried interest reversal of $2,324 and income of $1,836, respectively) | | (4,033 | ) | | (18,320 | ) | | 14,287 |
|
| | $ | (374,859 | ) | | $ | (257,452 | ) | | (117,407 | ) |
Digital—Amounts represent net earnings from interests in (i) our sponsored DCP fund; (ii) through July 2019, Digital Colony Manager, the manager of DCP, prior to its consolidation upon acquisition of DBH; and beginning March 31, 2020, existing Colony investment vehicles that were repurposed to execute an investment strategy focused around the digital sector.
CLNC—We recorded an other-than-temporary impairment on our investment in CLNC of $274.7 million in 2020 and $227.9 million in 2019. Our interest in CLNC also acquiredgenerated net loss of $75.6 million in 2020 (inclusive of $8.7 million adjustment to reduce the basis difference allocated to non-strategic assets resolved during the second quarter of 2020) and net loss of $40.0 million in 2019. CLNC's net losses were driven by allowance for loan losses, impairment or unrealized fair value losses on investments, and realized losses from sale of investments and unwinding of hedge positions, further affected by COVID-19 in 2020. Refer to Note 6 to the consolidated financial statements for further discussion of the CLNC impairment and basis adjustment.
Other Equity and Debt—Equity method losses in 2020 compared to earnings in 2019, resulting in a decrease of $54.2 million, arose from impairment of an investee based upon projected exit strategy, decrease in fair value of investments under the fair value option and our share of investee net losses, all of which reflect the economic effects of COVID-19.
Other Investment Management—Equity method net loss was $14.3 million lower due to an impairment charge recorded in 2019 on an investee which has since been sold, partially offset by reversal of unrealized carried interest allocation in 2020.
Other Loss, Net
We recorded other propertiesnet loss of $173.0 million in 2020 and $89.5 million in 2019, driven primarily by the following:
Three Months Ended June 30, 2020
$284.4 million ($230.3 million attributable to noncontrolling interests in investment entities) of net unrealized losses on loans receivable carried at fair value as recoverability is affected by increasing uncertainty and deterioration in the economic environment arising from the effects of COVID-19 (fair value option was elected on loans receivable beginning 2020);
$21.4 million of unrealized credit losses on commercial real estate ("CRE") debt securities;
realized gain of $60.7 million, of which the Company's share is 50%, and recognition of future profit allocation at fair value of $66.0 million ($33.7 million attributable to noncontrolling interests in investment entities) from recapitalization of our co-investment venture which holds common stock in Albertsons Companies, Inc. (refer to Note 6 to the consolidated financial statements).
Three Months Ended June 30, 2019
unrealized loss of $86.9 million on a non-designated interest rate swap assumed through the Merger mainlythat was intended to hedge future refinancing on certain healthcare mortgage debt. Such debt was refinanced in June 2019 and the swap was terminated at the end of 2019.
Income Tax Expense
Income tax expense was higher by $5.1 million, attributed primarily to (i) valuation allowances established against deferred tax assets in the hospitality and healthcare segments as a result of uncertainties in future realization of tax benefit on net operating losses, taking into consideration the impairment of assets in these segments; partially offset by (ii) deferred tax benefit recognized on taxable losses in the other investment management segment.
Income (Loss) from Discontinued Operations
In 2020, discontinued operations represent (i) results of operations of the bulk industrial portfolio; and (ii) in the second quarter of 2020, final adjustments to proceeds from the December 2019 sale of the light industrial portfolio upon release of escrowed funds, which resulted in a net loss of $7.4 million, including a corresponding effect on carried interest and related compensation. In 2019, discontinued operations encompassed predominantly results of the light industrial portfolio and the related management platform prior to its sale in December 2019. Refer to Note 16 to the consolidated financial statements.
Consolidated Results of Operations
Comparison of Six Months Ended June 30, 2020 to Six Months Ended June 30, 2019
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Revenues | | | | | | |
Property operating income | | $ | 719,232 |
| | $ | 947,686 |
| | $ | (228,454 | ) |
Interest income | | 55,244 |
| | 81,125 |
| | (25,881 | ) |
Fee income | | 87,045 |
| | 66,461 |
| | 20,584 |
|
Other income | | 18,358 |
| | 26,226 |
| | (7,868 | ) |
Total revenues | | 879,879 |
| | 1,121,498 |
| | (241,619 | ) |
Expenses | | | | | | |
Property operating expense | | 457,276 |
| | 549,982 |
| | (92,706 | ) |
Interest expense | | 230,199 |
| | 276,627 |
| | (46,428 | ) |
Investment and servicing expense | | 23,572 |
| | 38,466 |
| | (14,894 | ) |
Transaction costs | | 496 |
| | 2,822 |
| | (2,326 | ) |
Depreciation and amortization | | 271,763 |
| | 220,734 |
| | 51,029 |
|
Provision for loan loss | | — |
| | 18,614 |
| | (18,614 | ) |
Impairment loss | | 2,388,825 |
| | 110,317 |
| | 2,278,508 |
|
Compensation expense—cash and equity-based | | 117,547 |
| | 73,947 |
| | 43,600 |
|
Compensation expense—carried interest and incentive fee | | (10,343 | ) | | 2,418 |
| | (12,761 | ) |
Administrative expenses | | 53,163 |
| | 42,840 |
| | 10,323 |
|
Settlement loss | | 5,090 |
| | — |
| | 5,090 |
|
Total expenses | | 3,537,588 |
| | 1,336,767 |
| | 2,200,821 |
|
Other income (loss) | | | | | | |
Gain on sale of real estate | | 10,800 |
| | 35,530 |
| | (24,730 | ) |
Other loss, net | | (176,501 | ) | | (138,575 | ) | | (37,926 | ) |
Equity method losses | | (256,833 | ) | | (225,225 | ) | | (31,608 | ) |
Equity method earnings (losses)—carried interest | | (20,735 | ) | | 6,732 |
| | (27,467 | ) |
Loss before income taxes | | (3,100,978 | ) | | (536,807 | ) | | (2,564,171 | ) |
Income tax expense | | (16,044 | ) | | (3,783 | ) | | (12,261 | ) |
Loss from continuing operations | | (3,117,022 | ) | | (540,590 | ) | | (2,576,432 | ) |
Income (loss) from discontinued operations | | (6,028 | ) | | 25,789 |
| | (31,817 | ) |
Net loss | | (3,123,050 | ) | | (514,801 | ) | | (2,608,249 | ) |
Net income (loss) attributable to noncontrolling interests: | | | | | | |
Redeemable noncontrolling interests | | (158 | ) | | 1,953 |
| | (2,111 | ) |
Investment entities | | (491,801 | ) | | 36,574 |
| | (528,375 | ) |
Operating Company | | (264,658 | ) | | (36,600 | ) | | (228,058 | ) |
Net loss attributable to Colony Capital, Inc. | | (2,366,433 | ) | | (516,728 | ) | | (1,849,705 | ) |
Preferred stock dividends | | 37,990 |
| | 54,275 |
| | (16,285 | ) |
Net loss attributable to common stockholders | | $ | (2,404,423 | ) | | $ | (571,003 | ) | | (1,833,420 | ) |
Property Operating Income and Property Operating Expenses |
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Property operating income: | | | | | | |
Digital | | $ | 87,166 |
| | $ | — |
| | $ | 87,166 |
|
Healthcare | | 278,232 |
| | 289,553 |
| | (11,321 | ) |
Hospitality | | 210,632 |
| | 423,571 |
| | (212,939 | ) |
Other Equity and Debt | | 143,202 |
| | 234,562 |
| | (91,360 | ) |
| | $ | 719,232 |
| | $ | 947,686 |
| | (228,454 | ) |
Property operating expenses: | | | | | | |
Digital | | $ | 34,961 |
| | $ | — |
| | $ | 34,961 |
|
Healthcare | | 141,319 |
| | 128,226 |
| | 13,093 |
|
Hospitality | | 184,728 |
| | 281,036 |
| | (96,308 | ) |
Other Equity and Debt | | 96,268 |
| | 140,720 |
| | (44,452 | ) |
| | $ | 457,276 |
| | $ | 549,982 |
| | (92,706 | ) |
Digital—Amounts represent income and related operating expenses from our DataBank subsidiary that was acquired in December 2019, primarily in connection with colocation rent and data center services.
Healthcare—Property operating income decreased $11.3 million, driven by sales of 25 net lease multifamilyproperties in 2019 and one in the first quarter of 2020, and to a lesser extent, lower rental income from lease restructurings on certain net leased senior housing and skilled nursing facilities. Property operating expenses increased $13.1 million, primarily due to incremental costs incurred in our senior housing facilities in response to COVID-19, and to a lesser extent, higher insurance premiums. A small portion of the incremental costs were abated by government stimulus funding under the CARES Act Provider Relief Fund, which partially offset the decrease in property operating income. Refer to further discussion in "—Segment Results—Healthcare."
Hospitality—Property operating income and expense decreased $212.9 million and $96.3 million, respectively. On a same store basis (excluding the effects of ten select service hotels sold in 2019), property operating income and expense decreased $193.8 million or 48% and $81.2 million or 31%, respectively. The decrease in income reflects the effects of COVID-19 with significant declines in room demand with an average occupancy of 44.4%, a decrease of 40% compared to the same period last year. This was further compounded by lower ADR resulting in RevPAR falling 47% compared to the same period last year. Although we have taken various steps to minimize non-essential operating expenses during this time, the decrease in operating expenses, as expected, was less pronounced as we continue to incur fixed operating costs. Notwithstanding the overall negative results for the second quarter of 2020, operations have recovered from the trough in April 2020 and have since trended positively through July 2020. Refer to further discussion in "—Segment Results—Hospitality."
Other Equity and Debt—Property operating income and expenses decreased $91.4 million and $44.5 million, respectively, driven by sales of limited service hotels in our THL Hotel Portfolio, U.S. multi-tenant offices includedand other properties in our European portfolio, as well as the effects of COVID-19 on the operating results of our THL Hotel Portfolio and a hotel in Spain.
Interest Income
Interest income decreased $25.9 million, attributed to loan payoffs and sales in 2019 and loans placed on nonaccrual in the second quarter of 2020 as the COVID-19 crisis has led to increased uncertainty over collectability.
Fee Income
Fee income is earned from the following sources: |
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Institutional funds and other investment vehicles | | $ | 61,813 |
| | $ | 23,671 |
| | $ | 38,142 |
|
Public companies (CLNC, and NRE prior to its sale in September 2019) | | 15,281 |
| | 30,144 |
| | (14,863 | ) |
Non-traded REIT | | 8,862 |
| | 10,095 |
| | (1,233 | ) |
Other | | 1,089 |
| | 2,551 |
| | (1,462 | ) |
| | $ | 87,045 |
| | $ | 66,461 |
| | 20,584 |
|
Total fee income increased $20.6 million resulting from:
net increase of $38.1 million in fees from institutional funds and investment vehicles, driven by $40.2 million of fees from DBH (50% of fees from DCP was recognized as equity method income prior to acquisition of DBH) and Colony Latam, which were acquired in July 2019 and April 2019, respectively, partially offset by decreases in fees from liquidating funds;
The increase in fees from institutional funds and investment vehicles was partially offset by:
$6.4 million decrease in fees from Colony Credit due to a lower stockholders' equity fee base;
$7.7 million of fees from NRE in 2019 prior to its sale in September 2019;
$1.1 million decrease in fees from NorthStar Healthcare following a decrease in its NAV fee basis effective December 2019; and
$1.5 million decrease in other fees related primarily to advisory fees earned in the second quarter of 2019.
Other Income
Other income decreased $7.9 million, attributed primarily to (i) lower other income in connection with CLNC equity awards that were remeasured at fair value based upon CLNC's stock price at period end, and other income recognized in 2019 in relation to NRE equity awards, with such amounts correspondingly recognized in equity-based compensation, as a gross-up of income and expense (refer to Note 19 to the consolidated financial statements for a description of the accounting treatment of managed company awards); and (ii) lower cost reimbursement from affiliates. These decreases were partially offset by hotel management fee income in the first quarter of 2020 from our acquisition of a distressed hotel manager in France in July 2019 within our other equity and debt segment. These
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Investment-level financing: | | | | | | |
Digital | | $ | 17,586 |
| | $ | — |
| | $ | 17,586 |
|
Healthcare | | 74,565 |
| | 104,662 |
| | (30,097 | ) |
Hospitality | | 69,678 |
| | 83,656 |
| | (13,978 | ) |
Other Equity and Debt | | 38,271 |
| | 61,069 |
| | (22,798 | ) |
Corporate-level debt | | 30,099 |
| | 27,240 |
| | 2,859 |
|
| | $ | 230,199 |
| | $ | 276,627 |
| | (46,428 | ) |
Net decrease in interest expense $46.4 million is attributed to the following:
Digital—Amount represents interest expense on debt assumed from our DataBank subsidiary that was acquired assets, in aggregate, generated property operating incomeDecember 2019.
Healthcare—Interest expense was $30.1 million lower as a result of: (i) decrease in LIBOR on predominantly variable rate debt; (ii) interest expense recognized in the second quarter of $392.6 million and incurred property operating expenses2019 from the write-off of $222.1 million for the three months ended September 30, 2017.
Industrial—Increasesdebt discount in total property operating income and expenses in our industrial portfolio reflect continued growth of the portfolio through acquisitions and increase in base rents. As of September 30, 2017 and 2016, the industrial portfolio consisted of 388 and 336 buildings, respectively,connection with a net additionJune 2019 refinancing; and (iii) debt repayment upon sale of 52 buildings between September 30, 2016non-core properties in 2019. These decreases were partially offset by interest expense recognized from amortization of deferred financing costs incurred in connection with the June 2019 refinancing.
Hospitality—Interest expense decreased $14.0 million, driven by a decline in LIBOR on predominantly variable rate debt on our hotel portfolio, partially offset by additional debt obtained in connection with debt refinancing in 2019 and September 30, 2017.
Comparing our industrial portfolio on a same store basis for the three months ended September 30, 2017 and 2016, property operating income increasedhigher deferred financing costs expensed as a result of higher rental rates on new and renewal leases as well as contractual rental rate increases within existing leases. Property operating expenses decreased marginally due to lower repair and maintenance costs.the refinancing.
|
| | | | | | | | | | | |
| | Three Months Ended September 30, | | |
($ in thousands) | | 2017 | | 2016 | | % change |
Industrial: (1) | | | | | | |
Same store property operating income | | $ | 48,335 |
| | $ | 47,050 |
| | 2.7 | % |
Same store property operating expenses | | 13,251 |
| | 13,449 |
| | (1.5 | )% |
__________
| |
(1)
| Our same store portfolio consisted of 312 buildings, which consisted of the same buildings that were owned during the three months ended September 30, 2017 and 2016. |
Other Equity and Debt—Excluding properties acquired through the Merger, property operating income and property operating expenses relatedDebt—Interest expense decreased $22.8 million due to our remaining other equitya decline in LIBOR and debt portfolio increased $115.1 millionpayoffs from sale of properties and $78.3 million, respectively, for the three months ended September 30, 2017 compared to the same period in 2016. The increases were driven by $105.0 million of property operating income and $70.9 million of property operating expenses from the THL Hotel Portfolio which we acquired through a consensual foreclosure in July 2017.
Interest Income
The increase in interest income in 2017 can be attributed to interest earning assets acquired from NRF and NSAM, specifically $19.2 million and $6.7 million of interest income from CRE securities and loans receivable, respectively, for the three months ended September 30, 2017. Excluding interest earning assets from the Merger, remaining interest income decreased $17.7 million between the third quarter of 2017 and 2016 due to loan repayments, pay-offs, sales as well as foreclosures, which more than offset income from new loans and additional draws on existing loans.
Fee Income
Fee income was earned from the following sources: |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Institutional funds | | $ | 16,001 |
| | $ | 17,233 |
| | $ | (1,232 | ) |
Retail Companies | | 25,142 |
| | — |
| | 25,142 |
|
Public company—NRE | | 3,770 |
| | — |
| | 3,770 |
|
Broker dealer, Townsend funds and other clients | | 14,780 |
| | — |
| | 14,780 |
|
| | $ | 59,693 |
| | $ | 17,233 |
| | 42,460 |
|
In the third quarter of 2017, we earned $43.7 million of additional fee income following the Merger, primarily management fees from the retail companies and NRE, as well as management fees and advisory fees from Townsend private funds and clients.
Fee income from Colony private funds decreased $1.2 million in the third quarter of 2017 compared to the third quarter of 2016 as $2.4 million of additional fee income from private funds that we sponsor was offset by fee concessions and the continued liquidation of investments by various legacy private funds that we manage.
Other Income
The majority of other income for the three months ended September 30, 2017 consisted of $6.0 million of cost reimbursements, of which $4.3 million was from managing the operations of the retail companies. For the same period in 2016, other income was made up of $1.4 million of cost reimbursements, with the remainder attributed primarily to expense recoveries from borrowers and other recoveries from resolution of our loan investments.loans receivable.
Corporate-level Debt—Interest Expense
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Investment-level financing: | | | | | | |
Healthcare | | $ | 48,586 |
| | $ | — |
| | $ | 48,586 |
|
Industrial | | 8,803 |
| | 11,532 |
| | (2,729 | ) |
Hospitality | | 35,351 |
| | — |
| | 35,351 |
|
Other Equity and Debt | | 46,333 |
| | 19,475 |
| | 26,858 |
|
Corporate-level debt | | 12,981 |
| | 11,189 |
| | 1,792 |
|
| | $ | 152,054 |
| | $ | 42,196 |
| | 109,858 |
|
Net increase in interest expense between the third quarterincreased $2.9 million as a result of 2017 compared to the same period in 2016 resulted from the following:
$93.1 millionwriting off a portion of interest expense on $6.5 billion of investment level debt assumed in the Merger, financing NRF assets in the healthcare, hospitality as well as other equity and debt segments;
$2.7 million of lower interest expense in our industrial portfolio as (i) the three months ended September 30, 2016 included approximately $1.0 million of accelerated deferred financing costs and (ii) lower average debt balance in the three months ended September 30, 2017 compared to the same period in 2016 as we paid off the remaining balance on our variable rate acquisition debt in 2017;
$17.7 million net increase in interest expense on legacy Colony debt in the other equity and debt segment from new investment level financing as well as debt assumed from acquisitions of CPI and THL Hotel Portfolio. These increases were partially offset by the paydown of debt, primarily from sales of our loan and real estate investments, particularly in our non-core portfolio of limited service hotels; and
$1.8 million net increase in interest expense on corporate level debt driven by (i) $3.4 million of interest expense on NRF exchangeable notes and junior subordinated debt assumed in the Merger, largely offset by (ii) $1.9 million decrease in interest expense on our corporate credit facility due to reflect a reduction in the facility amount in June 2020, along with a higher average outstanding balance on the facility in 2020. This increase was partially offset by the effect of a decline in LIBOR on our junior subordinated debt and lower utilizationunused fees on our credit facility.
Investment and Servicing Expense
Investment and servicing costs were $14.9 million lower, attributed primarily to costs related to refinancing of our credit line as we applied somehealthcare debt in 2019, higher unconsummated deal costs in 2019 and lower hotel asset management and incentive fees
in 2020, which corresponds to the net proceeds from sale of our manufactured housing portfolio for working capital purposes.
Investment, Servicing and Commission Expense
This includes on-going costsdecline in hotel revenues, partially offset by higher investment expenses incurred by the Company for servicing and managing loan portfolios and foreclosed properties, fees paid to third parties for management of our real estate portfolios, and unconsummated deal costs. The
$13.3 million increase between the three months ended September 30, 2017 compared to the same period in 2016 can be attributed largely to $9.5 million of expenses incurred in relation to assets and service arrangements acquired from NSAM and NRF, and $1.6 million in connection with special servicing and hotel management fees on the THL Hotel Portfolio.European portfolio.
Transaction Costs
The higher transaction costs in the third quarter2019 of 2016 was due to $4.9$2.8 million related to our acquisition of the Merger. Latin American investment management business of The Abraaj Group and acquisition of a hotel portfolio in France through a joint venture.
Depreciation and Amortization
Higher depreciation and amortization expense is attributed to real estate and intangible assets acquired from DataBank in December 2019 and DBH in July 2019, as well as capital improvements and fixed asset additions to our hotel properties that were completed throughout 2019 and beginning of 2020. These increases were partially offset by sales of non-core properties, lower real estate basis after impairment charges in 2019, termination of NRE management contract in September 2019 and write-down of NorthStar Healthcare management contract in December 2019.
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Healthcare | | $ | 709,787 |
| | $ | 51,324 |
| | $ | 658,463 |
|
Hospitality | | 910,913 |
| | 4,270 |
| | 906,643 |
|
Other Equity and Debt | | 161,828 |
| | 54,074 |
| | 107,754 |
|
Other Investment Management | | 594,000 |
| | — |
| | 594,000 |
|
Unallocated | | 12,297 |
| | 649 |
| | 11,648 |
|
| | $ | 2,388,825 |
| | $ | 110,317 |
| | 2,278,508 |
|
| | | | | | |
Impairment loss attributable to noncontrolling interests in investment entities | | $ | 319,974 |
| | $ | 51,346 |
| | 268,628 |
|
Impairment loss on real estate and goodwill are discussed further in Notes 4 and 7, respectively, to the consolidated financial statements.
Healthcare and Hospitality—In 2020, we recognized impairment of $709.8 million on healthcare assets and $910.9 million on hotel assets, resulting from shortened holding period assumptions, attributable to both the same periodCompany's accelerated digital transformation, and the risk that the Company is unable to obtain accommodation from lenders on non-recourse mortgage debt that is in 2017,default or at risk of default. This resulted in a shortfall in projected future cash flows, which was further exacerbated by a decline in property operating performance and market values as a result of the majorityeconomic effects of transaction costs were incurredCOVID-19, such that the carrying value of these assets would not be recoverable.
In 2019, impairment of (i) $51.3 million on healthcare assets was based upon a negotiated purchase option exercised by a tenant on three hospitals and preliminary offers received on certain net lease properties, all of which have since been sold; and (ii) $4.3 million on hotel assets was based upon revised expected sales prices or final net proceeds from sale.
Other Equity and Debt—Impairment was $107.8 million higher, attributed to write-downs in connection with the foreclosure of2020 on the THL Hotel Portfolio and office properties in the potential Combination transaction to create a new publicly traded commercial real estate credit REIT.
Depreciation and Amortization
Depreciation and amortization was significantly higher for the three months ended September 30, 2017 as a result of the real estate and related intangible assets as well as the investment management intangible assets acquired from NRF and NSAM, respectively, which contributed $97.7 million in aggregate. Depreciation and amortization on Colony real estate and intangible assets increased $21.4 million, attributable largely to the acquisition of the THL Hotel Portfolio and continued growth of our industrial portfolio,U.S, partially offset by decreases due to sales or classification of real estate as held for sale, mainly in our non-core hotel and European portfolios.
Provision for Loan Losses
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Non-PCI loans | | $ | 3,965 |
| | $ | 36 |
| | $ | 3,929 |
|
PCI loans | | 1,151 |
| | 6,533 |
| | (5,382 | ) |
Total provision for loan losses | | $ | 5,116 |
| | $ | 6,569 |
| | (1,453 | ) |
While provision for loan losses in both periods reflected largely a decrease in expected cash flows on PCI loans, the three months ended September 30, 2017 also included a $1.8 million reversal of provision following higher recoveries upon the bulk sale of a portfolio of PCI loans, as well as provision on non-PCI loans, specifically $1.8 million on a development loan based on revised cash flow projections and $1.6 million on a loan in the healthcare segment due to a decline in collateral value.
For the three months ended September 30, 2017 and 2016, $2.5 million and $5.4 million of provision for loan losses, respectively, were attributed to noncontrolling interests in investment entities.
Impairment Loss
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Healthcare | | $ | 8,250 |
| | $ | — |
| | $ | 8,250 |
|
Industrial | | 44 |
| | — |
| | 44 |
|
Other Equity and Debt | | 6,718 |
| | 941 |
| | 5,777 |
|
Investment Management | | 9,061 |
| | — |
| | 9,061 |
|
| | $ | 24,073 |
| | $ | 941 |
| | 23,132 |
|
Healthcare—Impairment of $7.6 million was recorded on three net lease properties in Illinois which were classified as held for sale in September 2017. The remaining $0.6 million of impairment, net of expected insurance recoveries, was taken on four senior housing operating facilities in Texas as a result of Hurricane Harvey.
Other Equity and Debt—Impairment in both periods pertained largely to properties that were sold or held for sale. The higher impairment in the three months ended September 30, 2017 can be attributed primarily to $3.2 million on three net lease warehouses in Ohio based on their contracted selling price, $1.2 million from the sale of our remaining two non-core limited service hotels, and a $0.8 million increasedecrease in impairment on our European properties. Additionally, twenty-five hotelsportfolio. The higher impairment in our THL Hotel Portfolio located in Texas, Florida2020 was driven by a shortened holding period assumption due to the Company's accelerated digital transformation or risk of default on non-recourse investment level debt; and/or the economic effects of COVID-19 on property operating cash flows and Georgia suffered varying degrees of physical damage from Hurricanes Harvey and Irmamarket values.
Other Investment Management—Goodwill in the third quarterother investment management segment was written down by $594 million, driven by acceleration of 2017, resultingthe Company's digital transformation and significant reduction in estimated impairment lossthe value of approximately $0.8 million, net of insurance recoveries.its non-digital balance sheet assets.
Investment Management—The $9.1 million impairment represents a write-down of goodwill allocated to the Townsend operating segment basedUnallocated—Impairment was recorded on the netcorporate aircraft in 2020 to reflect recoverable value based upon a shortened holding period and on an office operating lease asset valuein 2019.
Impairment loss of $4.7 million and $0.8 million in the three months ended September 30, 2017 and 2016, respectively, were attributed to noncontrolling interests in investment entities.
Compensation Expense
The following table provides the components of compensation expense. In addition to a significantly larger workforce following the Merger, the three months ended September 30, 2017 also included Merger-related compensation expense.
| | | | Three Months Ended September 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2017 | | 2016 | | Change | | 2020 | | 2019 | | Change |
Cash compensation and benefits | | $ | 43,969 |
| | $ | 26,098 |
| | $ | 17,871 |
| | $ | 99,262 |
| | $ | 54,086 |
| | $ | 45,176 |
|
Equity-based compensation | | 7,848 |
| | 3,484 |
| | 4,364 |
| | 18,671 |
| | 13,491 |
| | 5,180 |
|
Incentive and carried interest compensation | | | (10,343 | ) | | 2,418 |
| | (12,761 | ) |
| | 51,817 |
| | 29,582 |
| | 22,235 |
| | 107,590 |
| | 69,995 |
| | 37,595 |
|
Merger-related compensation expense | |
|
| |
|
| |
|
| |
Equity-based compensation for replacement awards to NSAM executives subject to one year vesting
| | 30,336 |
| | — |
| | 30,336 |
| |
Severance and other employee transition | | 2,869 |
| | — |
| | 2,869 |
| |
| | 33,205 |
| | — |
| | 33,205 |
| |
| | $ | 85,022 |
| | $ | 29,582 |
| | 55,440 |
| |
Compensation grossed up in income and expense | | | | | | | |
Equity-based compensation—CLNC and NRE (prior to September 2019) awards | | | (386 | ) | | 6,370 |
| | (6,756 | ) |
Total compensation expense | | | $ | 107,204 |
| | $ | 76,365 |
| | 30,839 |
|
Administrative Expense
In additionTotal compensation expense increased $30.8 million, attributed primarily to operating a much larger organization(i) additional compensation cost following the Merger, the three months ended September 30, 2017 also included $4.9consolidation of DBH and DataBank, acquired in July and December 2019, respectively; and (ii) $6.6 million of administrativeseverance related costs incurred in the second quarter of 2020 in connection with integratingour new cost reduction initiative. These increases were partially offset by a decrease in compensation cost following the operationscost reduction initiative, sales of NRE in September 2019 and our industrial business in December 2019, and reversals of carried interest compensation and equity-based compensation on CLNC awards in 2020 (refer to discussion in Other Income).
Administrative Expenses
Administrative expense was $10.3 million higher, largely attributable to higher professional service costs and additional expenses in connection with businesses acquired in 2019, partially offset by savings in business travel and office costs resulting from efforts to reduce the spread of COVID-19.
Settlement Loss
Amount represents fair value of the combined entities,settlement arrangement with Blackwells at inception in March 2020, including but not limitedreimbursement of legal costs. Refer to system integration, legal fees and other professional fees paidadditional discussion in Note 12 to third party advisors and consultants. Such costs are not expected to recur and do not represent the on-going costs of a fully integrated combined organization.consolidated financial statements.
Gain on Sale of Real Estate
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Industrial | | $ | — |
| | $ | 1,949 |
| | $ | (1,949 | ) |
Other Equity and Debt | | 72,541 |
| | 9,202 |
| | 63,339 |
|
| | $ | 72,541 |
| | $ | 11,151 |
| | 61,390 |
|
Industrial—InThere were higher gains in 2019 from sales of our European properties and U.S. multi-tenant office buildings. The pace of dispositions have slowed considerably in 2020 given the third quarter of 2017, there was no gaincurrent global economic downturn resulting from the sale of one industrial property in Atlanta, while the gain in the third quarter of 2016 arose largely from the sale of our industrial properties in Memphis.
Other Equity and Debt—The significantly higher gain in the third quarter of 2017 was driven by a $68.1 million gain from the sale of two net lease properties in Switzerland which we acquired in January 2015. In the same period last year, we recorded gains primarily from the sale of our non-core limited service hotels and a net lease property.efforts to contain COVID-19.
Gain on sale of $3.1$7.4 million and $4.4$34.7 million in the threesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively, were attributedattributable to noncontrolling interests in investment entities.
Equity Method Earnings (Losses)
|
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change |
Digital | | $ | 8,408 |
| | $ | 6,423 |
| | $ | 1,985 |
|
CLNC | | (360,310 | ) | | (262,399 | ) | | (97,911 | ) |
Other Equity and Debt | | (10,824 | ) | | 50,206 |
| | (61,030 | ) |
Other Investment Management (including carried interest reversal $20,735 and income of $6,732, respectively) | | 85,158 |
| | (12,723 | ) | | 97,881 |
|
| | $ | (277,568 | ) | | $ | (218,493 | ) | | (59,075 | ) |
Digital—Amounts represent net earnings from interests in (i) our sponsored DCP fund; (ii) through July 2019, Digital Colony Manager, the manager of DCP, prior to its consolidation upon acquisition of DBH; and beginning March 31, 2020, existing Colony investment vehicles that were repurposed to execute an investment strategy focused around the digital sector.
CLNC—We recorded other-than-temporary impairment on our investment in CLNC of $274.7 million in 2020 and $227.9 million in 2019.
Our interest in CLNC also generated net loss of $85.6 million in 2020 (inclusive of $27.9 million adjustment to reduce the basis difference allocated to non-strategic assets resolved during the six months ended June 30, 2020) and net loss of $34.5 million in 2019. CLNC's net losses were driven by allowance for loan losses, impairment or unrealized fair value
losses on investments, and realized losses from sale of investments and unwinding of hedge positions, further affected by COVID-19 in 2020.
Refer to Note 6 to the consolidated financial statements for further discussion of the CLNC impairment and basis adjustment.
Other Gain (Loss),Equity and Debt—Equity method losses in 2020 compared to earnings in 2019, resulting in a decrease of $61.0 million, arose from impairment of an investee based upon projected exit strategy, decrease in fair value of investments under the fair value option and our share of investee net losses, all of which reflect the economic effects of COVID-19. To a lesser extent, there was also a loss of earnings from investments that were resolved or sold in 2019, partially offset by income from additional acquisition, development and construction ("ADC") loan disbursements.
Other Investment Management—Equity method net income in 2020 was driven by a $106.1 million gain from sale of our equity investment in RXR Realty in February 2020, partially offset by a reversal of unrealized carried interest allocation. In comparison, equity method net loss was incurred in 2019, driven by impairment charge on an investee that has since been sold, partially offset by unrealized carried interest income.
Other Loss, Net
NetWe recognized other net loss of $8.8$176.5 million in the third quarter of 2017 can be attributed2020 and $138.6 million in 2019, driven primarily to the combined effect ofby the following:
$8.5Six Months Ended June 30, 2020
| |
• | $281.3 million ($227.6 million attributable to noncontrolling interests in investment entities) of net unrealized losses on loans receivable carried at fair value as recoverability is affected by increasing uncertainty and deterioration in the economic environment arising from the effects of COVID-19 (fair value option was elected on loans receivable beginning 2020); and |
$22.2 million of unrealized credit losses on CRE debt securities; partially offset by
realized gain of $60.7 million and recognition of future profit allocation at fair value of $66.0 million ($33.7 million attributable to noncontrolling interests in investment entities) from recapitalization of our co-investment venture which holds common equity in the Albertsons supermarket chain (refer to Note 6 to the consolidated financial statements).
Six Months Ended June 30, 2019
unrealized loss of $146.1 million on an undesignated out-of-moneya non-designated interest rate swap assumed through the Merger. The swapMerger that was intended to economically hedge future refinancing risk on certain NRFhealthcare mortgage debt;debt. Such debt was refinanced in June 2019 and
$10.4 million loss due to OTTI and write off the swap was terminated at the end of basis, primarily on CMBS securities held by consolidated N-Star CDOs, as the underlying securitization tranches continue to wind up.
These losses were offset by:
$6.1 million gain due to a decrease in fair value of the contingent consideration liability from the Internalization transaction in 2015;
$2.0 million gain on remeasurement of a foreign currency loan receivable in our healthcare segment; and
approximately $2.0 million gain resulting from the syndication of 90% of the equity in a California office building in September 2017. The new equity partners were granted certain participation rights in the business, resulting in a deconsolidation of the investment. The deconsolidation resulted in a gain, which represents the excess of proceeds from the syndication over the carrying value of our equity that was sold.
In contrast, in the third quarter of 2016, we recorded a net gain of $4.6 million due to the decrease in fair value of the contingent consideration liability from the Internalization. The estimated fair value of the contingent consideration from the Internalization is affected by various factors, including projected performance targets and probabilities of achieving those targets, and as the contingent consideration is payable in shares of the Company, our class A common stock price.
Earnings from Investments in Unconsolidated Ventures
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Industrial | | $ | 34 |
| | $ | — |
| | $ | 34 |
|
Other Equity and Debt | | 13,071 |
| | 12,805 |
| | 266 |
|
Investment Management | | 4,342 |
| | 3,879 |
| | 463 |
|
| | $ | 17,447 |
| | $ | 16,684 |
| | 763 |
|
Through the Merger, we acquired approximately $0.7 billion of investments in unconsolidated ventures, which include interests in a healthcare investment manager, real estate investment managers, various real estate joint ventures and limited partnership interests in third party sponsored private equity funds. These investments contributed $6.3 million in net losses in the third quarter of 2017, driven by decreases in expected future cash flows of certain investments in private funds accounted for under the fair value option.
The legacy Colony investments contributed $23.7 million in earnings in the three months ended September 30, 2017, a $7.1 million increase from the same period in 2016, resulting from new investments since the third quarter of 2016 and additional preferred equity investments in July 2017.2019.
Income Tax BenefitExpense
A net incomeIncome tax benefit of $10.6expense was $12.3 million was recordedhigher, attributed primarily to (i) valuation allowances established against deferred tax asset in the three months ended September 30, 2017 compared to a $3.4 million net income tax benefit in the same period in 2016. The higher income tax benefit can be attributed in part to a net loss in the Townsend investment management businesshospitality and healthcare segments as a result of anuncertainties in future realization of net operating losses, taking into consideration the impairment charge takenof assets in these segments; (ii) tax liability on the gain from sale of our equity investment in RXR Realty in February 2020; partially offset by (iii) deferred tax benefit recognized in connection with our DataBank subsidiary acquired in December 2019 and taxable losses in the thirdother investment management segment in the second quarter of 2017.2020.
Income (Loss) from Discontinued Operations
Income fromIn 2020, discontinued operations representsrepresent (i) results of operations of the bulk industrial portfolio; and (ii) in the second quarter of 2020, final adjustments to proceeds from the December 2019 sale of the light industrial portfolio upon release of escrowed funds, which resulted in a net income generated from businesses that we acquired through the business combinations which were classified as held for sale at the timeloss of acquisition.$7.4 million, including a corresponding effect on carried interest and related compensation. In the three months ended September 30, 2017, net income from2019, discontinued operations encompassed predominantly results of $1.5 million relatesthe light industrial portfolio and the related management platform prior to hotels held forits sale in December 2019. Refer to Note 16 to the consolidated financial statements.
Assets Under Management ("AUM") and Fee Earning Equity Under Management ("FEEUM")
Below is a summary of our THL Hotel Portfolio acquired in July 2017.
Preferred Stock Redemption
In the three months ended September 30, 2017, $0.9 million was recorded to increase net income available to common stockholders, representing the excess in aggregate carrying value of the legacy NRF Series Bthird party AUM and Series C preferred stock,FEEUM for which redemption notices were delivered in September 2017, over their redemption price of $25.00 per share. This was because the Series C preferred stock carrying value included a premium that was recognized based on its trading price at the closing of the Merger.
Nine Months Ended September 30, 2017our digital and 2016
Property Operating Income and Property Operating Expensesother investment management business.
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Property operating income: | | | | | | |
Healthcare | | $ | 451,099 |
| | $ | — |
| | $ | 451,099 |
|
Industrial | | 175,064 |
| | 142,693 |
| | 32,371 |
|
Hospitality | | 619,027 |
| | — |
| | 619,027 |
|
Other Equity and Debt | | 295,860 |
| | 136,777 |
| | 159,083 |
|
| | $ | 1,541,050 |
| | $ | 279,470 |
| | 1,261,580 |
|
Property operating expenses: | | | | | | |
Healthcare | | $ | 206,363 |
| | $ | — |
| | $ | 206,363 |
|
Industrial | | 49,312 |
| | 41,636 |
| | 7,676 |
|
Hospitality | | 401,351 |
| | — |
| | 401,351 |
|
Other Equity and Debt | | 145,046 |
| | 47,833 |
| | 97,213 |
|
| | $ | 802,072 |
| | $ | 89,469 |
| | 712,603 |
|
Subsequent to the Merger, we earn resident fee income and rental income from our healthcare portfolio as well as hotel operating income from our hotel portfolio acquired from NRF, and incur corresponding operating expenses. We also acquired other properties through the Merger, mainly net lease, multifamily and multi-tenant offices, included in our other equity and debt segment. These acquired assets, in aggregate, generated property operating income of $1,110.6 million and incurred property operating expenses of $623.5 million for the nine months ended September 30, 2017.
Industrial—Increases in total property operating income and expenses in our industrial portfolio reflect continued growth of the portfolio through acquisitions and increase in base rents. As of September 30, 2017 and 2016, the industrial portfolio consisted of 388 and 336 buildings, respectively, with a net addition of 52 buildings between September 30, 2016 and September 30, 2017.
Comparing our industrial portfolio on a same store basis for the nine months ended September 30, 2017 and 2016, the increase in property operating income reflects an increase in average occupancy from 93.6% to 94.6%, and generally, higher rental rates on new and renewal leases as well as contractual rental rate increases within existing leases. Same store property operating expenses also increased during this period due to higher real estate taxes, bad debt expense and property management fees, partially offset by lower repair and maintenance costs.
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
($ in thousands) | | 2017 | | 2016 | | % change |
Industrial: (1) | | | | | | |
Same store property operating income | | $ | 139,413 |
| | $ | 134,778 |
| | 3.4 | % |
Same store property operating expenses | | 39,693 |
| | 38,838 |
| | 2.2 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | AUM (1) (In billions) | | FEEUM (2) (In billions) |
Type | | Products | | Description | | June 30, 2020 | | December 31, 2019 (3) | | June 30, 2020 | | December 31, 2019 (3) |
Digital segment | | | | | | | | |
Other Investment Vehicles | | Digital real estate and infrastructure | | Earns base management fees and service fees; potential for carried interest from DCP | | $ | 21.0 |
| | $ | 13.5 |
| | $ | 7.8 |
| | $ | 6.8 |
|
Other Investment Management segment | | | | | | | | |
Institutional funds | | Credit funds, opportunistic funds, value-add funds and other co-investment vehicles | | Earns base and asset management fees from all managed funds; potential for carried interest on sponsored funds | | 8.5 |
| | 8.5 |
| | 5.6 |
| | 5.6 |
|
Retail Companies | | NorthStar Healthcare | | Earns base management fees and potential for carried interest | | 3.4 |
| | 3.4 |
| | 1.2 |
| | 1.2 |
|
Public Companies | | Colony Credit Real Estate, Inc.(4) | | NYSE-listed credit REIT | | 3.0 |
| | 3.5 |
| | 1.7 |
| | 2.2 |
|
| Earns base management fees and potential for incentive fees | | | | | | | | |
Subtotal - Other Investment Management segment | | 14.9 |
| | 15.4 |
| | 8.5 |
| | 9.0 |
|
Total Company | | $ | 35.9 |
| | $ | 28.9 |
| | $ | 16.3 |
| | $ | 15.8 |
|
__________
| |
(1) | Our same store portfolio consistedAssets for which the Company and its affiliates provide investment management services, including assets for which the Company may or may not charge management fees and/or performance allocations. AUM is based on the cost basis of 306 buildings, which consistedmanaged investments as reported by each underlying vehicle as of the same buildings that were owned duringend of the nine months ended Septemberreporting period and includes uncalled capital commitments. The Company's calculations of AUM may differ from other asset managers, and as a result, may not be comparable to similar measures presented by other asset managers. |
| |
(2) | Equity for which the Company and its affiliates provide investment management services and derive management fees and/or incentives. FEEUM generally represents the basis used to derive fees, which may be based upon invested equity, stockholders’ equity, or fair value pursuant to the terms of each underlying investment management agreement. The Company's calculation of FEEUM may differ from other asset managers, and as a result, may not be comparable to similar measures presented by other asset managers. |
| |
(3) | Effective June 30, 20172020, we no longer include the Company's share of AUM and 2016.FEEUM managed by third party asset managers in which we have an equity interest. AUM and FEEUM for December 31, 2019 have been revised to conform to the current definition. |
| |
(4) | Represents third party ownership share of CLNC's pro rata share of total assets, excluding consolidated securitization trusts. |
Other Equity and Debt—Excluding properties acquired through the Merger, property operating income and property operating expenses relatedTotal third party FEEUM increased $0.5 billion to our remaining other equity and debt portfolio increased $118.6 million and $81.4 million, respectively, for the nine months ended September$16.3 billion at June 30, 2017 compared to the same period in 2016. The increases were driven by $105.0 million of property operating income and $70.9 million of property operating expenses from the THL Hotel Portfolio which we acquired through2020.
There was a consensual foreclosure in July 2017.
Interest Income
The$1.0 billion increase in interest incomeour digital FEEUM, of which $0.7 billion arose from DCP's acquisition in 2017 can be attributed to interest earning assets acquired from NRF and NSAM, specifically $56.4 million and $20.4 millionFebruary 2020 of interest income from CRE securities and loans receivable, respectively. Excluding interest earning assets from the Merger, remaining interest income from the Colony portfolioZayo Group Holdings, Inc., a provider of loans receivable decreased $35.0 million between the nine months ended September 30, 2017 and 2016 due to loan repayments, pay-offs, sales as well as foreclosures, which more than offset income from new loans and additional draws on existing loans.
Fee Income
Fee income was earned from the following sources: |
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Institutional funds | | $ | 46,287 |
| | $ | 49,347 |
| | $ | (3,060 | ) |
Retail Companies | | 67,674 |
| | — |
| | 67,674 |
|
Public company—NRE | | 10,495 |
| | — |
| | 10,495 |
|
Broker dealer, Townsend funds and other clients | | 42,806 |
| | — |
| | 42,806 |
|
| | $ | 167,262 |
| | $ | 49,347 |
| | 117,915 |
|
For the period following the Merger through September 30, 2017, we earned $121.0 million of additional fee income, primarily management fees from the retail companies and NRE, as well as management fees, incentive income and advisory fees from Townsend private funds and clients.
Fee income from Colony private funds decreased $3.1 millionbandwidth infrastructure services in the year-to-date 2017 compared to the same period in 2016. While theUnited States and Europe. Zayo, formerly a publicly-traded company, was taken private funds that we sponsor contributed a $5.8 million increase in fee income, predominantly from our distressed credit and industrial funds, this was more than offset by fee concessions and continued realization of investments by various legacy private funds that we manage.
Other Income
The majority of other income for the nine months ended September 30, 2017 consisted of $19.6 million of cost reimbursements, of which $15.0 million was from managing the operationsas part of the retail companies, as well as approximately $6.4 million of expense recoveries from borrowers and other recoveries from loan resolutions. For the same period in 2016, other income was made up of $3.5 million of cost reimbursements, with the remainder attributed primarily to recoveries related to our loan investments.acquisition by DCP.
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Investment-level financing: | | | | | | |
Healthcare | | $ | 137,522 |
| | $ | — |
| | $ | 137,522 |
|
Industrial | | 29,163 |
| | 30,906 |
| | (1,743 | ) |
Hospitality | | 98,484 |
| | — |
| | 98,484 |
|
Other Equity and Debt | | 112,782 |
| | 62,103 |
| | 50,679 |
|
Corporate-level debt | | 40,641 |
| | 33,626 |
| | 7,015 |
|
| | $ | 418,592 |
| | $ | 126,635 |
| | 291,957 |
|
The significant netThis increase in interest expense between the nine months ended September 30, 2017 and 2016 was a result of the following:
$261.9 million of interest expense on $6.5 billion of investment level debt assumed in the Merger, financing NRF assets in the healthcare, hospitality as well as other equity and debt segments;
$1.7 million decrease in interest expense in our industrial segment due to a lower average debt balance in 2017 as we paid off the remaining balance on our variable rate acquisition debt in 2017;
$24.8 million net increase in interest expense on legacy Colony debt in the other equity and debt segment from additional investment level financing as well as debt assumed from acquisition of CPI and THL Hotel Portfolio. These increases were partially offset by decreases in interest expense due debt paydowns, primarily from sales of our loans and real estate investments, particularly in our non-core hotel portfolio; and
$7.0 million net increase in interest expense on corporate level debt driven by (i) $10.5 million of interest expense on NRF exchangeable notes and junior subordinated debt assumed in the Merger, partially offset by (iii) $3.6 million decrease in interest expense on our corporate credit facility with lower utilization of our credit line as we applied some of the net proceeds from sale of our manufactured housing portfolio for working capital purposes.
Investment, Servicing and Commission Expense
This includes costs incurred by the Company for servicing and managing loan portfolios and foreclosed properties, fees paid to third parties for management of our real estate portfolios, and unconsummated deal costs. The $26.5 million
increase in costs between the nine months ended September 30, 2017 compared to the same period in 2016 can be attributed predominantly to expenses incurred in relation to assets and service arrangements acquired from NSAM and NRF.
Transaction Costs
For the nine months ended September 30, 2017, transaction costs of $85.3 million were incurred in connection with the Merger. These costs consisted primarily of professional fees for legal, financial advisory, accounting and consulting services, as well as fees incurred on a bridge loan facility commitment that was terminated on the Closing Date. Approximately $66.8 million of transaction costs represent fees paid to investment bankers that were contingent upon consummation of the Merger. Excluding Merger-related costs, other transaction costs were related predominantly to new acquisitions and the potential Combination transaction to create a new publicly traded commercial real estate credit REIT.
For the nine months ended September 30, 2016, we incurred $11.3 million of transaction costs related to the Merger, with remaining costs pertaining primarily to new investments.
Depreciation and Amortization
The significant increase in the nine months ended September 30, 2017 was driven by the real estate and related intangible assets as well as the investment management intangible assets acquired from NRF and NSAM, respectively, which contributed $293.7 million of depreciation and amortization in aggregate. Colony real estate and intangible assets recorded an $30.2 million increase in depreciation and amortization resulting largely from the acquisitions of CPI and THL Hotel Portfolio as well as continued growth in our industrial portfolio, partially offset by real estate sales or classification as held for sale, mainly in our non-core hotel and European portfolios.
Provision for Loan Losses
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Non-PCI loans | | $ | 6,890 |
| | $ | 4,101 |
| | $ | 2,789 |
|
PCI loans | | 6,017 |
| | 13,311 |
| | (7,294 | ) |
Total provision for loan losses | | $ | 12,907 |
| | $ | 17,412 |
| | (4,505 | ) |
Provision for loan losses in both periods reflected primarily a decrease in expected cash flows on PCI loans. In 2017, this was net of a $2.1 million reversal of provision following higher recoveries upon the bulk sale of a portfolio of PCI loans.
Significant drivers of provision for loan losses on non-PCI loans in 2017 included $1.8 million on a development loan based on revised cash flow projections, $1.6 million on a loan in the healthcare segment due to a decline in collateral value and $1.5 million on certain securitized loans which were subsequently resolved. In 2016, provision for loan losses on non-PCI loans reflected primarily a decrease in underlying collateral value and losses on a TDR loan.
For the nine months ended September 30, 2017 and 2016, provision for loan losses of $6.3 million and $10.6 million, respectively, were attributed to noncontrolling interests in investment entities.
Impairment Loss
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Healthcare | | $ | 8,250 |
| | $ | — |
| | $ | 8,250 |
|
Industrial | | 44 |
| | 137 |
| | (93 | ) |
Other Equity and Debt | | 27,998 |
| | 5,004 |
| | 22,994 |
|
Investment Management | | 9,061 |
| | 320 |
| | 8,741 |
|
| | $ | 45,353 |
| | $ | 5,461 |
| | 39,892 |
|
Healthcare—Impairment of $7.6 million was recorded on three net lease properties in Illinois which were classified as held for sale in September 2017. The remaining $0.6 million of impairment, net of expected insurance recoveries, was taken on four senior housing operating facilities in Texas as a result of Hurricane Harvey.
Industrial—Impairment loss reflects selling costs on properties sold.
Other Equity and Debt—The higher impairment in 2017 can be attributed to a $13.9 million increase in impairment on our European real estate due to declining performance or decreases in value of properties to be sold, $5.1 million from the sale of our remaining six non-core limited service hotels, and $3.2 million on three net lease warehouses in Ohio based on their contracted selling price. Additionally, twenty-five hotels in our THL Hotel Portfolio located in Texas, Florida and Georgia suffered varying degrees of physical damage from Hurricanes Harvey and Irma in the third quarter of 2017, resulting in estimated impairment loss of approximately $0.8 million, net of insurance recoveries.
Investment Management—The $9.1 million impairment in 2017 represents a write-down of goodwill allocated to the Townsend operating segment based on the net asset value of the Townsend business compared to its contracted sale price. The sale is expected to close in the fourth quarter of 2017 or the first quarter of 2018. In 2016, our investment management contract intangible was written down by $0.3 million due to a change in fee basis on a liquidating fund.
Impairment loss of $20.2 million and $4.0 million in the nine months ended September 30, 2017 and 2016, respectively, were attributed to noncontrolling interests in investment entities.
Compensation Expense
The following table provides the components of compensation expense. In addition to a significantly larger workforce following the Merger, the nine months ended September 30, 2017 also included Merger-related compensation expense:
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Cash compensation and benefits | | $ | 126,623 |
| | $ | 70,363 |
| | $ | 56,260 |
|
Equity-based compensation | | 20,783 |
| | 10,326 |
| | 10,457 |
|
| | 147,406 |
| | 80,689 |
| | 66,717 |
|
Merger-related compensation expense | | | | | | |
Equity-based compensation for replacement awards to NSAM executives subject to one year vesting
| | 86,390 |
| | — |
| | 86,390 |
|
Severance and other employee transition | | 23,803 |
| | — |
| | 23,803 |
|
| | 110,193 |
| | — |
| | 110,193 |
|
| | $ | 257,599 |
| | $ | 80,689 |
| | 176,910 |
|
Administrative Expense
In addition to operating a much larger organization following the Merger, in the nine months ended September 30, 2017, we also incurred $11.1 million of administrative costs in connection with integrating the operations of the combined entities, including but not limited to system integration, office lease rationalization, legal costs as well as other professional fees paid to third party advisors and consultants. Such costs are not expected to recur and do not represent the on-going costs of a fully integrated combined organization.
Gain on Sale of Real Estate
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Industrial | | $ | 8,695 |
| | $ | 2,749 |
| | $ | 5,946 |
|
Other Equity and Debt | | 88,006 |
| | 65,365 |
| | 22,641 |
|
| | $ | 96,701 |
| | $ | 68,114 |
| | 28,587 |
|
Industrial—The higher gain in the nine months ended September 30, 2017 was driven by the sale of eight industrial properties in the Chicago market in May 2017.
Other Equity and Debt—We recorded significant gains from a single sale transaction in each of the nine months ended September 30, 2017 and 2016, comprised of a $68.1 million gain from the sale of two net lease properties in Switzerland in July 2017 and a $49.3 million gain from the sale of a foreclosed property in Germany in February 2016, respectively.
Gain on sale of $14.3 million and $44.7 million in the nine months ended September 30, 2017 and 2016, respectively, were attributed to noncontrolling interests in investment entities.
Other Gain (Loss), Net
During the nine months ended September 30, 2017, a net loss of $7.3 million was recorded, resulting primarily from the net impact of the following:
$14.3 million unrealized loss on an undesignated out-of-money interest rate swap assumed through the Merger; and
$12.5 million loss due to OTTI and write off of basis, primarily on CMBS securities held by consolidated N-Star CDOs, as the underlying securitization tranches continue to wind up.
These losses were offset by:
$14.3 million gain due to a decrease in fair value of the contingent consideration liability from the Internalization transaction in 2015;
$6.2 million gain on remeasurement of a foreign currency loan receivable in our healthcare segment; and
approximately $2.0 million gain resulting from the syndication of 90% of the equity in a California office building in September 2017. The new equity partners were granted certain participation rights in the business, resulting in a deconsolidation of the investment. The deconsolidation resulted in a gain, which represents the excess of proceeds from the syndication over the carrying value of our equity that was sold.
In the same period in 2016, the gain of $18.3 million was due to a $13.6 million decrease in fair value of the contingent consideration liability from the Internalization, with other unrealized gains from derivative fair value changes.
Earnings from Investments in Unconsolidated Ventures
|
| | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
(In thousands) | | 2017 | | 2016 | | Change |
Industrial | | $ | 62 |
| | $ | — |
| | $ | 62 |
|
Other Equity and Debt | | 241,462 |
| | 69,189 |
| | 172,273 |
|
Investment Management | | 12,309 |
| | 3,037 |
| | 9,272 |
|
| | $ | 253,833 |
| | $ | 72,226 |
| | 181,607 |
|
The significant increase in earnings from investments in unconsolidated ventures in the nine months ended September 30, 2017 was driven by a $191.2 million gain from the sale of all of our 14% interest in SFR and $22.5 million of net earnings from investments acquired through the Merger. This was partially offset by a $45.0 million gain$0.4 billion decrease in FEEUM from CLNC as a result of a decrease in CLNC's asset values.
With the redemptionraising of third party capital alongside our preferred equity in a joint venturebalance sheet investment in the nine months ended September 30, 2016.
Income Tax Expense
While we incurred additional income tax expense on the healthcare, industrial and hospitality segments, there was a larger income tax benefit in the investment management segment post Merger, which resulted in an overall higher net income tax benefitVantage's portfolio of $7.0 million in the nine months ended September 30, 2017 compared to a $0.9 million income tax benefit in the same period in 2016.
Income from Discontinued Operations
Income from discontinued operations represents net income generated from businesses that we acquired through business combinations which were classified as held for sale at the time of acquisition. In the nine months ended September 30, 2017, net income from discontinued operations included $12.6 million from the operations of our manufactured housing portfolio during the two month period prior to its disposition in March 2017 and $1.5 million from the operations of hotels held for sale in the THL Hotel Portfolio acquiredstabilized hyperscale data centers in July 2017.2020, our third party digital AUM and FEEUM have increased to $21.6 billion and $8.3 billion, respectively.
Preferred Stock Redemption
A $4.5 million charge against net income available to common stockholders was recorded in the nine months ended September 30, 2017, representing the excess of the redemption price of $25.00 per share over the carrying value of our Series A and F preferred stock which we redeemed in June 2017 and Series B and C preferred stock for which redemption notices were delivered in September 2017 and settled in October 2017.
Segments
The following discussion summarizes key information on eachour reportable segments.
Digital Real Estate and Investment Management ("Digital")
Digital is a new segment for the Company effective the fourth quarter of 2019, and is where we expect substantial growth to take place, both in terms of the balance sheet and investment management through (a) further investment of capital into digital real estate and infrastructure assets and GP co-investments and (b) net inflows of third-party capital into digital-related investment strategies sponsored by the Company.
Our digital segment is composed of the following as of June 30, 2020:
| |
• | Digital real estate—A 20% controlling interest in DataBank, acquired in December 2019. DataBank is a leading provider of enterprise-class data centers, connectivity and managed services. |
DataBank owns eight data centers, having completed the construction of a new data center in the second quarter of 2020, and have leasehold interests in 12 data centers, operating in nine U.S. markets. This is our inaugural direct balance sheet investment in digital real estate and represents our first step in investing in the edge/colocation data center sector, which will support future growth opportunities through potential add-on acquisitions and greenfield edge data center developments. We earn rental and service income from providing use of space and/or capacity in our digital assets through long-term contracts and related service orders.
| |
• | Digital investment management—DBH investment management business, acquired in July 2019, which currently manages DCP and six digital real estate portfolio companies, including DataBank. |
At June 30, 2020, our digital FEEUM totaled $7.8 billion. Investment management products may include investment vehicles for co-investment partnerships and other managed assets, and digital credit and liquid securities products in the future. We earn management fees, generally based on the amount of assets or capital managed in investment vehicles, and have the potential to earn carried interest based on the performance of such investment vehicles subject to the achievement of minimum return hurdles.
| |
• | Digital equity investments—DCP, our first sponsored digital real estate and infrastructure fund, which had its final closing in May 2019; and interests in existing Colony investment vehicles that were repurposed to execute an investment strategy focused around the digital sector. |
DCP has total commitments of $4.06 billion, including our $250 million commitment, of which we have funded $115 million through June 30, 2020. Refer to discussion of the Wafra transaction below in connection with our capital commitments to DCP. As of August 4, 2020, DCP has called 77% of commitments, and is invested in ten geographically diversified portfolio companies across North America, South America, and Europe, composed of the digital infrastructure ecosystem of cell towers, data centers, small cells and fiber networks.
Acceleration of Our Digital Transformation
Strategic Partnership in Our Digital Investment Management Business
On July 17, 2020, we formed a strategic partnership with Wafra in which Wafra made a minority investment representing an approximate 31.5% interest in our Digital IM Business. Wafra paid a consideration of $254 million for its investment in the Digital IM Business and for warrants issued by the Company to Wafra (assuming the consideration excludes the warrants, this implies an approximately $805 million valuation of the Digital IM Business). Wafra has agreed to assume certain of the Company's existing commitments made to DCP and to make commitments to the successor fund to DCP and to the Company’s initial digital credit fund, in an aggregate amount of up to $150 million. Wafra has also agreed to make commitments to the Company's future digital funds and investment vehicles on a pro rata basis with the Company based on Wafra's percentage interest in the Digital IM Business, subject to certain caps. Wafra's investment provides us with permanent capital to pursue strategic digital infrastructure investments and grow the Digital IM Business. Refer to Note 24 to the consolidated financial statements for further discussion of the Wafra transaction.
Investment in Hyperscale Data Centers
On July 22, 2020, alongside an approximate $1 billion of fee bearing third party capital that we raised, we invested $1.21 billion for an approximate 80% equity stake in Vantage's portfolio of 12 stabilized hyperscale data centers in North America. Our balance sheet investment is $185 million, which represents a 12.3% interest. Following the closing of this transaction, our digital FEEUM increased to $8.3 billion. This investment is our second significant balance sheet investment in a digital operating business and achieves our transformation goals on two fronts, that is the rotation of our five segments.balance sheet to digital assets and growing our digital investment management business.
Net operating income ("NOI")
Balance Sheet Information
The following table presents key balance sheet data of our digital segment: |
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Real estate held for investment | | $ | 845,146 |
| | $ | 846,393 |
|
Deferred leasing costs and identifiable intangibles, net (excluding goodwill) | | | | |
Lease intangibles, customer relationships and trade name | | 179,338 |
| | 195,291 |
|
Investment management intangibles | | 149,753 |
| | 162,878 |
|
Equity investments | | 241,535 |
| | 47,891 |
|
Secured debt | | 515,007 |
| | 539,155 |
|
The increase in equity investments reflect additional funding in DCP, and earnings before interest, income tax, depreciation and amortization ("EBITDA") forinterests in existing Colony investment vehicles that were repurposed to execute an investment strategy focused on the digital sector effective March 31, 2020.
Operating Performance
Results of operations of our core real estate segments were determineddigital segment are as follows. NOI and EBITDA are discussed further and reconciled to GAAP in "—Non-GAAP Measures."
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Total Revenues (1) | | Net Income (Loss) | | Net Income (Loss) Attributable to Colony Capital, Inc. |
Three Months Ended June 30, | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
Digital real estate | | $ | 42,021 |
| | $ | — |
| | $ | (21,142 | ) | | $ | — |
| | $ | (3,795 | ) | | $ | — |
|
Digital investment management | | 20,729 |
| | — |
| | 2,304 |
| | 1,833 |
| | 1,346 |
| | 1,723 |
|
Digital equity investments | | 663 |
| | — |
| | 12,292 |
| | 124 |
| | 10,968 |
| | 116 |
|
Total | | $ | 63,413 |
| | $ | — |
| | $ | (6,546 | ) | | $ | 1,957 |
| | $ | 8,519 |
| | $ | 1,839 |
|
Six Months Ended June 30, | | | | | | | | | | | | |
Digital real estate | | $ | 87,188 |
| | $ | — |
| | $ | (39,437 | ) | | $ | — |
| | $ | (7,587 | ) | | $ | — |
|
Digital investment management | | 39,908 |
| | — |
| | 4,414 |
| | 4,814 |
| | 3,867 |
| | 4,523 |
|
Digital equity investments | | 823 |
| | — |
| | 9,257 |
| | 159 |
| | 8,481 |
| | 149 |
|
Total | | $ | 127,919 |
| | $ | — |
| | $ | (25,766 | ) | | $ | 4,973 |
| | $ | 4,761 |
| | $ | 4,672 |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
(In thousands) | | Healthcare | | Industrial | | Hospitality | | Industrial |
Total revenues | | $ | 157,732 |
| | $ | 63,410 |
| | $ | 221,987 |
| | $ | 49,494 |
|
Straight-line rent revenue and amortization of above- and below-market lease intangibles
| | (6,513 | ) | | (2,011 | ) | | (3 | ) | | (608 | ) |
Interest income | | — |
| | (165 | ) | | — |
| | — |
|
Property operating expenses (1) | | (73,217 | ) | | (16,620 | ) | | (143,042 | ) | | (13,921 | ) |
Compensation expense (1) | | — |
| | (336 | ) | | — |
| | (238 | ) |
NOI or EBITDA | | $ | 78,002 |
| | $ | 44,278 |
| | $ | 78,942 |
| | $ | 34,727 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
(In thousands) | | Healthcare | | Industrial | | Hospitality | | Industrial |
Total revenues | | $ | 455,902 |
| | $ | 176,577 |
| | $ | 619,222 |
| | $ | 143,956 |
|
Straight-line rent revenue and amortization of above- and below-market lease intangibles
| | (21,897 | ) | | (4,824 | ) | | (30 | ) | | (2,410 | ) |
Interest income | | — |
| | (165 | ) | | — |
| | — |
|
Property operating expenses (1) | | (206,363 | ) | | (49,312 | ) | | (401,351 | ) | | (41,636 | ) |
Transaction, investment and servicing costs | | — |
| | (101 | ) | | — |
| | (14 | ) |
Compensation expense (1) | | — |
| | (1,229 | ) | | — |
| | (1,264 | ) |
NOI or EBITDA | | $ | 227,642 |
| | $ | 120,946 |
| | $ | 217,841 |
| | $ | 98,632 |
|
________________
| |
(1) | For healthcareDigital real estate revenues in the second quarter of 2020 included the effects of purchase price allocation adjustments to the amortization of above/below-market lease intangibles (see Note 3 to the consolidated financial statements) which reduced revenues by $3.2 million. |
Prior to July 2019, our digital segment generated only equity method earnings from our 50% interest in Digital Colony Manager which manages DCP, and from our interest in DCP. Digital Colony Manager was consolidated upon acquisition of DBH.
Revenues from our digital segment in 2020 represent primarily property operating income from DataBank, acquired in December 2019, and fee income from DBH, acquired in July 2019.
| |
• | Digital real estate—The net loss from our DataBank business in 2020 includes the effect of interest expense from debt financing, and hospitality, fees paiddepreciation and amortization expense. Operating results of DataBank excluding these effects are presented below as earnings before interest, tax and depreciation for real estate ("EBITDAre"). |
| |
• | Digital investment management—While fee income from our digital investment management business is trending positively in 2020, operating margins have a seen a decline as we ramp up resources to third parties for property management are includedsupport future investment product offerings. |
| |
• | Digital equity investments—Net income from digital equity investments in property operating expenses. For industrial, compensation costs2020 includes the results of employees engagedexisting Colony investment vehicles that were repurposed to execute an investment strategy focused on the digital sector, and more notable contributions from DCP as the fund ramps up its investing activities, in property management and operations are includedparticular contribution from DCP's Zayo co-investment that closed in compensation expense.February 2020. |
Earnings Before Interest, Tax and Depreciation for Real Estate
EBITDAre generated by our digital real estate business, which currently consists of DataBank, is as follows. A reconciliation of the most directly comparable GAAP measure to EBITDAre is presented in "—Non-GAAP Supplemental Financial Measures."
|
| | | | | | | | |
| | Digital Real Estate |
(In thousands) | | Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
Total revenues | | $ | 42,021 |
| | $ | 87,188 |
|
Property operating expenses | | (18,055 | ) | | (34,961 | ) |
Transaction, investment and servicing costs | | (576 | ) | | (773 | ) |
Compensation and administrative expense | | (10,464 | ) | | (23,120 | ) |
EBITDAre—Digital real estate | | $ | 12,926 |
| | $ | 28,334 |
|
Healthcare
Our healthcare segment is composed of a diverse portfolio of medical office buildings, senior housing facilities, skilled nursing and other healthcare properties. Over half of our healthcare properties arefacilities, medical office buildings and properties structuredhospitals. We earn rental income from our senior housing facilities, skilled nursing facilities and hospitals that are under net leases to healthcare single tenants/operators forand from medical office buildings which are both single tenant and multi-tenant. In addition, we earn rental income. Substantially all of our net leases include annual escalating rent provisions. We also earn resident fee income from senior housing operating facilities that operate through management agreements with independent third-partyare managed by operators predominantly through structures permitted byunder a RIDEA structure, which effectively allows us through a TRS, to have directgain financial exposure to resident fee incomethe underlying operations of the facility in a tax efficient manner versus receiving contractual rent under a net lease arrangement.
We own between 69.6% and incur customary related operating expenses.
In connection with our on-going sales initiative, subsequent to81.3% of the Merger, we closed on the sale of an 19% noncontrolling interest invarious portfolios within our healthcare real estate portfolio through a newly formed joint venture for $350 million (including $20 million of certain pre-funded capital items). Our healthcare joint venture in turn owns approximately 88% of our healthcare portfolio, with the remaining 12% owned by existing minority interest holders. We act as the manager of our healthcare joint venture and are responsible for the day-to-day business and affairs of our healthcare portfolio.segment.
At September 30, 2017, our interest in our healthcare segment was approximately 71%.Portfolio Overview
Our healthcare portfolio is located across 3332 states domestically and 10%in the United Kingdom (representing 17% of our portfolio (based on property count) is inbased upon NOI for the United Kingdom.second quarter of 2020).
The following table presents key balance sheet data of our healthcare segment: |
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Real estate | | | | |
Held for investment | | $ | 3,638,987 |
| | $ | 4,433,825 |
|
Held for sale | | 46,259 |
| | 57,664 |
|
Debt | | 2,884,765 |
| | 2,910,032 |
|
The following table presents selected operating metrics of our healthcare segment:
| | Type | | Number of Buildings at September 30, 2017 | | Capacity at September 30, 2017 | | Average Occupancy(1) | | Average Remaining Lease Term (Years) | | NOI for Three Months Ended September 30, 2017 (In thousands) | | NOI for Nine Months Ended September 30, 2017 (In thousands) | |
| | | Number of Properties | | Capacity | | Average Occupancy(1) | | Average Remaining Lease Term (Years) |
June 30, 2020 | | | | | | | |
Senior housing—operating(3) | | | 89 |
| | 6,898 units | | 79.3 | % | | N/A |
|
Medical office buildings | | 109 |
| | 3.9 million |
| square feet | | 83.5 | % | | 4.9 |
| | $ | 13,843 |
| | $ | 40,225 |
| | 106 |
| | 3.8 million sq. ft. | | 83.4 | % | | 4.5 |
|
Senior housing—operating(3) | | 109 |
| | 6,436 |
| units | | 87.8 | % | | N/A |
| | 18,704 |
| | 54,436 |
| |
Net lease—senior housing (2) | | | 65 |
| | 3,529 units | | 83.5 | % | | 11.9 |
|
Net lease—skilled nursing facilities | | | 88 |
| | 10,458 beds | | 82.5 | % | | 5.3 |
|
Net lease—hospitals | | | 9 |
| | 456 beds | | 66.9 | % | | 9.9 |
|
Total | | | 357 |
| | | | |
December 31, 2019 | | | | | | | |
Senior housing—operating | | | 83 |
| | 6,388 units | | 86.5 | % | | N/A |
|
Medical office buildings | | | 106 |
| | 3.8 million sq. ft. | | 82.2 | % | | 4.8 |
|
Net lease—senior housing
| | 82 |
| | 4,065 |
| units | | 82.3 | % | | 11.1 |
| | 14,638 |
| | 41,506 |
| | 71 |
| | 4,039 units | | 80.7 | % | | 11.5 |
|
Net lease—skilled nursing facilities | | 103 |
| | 12,420 |
| beds | | 82.1 | % | | 7.2 |
| | 25,513 |
| | 75,801 |
| | 89 |
| | 10,601 beds | | 82.7 | % | | 5.8 |
|
Net lease—hospitals | | 14 |
| | 872 |
| beds | | 61.5 | % | | 11.7 |
| | 5,304 |
| | 15,674 |
| | 9 |
| | 456 beds | | 58.0 | % | | 10.3 |
|
Total | | 417 |
| | | | 82.9 | % | | 9.0 |
| | $ | 78,002 |
| | $ | 227,642 |
| | 358 |
| | | | |
__________
| |
(1) | Occupancy represents the property operator's patient occupancy for all types except medical office buildings. Average occupancy is based onupon the number of units, beds or square footage by type of facility. Occupancy percentage ispercentages are presented as follows: (i) as of the last day of the quarter presented for medical office buildings, average of the quarter presented for senior housing—operating, and average of the prior quarter for net lease properties. |
Revenue mix
medical office buildings; (ii) average for the trailing twelve months ended June 30, 2017quarter for senior housing—operating; and (iii) average of the prior quarter for net lease properties as our operators report on a quarter lag and excludes two operating partners who do not track or report payor source data. |
| | | |
Payor Sources | | Revenue Mix % |
Private Pay | | 56 | % |
Medicaid | | 33 | % |
Medicare | | 11 | % |
Total | | 100 | % |
Subsequent to the Merger, we sold five medical office buildings totaling 0.2 million square feet and four skilled nursing facilities totaling 374 beds for aggregate net proceeds of $2.8 million. At September 30, 2017, we had one portfolio, one medical office building and four skilled nursing facilities held for sale, with an aggregate real estate carrying value of $197.5 million and corresponding debt carrying value of $143.4 million. These activities reflect our continued monetization initiatives on non core assets.
As a result of Hurricanes Harvey and Irma in the third quarter of 2017, a small number of medical office buildings and net lease properties in Texas and Florida suffered some physical damage. This includes the closure of one hospital in Texas, which is expected to re-open in December 2017. Our senior housing operating facilities, however, experienced only minor damage. As of September 30, 2017, we have recognized $0.6 million of impairment loss for damage on our properties, after taking into consideration approximately $7.0 million of anticipated insurance recoveries for property damage.
Industrial
Our industrial segment is composed primarily of light industrial assets. Our strategy is to pursue accretive asset acquisitions, capturing the benefits of scale as one of the few institutional investors primarily focused on the fragmented light industrial sector.
Light industrial buildings are generally either multi-tenant buildings of up to 500,000 square feet or single tenant buildings of up to 250,000 square feet with an office build-out of less than 20%. They are typically located in supply-constrained locations and are designed to meet the local and regional distribution needs of businesses of every size, from large international to local and regional firms, by providing smaller industrial distribution spaces located closer to a company's customer base.
Our investment in the industrial portfolio is made alongside third party limited partners through a joint venture, composed of two sponsored and managed partnerships, including an open-end industrial fund. We also have a wholly-owned industrial operating platform which provides vertical integration from acquisition and development to asset management and property management of the industrial assets.
At September 30, 2017, we owned 41% of our industrial portfolio based on net asset value through our capital contributions of $750.0 million. Our ownership interest decreased from 49% at December 31, 2016 as we continue to expand our industrial portfolio through third party capital.
In the nine months ended September 30, 2017, we called an additional $457.3 million of third party capital and contributed $131.5 million of additional capital from our balance sheet. In May 2017, we fully paid off our variable rate acquisition debt, which had an outstanding principal balance of $413.0 million at December 31, 2016, primarily through proceeds from new capital contributions and refinancing with new fixed rate debt.
Our portfolio is well-diversified with over 44 million square feet and over 1,000 tenants across 17 major U.S. markets, with significant concentrations (by total square feet) in Atlanta (18%) and Dallas (17%).
The following table presents selected operating metrics of our industrial portfolio: |
| | | | | | | | | | | | | | | | |
| | Number of Buildings | | Rentable Square Feet (in thousands) | | Leased % | | Average Remaining Lease Term (Years) | | Annualized Gross Rent (1) (in thousands) |
September 30, 2017 | | 388 |
| | 44,146 |
| | 95 | % | | 3.6 |
| | $ | 194,885 |
|
December 31, 2016 | | 346 |
| | 37,613 |
| | 96 | % | | 3.7 |
| | 161,102 |
|
_________lag.
| |
(1)(2)
| Represents annualized fixed base rental amount using rental revenue computed on a straight-line basisSix senior housing properties were transitioned from net leases into operating properties in accordance with GAAP and excludes the impactsecond quarter of amortization of above- and below-market lease values.2020. |
At September 30, 2017, 75% of our tenants (based on leased square feet) were international and national companies, with the top ten tenants making up only 9% of our portfolio based on annualized gross rent.
2017 Activity
Total portfolio leased percentage declined marginally from 96% at December 31, 2016 to 95% at September 30, 2017. In the nine months ended September 30, 2017, we added 6.5 million of net rentable square feet, taking into account both acquisitions and dispositions during the period.
Leasing activity continued at a steady pace with 80 new leases totaling 2.1 million square feet and 74 lease renewals totaling 3.3 million square feet. At September 30, 2017, no more than 18% of existing leases were scheduled to expire in any single year over the next ten years.
Acquisitions and dispositions during the nine months ended September 30, 2017 are summarized below. We continually recycle capital into newer assets to improve the overall quality of our portfolio.
|
| | | | | | | | | | | | | | | | | | | | | |
| | Number of Buildings | | Rentable Square Feet (in thousands) | | Weighted Average Occupancy % At Acquisition | | Purchase Price (1) (in thousands) | | Gross Sales Proceeds (in thousands) | | Realized Gain (in thousands) |
Acquisitions | | 52 |
| | 7,971 |
| | 90 | % | | $ | 603,591 |
| | NA |
| | NA |
|
Dispositions | | 10 |
| | 1,438 |
| | NA |
| | NA |
| | $ | 41,021 |
| | $ | 8,695 |
|
_________
| |
(1)(3)
| Purchase price includes transaction costs for asset acquisitions.In August 2020, 36 properties, along with the underlying debt, were indirectly conveyed to an affiliate of a lender, as discussed further below. |
Held for Sale and Dispositions
We sold a portfolio of net lease skilled nursing facilities totaling 143 beds and a land parcel in the first quarter of 2020 in our effort to monetize non-core assets in our healthcare segment. We received gross proceeds of $7.5 million, from which we paid off $6.5 million of associated debt.
At SeptemberJune 30, 2017, we had a purchase commitment of $8.5 million on one property in Las Vegas totaling 103,000 square feet that was 100% leased. The acquisition closed in November 2017. Also, at September 30, 2017, 12 buildings in Atlanta and one building in Dallas2020, real estate properties with aggregate carrying value of $62.8$46.3 million were held for sale.sale, comprising one portfolio of net lease skilled nursing facilities totaling 766 beds that was encumbered with $45.1 million of debt.
NoneFinancing
At June 30, 2020, our healthcare portfolio was financed by $2.92 billion of outstanding debt principal, of which $0.4 billion was fixed rate debt and $2.52 billion was variable rate debt, bearing a combined weighted average interest rate of 3.88% per annum.
Of the total healthcare debt at June 30, 2020, $203.0 million was in default. Subsequently, in August 2020, the Company indirectly conveyed the equity of certain of its healthcare borrower subsidiaries, comprising 36 assets in its senior housing operating portfolio and $157.9 million of the aforementioned defaulted healthcare debt (based on outstanding balance at June 30, 2020), to an affiliate of the lender, which released the Company from all rights and obligations with respect to those healthcare assets and corresponding debt. As of the date of this filing, $45.1 million of healthcare debt remains in default.
Operating Performance
Results of operations of our light industrialhealthcare segment are as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenues | | $ | 142,680 |
| | $ | 145,896 |
| | $ | (3,216 | ) | | $ | 281,862 |
| | $ | 291,670 |
| | $ | (9,808 | ) |
Net loss | | (680,140 | ) | | (81,520 | ) | | (598,620 | ) | | (744,285 | ) | | (88,726 | ) | | (655,559 | ) |
Net loss attributable to Colony Capital, Inc. | | (434,410 | ) | | (58,616 | ) | | (375,794 | ) | | (482,422 | ) | | (66,078 | ) | | (416,344 | ) |
Operating results at the property level are discussed under NOI below. Results summarized above include the effects of interest expense from mortgage financing, impairment charges and depreciation and amortization expense on our healthcare portfolio, which are discussed in "—Results of Operations."
While there was a loss of earnings from sales of net leased properties suffered structural damagein 2019 and operating profits declined in 2020, as a result of Hurricanes Harveydiscussed below, the net losses in all periods were driven by significant impairment charges, in particular $661.3 million and Irma$709.8 million in the third quarter of 2017. Certain properties in Orlando experienced minor damage. All of these properties remain fully operational.three and six months ended June 30, 2020, respectively, due to a shortened holding period assumption.
Net Operating Income
NOI generated byfor our industrial portfolio washealthcare segment is derived as follows:follows and reconciled to the most directly comparable GAAP measure in "—Non-GAAP Supplemental Financial Measures."
| | | | Three Months Ended September 30, | | Change | | Nine Months Ended September 30, | | Change | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2017 | | 2016 | | $ | | % | | 2017 | | 2016 | | $ | | % | | 2020 | | 2019 | | 2020 | | 2019 |
NOI—Industrial | | $ | 44,278 |
| | $ | 34,727 |
| | $ | 9,551 |
| | 27.5 | % | | $ | 120,946 |
| | 98,632 |
| | $ | 22,314 |
| | 22.6 | % | |
Total revenues | | | $ | 142,680 |
| | $ | 145,896 |
| | $ | 281,862 |
| | $ | 291,670 |
|
Straight-line rent and amortization of above- and below-market lease intangibles and ground lease asset | | | (8,071 | ) | | (4,817 | ) | | (12,037 | ) | | (10,044 | ) |
Interest income | | | (71 | ) | | — |
| | (98 | ) | | — |
|
Other income | | | — |
| | (36 | ) | | — |
| | (36 | ) |
Property operating expenses | | | (74,752 | ) | | (63,924 | ) | | (141,319 | ) | | (128,226 | ) |
NOI—Healthcare | | | $ | 59,786 |
| | $ | 77,119 |
| | $ | 128,408 |
| | $ | 153,364 |
|
NOI by healthcare portfolio is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
($ in thousands) | | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Senior housing—operating | | $ | 8,987 |
| | $ | 16,468 |
| | $ | (7,481 | ) | | (45.4 | )% | | $ | 25,840 |
| | $ | 33,803 |
| | $ | (7,963 | ) | | (23.6 | )% |
Medical office buildings | | 13,368 |
| | 13,481 |
| | (113 | ) | | (0.8 | )% | | 26,359 |
| | 25,905 |
| | 454 |
| | 1.8 | % |
Net lease—senior housing | | 12,845 |
| | 15,290 |
| | (2,445 | ) | | (16.0 | )% | | 27,149 |
| | 30,669 |
| | (3,520 | ) | | (11.5 | )% |
Net lease—skilled nursing facilities | | 22,572 |
| | 26,895 |
| | (4,323 | ) | | (16.1 | )% | | 45,095 |
| | 52,639 |
| | (7,544 | ) | | (14.3 | )% |
Net lease—hospitals | | 2,014 |
| | 4,985 |
| | (2,971 | ) | | (59.6 | )% | | 3,965 |
| | 10,348 |
| | (6,383 | ) | | (61.7 | )% |
NOI—Healthcare | | $ | 59,786 |
| | $ | 77,119 |
| | (17,333 | ) | | (22.5 | )% | | $ | 128,408 |
| | $ | 153,364 |
| | (24,956 | ) | | (16.3 | )% |
NOI decreased $17.3 million and $25.0 million in the three and six months ended June 30, 2020, respectively, of which $5.7 million and $11.5 million, respectively, are attributed to the sales of 25 net lease properties in 2019 and one in the first quarter of 2020.
The remaining decrease in NOI resulted primarily from:
lower rental income from lease restructurings on certain net leased senior housing and skilled nursing facilities; and
in our senior housing operating portfolio, resident fee income decreased as occupancy declined while operating costs increased, both as a result of COVID-19, as discussed further below.
Effects of COVID-19 on our Healthcare Segment
Our first priority has been, and continues to be, the health and safety of the residents and staff at our communities. We remain focused on supporting our operating partners during this challenging time. Concurrently, we are actively managing capital needs and liquidity to mitigate the financial impact of COVID-19 on our healthcare business.
At this time, we understand from our operators and managers that our communities as a whole continue to experience a moderate level of confirmed COVID-19 cases. The incidence of confirmed cases in our portfolio may continue and could accelerate depending on the duration, scope and depth of COVID-19.
The effect of COVID-19 varies by asset class in the Company's healthcare portfolio. Specifically, efforts to address COVID-19 have in some cases forced temporary closures of medical offices, restricted the admission of new residents to senior housing facilities, especially in communities that have experienced infections, and caused incurrence of unanticipated costs and other business disruptions. The Company will be directly impacted by these factors in its RIDEA assets, and indirectly impacted in its net leased assets as these factors influence tenants’ ability to pay rent.
In our medical office portfolio, beginning in April 2020, a number of tenants failed to make rent payments or make timely payments, and some sought more flexible payment terms or rent concessions as a result of the COVID-19 crisis. Local governments in certain jurisdictions have implemented or are considering implementing programs that permit or require forbearance of rent payments by tenants affected by COVID-19. The Company is currently engaged with affected tenants on a case-by-case basis to evaluate and respond to the current environment. The Company has agreed to provide the affected tenants with a deferral of rent, generally for two to three months, with deferred rent to be repaid in monthly installments over periods of four to 18 months. This resulted in an increase in NOIlease income receivable totaling $0.3 million as of June 30, 2020. All lease income receivable, including straight-line rents, are subject to the Company's policy for evaluation of collectability based upon creditworthiness of the lessee.
In our senior housing operating portfolio, statutory or self-imposed restrictions began to limit admission of new residents into our communities starting in bothMarch 2020 in an effort to contain COVID-19. Also, we continue to face challenges from existing communities that have experienced infections, heightened risk of resident and staff illness and resident move-outs, particularly in those communities that have experienced infections. There is typically a period of time where restrictions on admissions continue to be imposed in communities that have experienced infections until such time that infections are no longer detected. As a result, we anticipate a decline in occupancy to continue as the rate of resident move-outs continue to outpace new resident admissions.
Operating costs in our senior housing operating portfolio have risen as our healthcare operators take action to protect their residents and staff, specifically higher labor costs, as well as higher usage and cost of personal protective equipment, and medical and sanitation supplies. We incurred $7.7 million of such incremental costs in
the second quarter to-dateof 2020, of which $1.6 million was abated through government stimulus funding under the CARES Act Provider Relief Fund.
The challenges faced by our healthcare operators and year to-date periods reflect primarilyour tenants as a result of COVID-19 will continue to put pressure on future revenues and operating margins in our healthcare segment.
As necessary, we will engage in discussions with our lenders on the continued growthdeferral of payment obligations, and/or waiver of defaults for any potential failure in the future to satisfy certain financial or other covenants.
Given the ongoing nature of the pandemic, the extent of the financial effects and how prolonged the effects will be to our portfolio, with a 7.7 million net increase in rentable square feet between September 30, 2016healthcare business is uncertain at this time, and September 30, 2017, taking into account both acquisitionslargely dependent on the duration and dispositions during this period. Additionally, rental rates were higher across new
and renewal leases, including contractual rental rate increases within existing leases, which in aggregate, offsetseverity of the higher real estate taxes incurred. Occupancy rate was largely stable at 95% across these periods.COVID-19 crisis.
Hospitality
Our hotel portfolio consists primarily of extended stay hotels and premium branded select service hotels. Select service hotels generally generate higher operating marginslocated in both major metropolitan markets and have less volatile cash flow streams relative to full service hotels.high-demand suburban markets throughout the U.S. The majority of our hotels are affiliated with top hotel brands such as Marriott and Hilton.
We seekown between 89.7% and 100% of the various portfolios within our hospitality segment.
We are currently engaged with a third party advisor to achieveevaluate strategic and financial alternatives to maximize the value optimization through capital improvements, asset management and as appropriate, opportunistic asset sales.
At September 30, 2017, we owned approximately 94% of our hospitality segment.portfolio, including the THL Hotel Portfolio in the other equity and debt segment, while balancing the need to preserve liquidity and prioritize the growth of our digital business. We do not anticipate allocating material amounts of the Company's own capital to our hospitality portfolios, but may elect to contribute capital on a limited basis, including in the THL Hotel Portfolio, where we determine it would be meaningful to protect the value of these portfolios.
Portfolio Overview
Our hotel portfolio is geographically diverse, located across 26 states in the U.S., with concentrations (based on EBITDA) in California (17%Texas (13.9%), Texas (9%California (12.9%), and New Jersey (9%Florida (12.6%)., based upon revenues in the three months ended June 30, 2020.
The following table presents selected operating metricskey balance sheet data of our hotel portfolio:hospitality segment: |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | At September 30, 2017 | | Three Months Ended September 30, 2017 | | Nine Months Ended September 30, 2017 |
Type | | Number of Hotel Properties | | Number of Rooms | | Average Occupancy | | ADR (1) | | RevPAR (2) | | EBITDA (In thousands) | | EBITDA (In thousands) |
Select service | | 97 |
| | 13,193 |
| | 74.5 | % | | $ | 123 |
| | $ | 92 |
| | $ | 40,944 |
| | $ | 117,386 |
|
Extended stay | | 66 |
| | 7,936 |
| | 84.4 | % | | 138 |
| | 117 |
| | 35,337 |
| | 91,078 |
|
Full service | | 4 |
| | 962 |
| | 74.2 | % | | 153 |
| | 114 |
| | 2,661 |
| | 9,377 |
|
Total | | 167 |
| | 22,091 |
| | 78.1 | % | | 130 |
| | 102 |
| | $ | 78,942 |
| | $ | 217,841 |
|
|
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Real estate | | | | |
Held for investment | | $ | 2,635,718 |
| | $ | 3,544,264 |
|
Held for sale | | — |
| | 16,155 |
|
Debt | | 2,635,393 |
| | 2,623,306 |
|
__________
| |
(1)
| Average daily rate (“ADR”) is calculated by dividing room revenue by total rooms sold. |
| |
(2)
| Revenue per available room (“RevPAR”) is calculated by dividing room revenue by room nights available for the period. |
A majority of our portfolio is affiliated with top hotel brands. Composition of our hotel portfolio by brand at SeptemberJune 30, 2017 was2020, based upon the number of rooms, is as follows: |
| | | |
Brands | | % by Rooms |
Marriott | | 7978 | % |
Hilton | | 16 | % |
Hyatt | | 4 | % |
Intercontinental | | 12 | % |
Total | | 100 | % |
The following table presents selected operating metrics of our hotel portfolio: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
Type | | Number of Hotel Properties | | Number of Rooms | | Average Occupancy | | ADR (1) | | RevPAR (2) | | Average Occupancy | | ADR (1) | | RevPAR (2) |
2020 | | | | | | | | | | | | | | | | |
Select service | | 87 |
| | 11,737 |
| | 21.7 | % | | $ | 88 |
| | $ | 19 |
| | 38.2 | % | | $ | 114 |
| | $ | 44 |
|
Extended stay | | 66 |
| | 7,936 |
| | 44.7 | % | | 97 |
| | 43 |
| | 54.8 | % | | 113 |
| | 62 |
|
Full service | | 4 |
| | 966 |
| | 13.3 | % | | 167 |
| | 22 |
| | 34.5 | % | | 173 |
| | 60 |
|
Total | | 157 |
| | 20,639 |
| | 30.2 | % | | 95 |
| | 29 |
| | 44.4 | % | | 116 |
| | 51 |
|
2019 | | | | | | | | | | | | | | | | |
Select service | | 94 |
| | 12,762 |
| | 76.0 | % | | $ | 128 |
| | $ | 98 |
| | 71.5 | % | | $ | 127 |
| | $ | 91 |
|
Extended stay | | 66 |
| | 7,936 |
| | 83.0 | % | | 135 |
| | 112 |
| | 78.6 | % | | 132 |
| | 104 |
|
Full service | | 4 |
| | 966 |
| | 78.2 | % | | 168 |
| | 132 |
| | 74.1 | % | | 170 |
| | 126 |
|
Total | | 164 |
| | 21,664 |
| | 78.6 | % | | 133 |
| | 104 |
| | 74.2 | % | | 131 |
| | 97 |
|
_________
| |
(1) | ADR is calculated by dividing room revenue by total rooms sold. |
| |
(2) | RevPAR is calculated by dividing room revenue by room nights available for the period. |
Financing
At June 30, 2020, our hotel portfolio was financed by $2.67 billion of predominantly variable rate debt, bearing a weighted average interest rate of 3.29% per annum. Refer to further discussion below on the effects of COVID-19.
Operating Performance
Results of operations of our hospitality segment are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenues | | $ | 57,143 |
| | $ | 227,080 |
| | $ | (169,937 | ) | | $ | 210,669 |
| | $ | 423,695 |
| | $ | (213,026 | ) |
Net loss | | (741,621 | ) | | (3,505 | ) | | (738,116 | ) | | (1,037,378 | ) | | (29,582 | ) | | (1,007,796 | ) |
Net loss attributable to Colony Capital, Inc. | | (633,863 | ) | | (3,330 | ) | | (630,533 | ) | | (875,095 | ) | | (26,311 | ) | | (848,784 | ) |
Operating results at the property level are discussed under NOI before FF&E Reserve below. Results summarized above include the effects of interest expense from mortgage financing, impairment charges and depreciation and amortization expense on our hotel portfolio, which are discussed in "—Results of Operations."
While there was a loss of earnings from sales of ten properties in 2019 and operating performance declined due to COVID-19, as discussed below, the significant net losses in 2020 resulted from impairment charges of $660.8 million and $910.9 million in the three and six months ended June 30, 2020, respectively, driven by a shortened holding period assumption.
Net Operating Income before Reserves for Furniture, Fixtures and Equipment("NOI before FF&E Reserve")
NOI before FF&E Reserve for our hospitality segment is calculated as follows and reconciled to the most directly comparable GAAP figure in "—Non-GAAP Supplemental Financial Measures."
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Total revenues | | $ | 57,143 |
| | $ | 227,080 |
| | $ | 210,669 |
| | $ | 423,695 |
|
Straight-line rent and amortization of above- and below-market lease intangibles and ground lease asset | | (16 | ) | | 316 |
| | 298 |
| | 626 |
|
Interest income | | — |
| | (6 | ) | | — |
| | (6 | ) |
Other income | | — |
| | (3 | ) | | — |
| | (3 | ) |
Property operating expenses | | (63,733 | ) | | (144,691 | ) | | (184,728 | ) | | (281,036 | ) |
NOI before FF&E Reserve—Hospitality | | $ | (6,606 | ) | | $ | 82,696 |
| | $ | 26,239 |
| | $ | 143,276 |
|
NOI before FF&E Reserve by hotel type is as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Change | | Six Months Ended June 30, | | Change |
($ in thousands) | | 2020 | | 2019 | | $ | | % | | 2020 | | 2019 | | $ | | % |
Select service | | $ | (9,792 | ) | | $ | 45,701 |
| | $ | (55,493 | ) | | (121.4 | )% | | $ | 5,975 |
| | $ | 79,882 |
| | $ | (73,907 | ) | | (92.5 | )% |
Extended stay | | 4,691 |
| | 32,723 |
| | (28,032 | ) | | (85.7 | )% | | 20,079 |
| | 55,570 |
| | (35,491 | ) | | (63.9 | )% |
Full service | | (1,505 | ) | | 4,272 |
| | (5,777 | ) | | (135.2 | )% | | 185 |
| | 7,824 |
| | (7,639 | ) | | (97.6 | )% |
NOI before FF&E Reserve—Hospitality | | $ | (6,606 | ) | | $ | 82,696 |
| | $ | (89,302 | ) | | (108.0 | )% | | $ | 26,239 |
| | $ | 143,276 |
| | $ | (117,037 | ) | | (81.7 | )% |
NOI before FF&E Reserve decreased $89.3 million and $117.0 million in the three and six months ended June 30, 2020, respectively, of which $3.2 million and $4.3 million, respectively, are attributed to the sales of ten select service properties in 2019. The decrease otherwise reflects the effects of COVID-19, with significant declines in room demand. For the three and six months ended June 30, 2020, average occupancy fell 62% and 40%, respectively, compared to the same period last year, to 30.2% and 44.4%, respectively. This was further compounded by lower ADR, resulting in a decrease in RevPAR of 72% and 47% for the three and six months ended June 30, 2020, respectively, compared to the same periods last year.
Notwithstanding the overall negative results for the second quarter of 2020, operations have recovered from the trough in April 2020, with NOI before FF&E Reserve turning a slight positive in June 2020, as illustrated below. Improvements in occupancy from 21.8% in April 2020 to 39.1% in June 2020 was driven by extended stay demand and also weekend leisure demand, while demand from corporate business travel remains muted. |
| | | | | | | | | | | | | | | | |
| | Second Quarter 2020 |
($ in thousands) | | April | | May | | June | | Total |
Average occupancy | | 21.8 | % | | 29.7 | % | | 39.1 | % | | 30.2 | % |
NOI before FF&E Reserve | | $ | (6,331 | ) | | $ | (1,249 | ) | | $ | 974 |
| | $ | (6,606 | ) |
Efforts to Mitigate Effects of COVID-19 on our Hospitality Segment and THL Hotel Portfolio in Other Equity and Debt Segment
Through the date of this filing, all of our hotels are operating, but at significantly reduced levels; however, we may decide or be required to temporarily suspend operations at some or all of our hotels in the future.
Operating Performance
The fallout from COVID-19 began to negatively affect room demand and occupancy in March 2020, with significant effects on our revenues and operating cash flows beginning April 2020, as discussed above.
Liquidity
In order to conserve capital and improve liquidity:
We have taken various steps to minimize non-essential operating expenses, including where applicable, reduction of services, closure of amenities and floor spaces, and keeping only essential resources on the ground, with our hotel operators having furloughed a substantial number of personnel.
We are deferring all non-essential capital expenditures in 2020 of approximately $85 million for our hospitality segment and $10 million for our THL Hotel Portfolio, which will provide notable cost savings in the near term.
Following the onset of the COVID-19 crisis, we have not made certain debt service payments on our non-recourse debt. Through the date of this filing, we have successfully executed interest forbearance on some of our debt, after which a remaining combined total of $3.03 billion is in default in our hospitality segment and the THL Hotel Portfolio. The remaining $482.4 million of debt in our hospitality segment was not in default as of the date of this filing. We have received notices of acceleration with respect to defaulted debt of $780.0 million in our hospitality segment and $842.7 million related to the THL Hotel Portfolio. The $780.0 million accelerated debt in the hospitality segment is secured by a portfolio of 48 select service and extended stay hotels, and receivers have been or are expected to be appointed for all of these assets. In connection with the remaining defaulted debt, we continue to engage in active negotiations with the respective lenders or servicers to seek various relief, including executing or extending interest forbearance, temporary use of FF&E and other capital expenditure reserves to fund interest payments and hotel operations (such reserves total $35.1 million in our hospitality segment as of June 30, 2020), and execution of debt modifications, including extension of upcoming maturities in 2020, or make other arrangements, as appropriate. There can be no assurance that we will be successful in any of the negotiations with our lenders or servicers.
Due to uncertainties as to the duration and severity of the economic fallout from COVID-19, at this time, we are unable to estimate with any meaningful precision the extent of the economic and financial impact of COVID-19 to our hospitality business and operations, and how prolonged the impact would be. We cannot predict when business will return to normal levels when the effects of COVID-19 subside.
Colony Credit Real Estate, Inc.
The following table summarizes our ownership interest (on a fully diluted basis) and carrying value in CLNC. |
| | | | | | | | |
(In thousands, except %) | | June 30, 2020 | | December 31, 2019 |
Ownership in CLNC | | | | |
Number of shares of common stock and units in CLNC's operating subsidiary | | 47,936 |
| | $ | 47,936 |
|
Interest % | | 36.4 | % | | 36.4 | % |
Carrying value of CLNC investment | | $ | 336,513 |
| | $ | 725,443 |
|
Our carrying value in CLNC reflects its market value as of June 30, 2020. The $388.9 million decrease in carrying value in the first six months of 2020 resulted from an impairment charge recorded in the second quarter of 2020, our share of CLNC's net loss, and dividends received in the first quarter of 2020.
Our equity method loss from CLNC is as follows.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Equity method loss | | | | | | | | |
Share of CLNC's net loss | | $ | (75,570 | ) | | $ | (40,008 | ) | | $ | (85,639 | ) | | $ | (34,495 | ) |
Other-than-temporary impairment | | (274,671 | ) | | (227,904 | ) | | (274,671 | ) | | (227,904 | ) |
| | $ | (350,241 | ) | | $ | (267,912 | ) | | $ | (360,310 | ) | | $ | (262,399 | ) |
Our share of CLNC's net loss was net of $8.7 million and $27.9 million to reduce the basis difference allocated to non-strategic assets resolved during the three and six months ended June 30, 2020, respectively (Note 6 to the consolidated financial statements). CLNC's net loss was driven by allowance for loan losses, impairment or unrealized fair value losses on investments, and realized losses from sale of investments and unwinding of hedge positions, further affected by COVID-19 in 2020.
Other-Than-Temporary Impairment Assessment
In the second quarter of 2017, we refinanced debt2020, the Company determined that its investment in CLNC was other-than-temporarily impaired, and recorded an impairment charge of $274.7 million, measured as the excess of carrying value over market value of its investment in CLNC based upon CLNC's closing stock price on the last trading day of the quarter of $7.02 per share on June 30, 2020. Refer to further discussion of the impairment on our CLNC investment in Note 6 to the consolidated financial statements.
CLNC Business Update
Michael J. Mazzei was appointed Chief Executive Officer and President of CLNC effective April 1, 2020. Mr. Mazzei brings 35 years of experience, knowledge of navigating through cycles, and strong executive leadership in the commercial real estate finance and mortgage REIT business.
Following the onset of the COVID-19 crisis, CLNC suspended its monthly stock dividend beginning April 2020 in an effort to conserve available liquidity, a move that is in line with outstanding principalmany other mortgage REITs. In the second quarter of $1.6 billion in our hotel portfolio at2020, CLNC executed on a moderately reduced interest rate and extended their fully extended maturity dates from 2019 to 2022.
There was only minor damage and business interruption to a small number of our hotels instrategic initiatives that generated additional liquidity while reducing recourse financing to further fortify its balance sheet under the hospitality segment caused by Hurricanes Harvey and Irma in the third quarter of 2017. Business interruption losses were fully offset by incremental revenue from hurricane-related demand.current challenging economic environment.
Other Equity and Debt
Our interests inThis segment is composed of a diversified group of non-digital real estate and real estate-related debt and equity investments, including investments for which the Company acts as a general partner and/or manager ("GP co-investments") and receives various forms of investment management economics on related third-party capital on such investments, other equity and debt assets are held as direct interests as well as through unconsolidated ventures. Over time, we intend to recycle capital from our otherreal estate equity and debt investments and shift our balance sheet exposure to our coreother real estate segments.related securities, among other holdings.
Over time, the Company expects to monetize the bulk of its existing portfolio as it completes its digital evolution.
Significant investmentsInvestments and financing in our other equity and debt portfolio at September 30, 2017 were as follows:are summarized below:
|
| | | | | | | | |
(In thousands) | | June 30, 2020 | | December 31, 2019 |
Real estate | | | | |
Held for investment | | $ | 1,868,051 |
| | $ | 2,036,036 |
|
Held for sale | | 263,023 |
| | 353,724 |
|
Equity and debt investments | | | | |
Limited partnership interests in our sponsored and co-sponsored funds | | 54,978 |
| | 63,102 |
|
Other equity investments (1) | | 1,131,100 |
| | 1,276,059 |
|
CRE debt securities | | 33,949 |
| | 57,591 |
|
Loans receivable (2) | | 1,349,103 |
| | 1,518,058 |
|
Debt (3) | | 1,924,639 |
| | 2,061,101 |
|
|
| | | | |
Type | | Carrying Value (In thousands) |
Other real estate equity | | $ | 2,860,703 |
|
Investments in unconsolidated ventures—third party private equity funds (1) | | 287,886 |
|
Investments in unconsolidated ventures—other (2) | | 1,088,913 |
|
Loans receivable | | 3,383,139 |
|
Securities | | 408,663 |
|
___________________
| |
(1) | Carrying value reflects fair value of our limited partnership interests in third party sponsored private equity funds as we elected fair value option accounting. |
| |
(2)
| Represents various equity method and cost method investments. Significant investments include acquisition, development and construction loans ($330575.6 million) and preferred equity investments ($433140.3 million). |
| |
(2) | Carried at fair value upon adoption of fair value option on January 1, 2020. |
| |
(3) | Includes debt carrying value of $155.3 million related to real estate held for sale. |
Significant activities duringOur other equity and debt segment generated the nine months ended September 30, 2017 were as follows:following results of operations:
Acquired a portfolio of distressed CRE loans in Ireland for $578 million, at approximately 60% discount to par, utilizing approximately 64% debt financing.
Acquired a controlling interest in CPI, a real estate investment group in Europe, through a restructuring of our loan receivable, resulting in the assumption of $566 million of real estate with underlying debt of $278 million.
Sold all of our interest in SFR for net proceeds of $501 million and a gain of $191 million.
Acquired an additional 4.7 million shares of NRE common stock, increasing our ownership interest in NRE to approximately 9%, valued at $66 million based on the closing price of NRE on November 7, 2017.
Acquired a Class A office building in Los Angeles in June 2017 for $456 million, including transaction costs. In September 2017, we syndicated 90% of the equity to third party investors and deconsolidated the property holding entity, with our remaining interest reflected as an equity method investment.
Acquired the THL Hotel Portfolio of 148 limited service hotels across the Southwest and Midwest U.S. in July 2017 through a consensual foreclosure of our loan receivable, resulting in the assumption of $1,260 million of real estate with underlying debt of $908 million. As a result of Hurricanes Harvey and Irma in the third quarter of 2017, 25 hotels in the THL Hotel Portfolio suffered varying degrees of damage, with certain hotels experiencing business interruption. One hotel was forced to close and is expected to re-open in January 2018. As of September 30, 2017, we have recognized $0.8 million of impairment loss for property damage, after taking into consideration $1.2 million of anticipated insurance recoveries for property damage. We are still assessing the estimated business interruption losses affecting certain of our hotels.
Sold two net lease properties in Switzerland that were acquired in January 2015 for a gain of $68 million.
At September 30, 2017, we had $713 million of real estate held for sale, financed with $364 million of debt.
Investment Management
We manage capital on behalf of third party institutional and retail investors through private funds, traded and non-traded REITs and investment companies, which provide a stable stream of management fee income. We also have an embedded broker-dealer platform which raises capital in the retail market.
Our investment management platform allows us to raise private third party capital in partnership with our own balance sheet to further scale our core real estate segments and also allows us to pursue a balance sheet light tactical strategy.
For the nine months ended September 30, 2017, we closed on approximately $1.7 billion of third party capital commitments, including our pro rata share from equity method investments in third party asset managers.
Our total third party assets under management ("AUM") were as follows: |
| | | | |
(In billions) | | September 30, 2017 | | December 31, 2016 |
Third party AUM (1) | | $41.7 | | $10.7 |
__________
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenues | | $ | 74,428 |
| | $ | 152,066 |
| | $ | (77,638 | ) | | $ | 195,547 |
| | $ | 314,754 |
| | $ | (119,207 | ) |
Net income (loss) | | (370,305 | ) | | (128 | ) | | (370,177 | ) | | (340,328 | ) | | 59,400 |
| | (399,728 | ) |
Net income (loss) attributable to Colony Capital, Inc. | | (141,671 | ) | | (5,957 | ) | | (135,714 | ) | | (143,123 | ) | | 17,932 |
| | (161,055 | ) |
| |
(1) • | All references to AUM herein refer to third party investments thatNet income from the other equity and debt segment has decreased over time as we manage, excludingmonetized our own balance sheet investments. AUM refers toother equity and debt portfolio throughout 2019, and also reflects the assets for whicheffects of COVID-19 on the Company and its affiliates provide investment management services, including assets for which the Company may or may not charge management fees and/or performance allocations. AUM is generally based on reported gross undepreciated carrying value of managed investments as reported by each underlying vehicle at September 30, 2017, except that AUMoperating results of the retail companiesTHL Hotel Portfolio in 2020. However, the large net loss in 2020 resulted primarily from (i) significant unrealized losses on loans receivable carried at fair value; and NRE are presented as(ii) real estate impairment, in particular on the THL Hotel Portfolio and a U.S. net lease property. Refer to further discussion in "—Results of November 3, 2017. AUM further includes a) uncalled capital commitments and b) for corporate investments in affiliates with asset and investment management functions, the Company’s pro rata share of assets of each affiliate as presented and calculated by the affiliate. The Company’s calculation of AUM may differ from the calculations of other asset managers, and as a result, this measure may not be comparable to similar measures presented by other asset managers.Operations." |
Prior to the Merger, the Company's AUM was determined based on the gross fair valueGenerally, in 2020, we expect a slower pace of managed investments. The AUM at December 31, 2016 is presented above in accordance withdispositions given the current definition of AUM based on gross undepreciated carrying value of managed investments.
The acquisition of NSAM's investment management business, including Townsend and NSAM's investments in third party asset managers, contributed $31.5 billion of our third party AUM at September 30, 2017. Colony's third party AUM of $10.2 billion at September 30, 2017 decreased $0.4 billionglobal economic downturn resulting from December 31, 2016 dueefforts to continued realization of investments by liquidating funds, includingcontain COVID-19; nevertheless, we do intend to accelerate the sale of sharesthese non-core assets where reasonable values can be attained. Most recently, in SFR held byApril 2020, we recapitalized a co-investment venture which holds common equity in the Albertsons supermarket chain, generating $72.7 million of proceeds to us and realizing our managed funds, partially offset by the July 2017 acquisitionshare of gain of $29.7 million.
In connection with the THL Hotel Portfolio, operations have recovered from the trough in April 2020 when we recorded negative NOI before FF&E with average occupancy at 25%. Beginning in May, NOI before FF&E has turned positive with average occupancy recovering to 48% in June, and this positive trend has continued into July.
A discussion of our efforts to mitigate the effects of COVID-19 on the THL Hotel Portfolio is included within the Hospitality segment above.
Other Investment Management
This segment, which is co-invested withseparate from the digital investment management business that resides in the digital segment, encompasses primarily the Company’s management of private real estate credit funds and related co-investment vehicles, CLNC, and NorthStar Healthcare, a public non-traded healthcare REIT. The Company earns management fees, generally based on the amount of assets or capital managed, and contractual incentive fees or potential carried interest based on the performance of the investment vehicles managed subject to the achievement of minimum return hurdles.
As part of the Company’s ongoing transition and rotation to an investment management and operating business focused on digital real estate and infrastructure, the Company continues to pivot away from its non-digital investment management business.
Balance Sheet Information
Equity investments on the balance sheet of our managed funds,other investment management segment totaling $23.6 million at June 30, 2020 and $140.0 million at December 31, 2019 generally consist of our general partner and co-general partner interests in non-digital investment vehicles we sponsor or co-sponsor, and interests in other real estate asset managers.
Operating Performance
Results of operations of our other investment management segment are as well as the acquisition and subsequent syndication of a California office building investment to third party investors in September 2017.
Our third party AUM at September 30, 2017 by type is summarized below:follows.
|
| | | | | | | | |
Type | | Products | | Description | | AUM (in billions) |
Institutional Funds | | Credit funds, opportunistic funds, value-add funds, Colony industrial open end fund, other co-investment vehicles and special accounts | | Earns base and asset management fees, potential for incentives on sponsored funds | | $ | 10.6 |
|
Retail Companies | | NorthStar Income I, NorthStar Income II | | Public non-traded REITs and investment companies | | 7.0 |
|
| NorthStar Healthcare | | Broker-dealer subsidiary acts as dealer-manager for non-traded REIT product offerings or wholesale marketing agent for investment company product offerings | | |
| NorthStar/RXR NY Metro (1) | | Earns base management fees from all retail companies, acquisition and disposition fees from non-traded REITs (except for NorthStar/RXR NY Metro), and potential for performance fees (except for NorthStar/Townsend) | | |
| NorthStar Capital Fund | | | |
| NorthStar/Townsend (2)
| | | |
Public Companies | | NorthStar Realty Europe Corp. | | NYSE-listed European equity REIT | | 2.1 |
|
| | Earns base management fees, potential for incentives | | |
Townsend (3) | | Commingled funds, segregated mandates, advisory services | | 84% interest in Townsend Group | | 14.8 |
|
| | Manage fund-of-funds and custom portfolios primarily invested in direct real estate funds | | |
| | Source co-investments and joint ventures alongside GPs | | |
| | Earns base management fees, performance fees, advisory fees | | |
Pro Rata Corporate Investments | | Joint venture investments | | Earns share of earnings from unconsolidated ventures | | 7.2 |
|
| | Includes investments in RXR Realty (27% interest), a real estate owner, developer and asset manager with AUM over $12 billion; and AHI (43% interest), a healthcare asset manager and sponsor of non-traded vehicles with AUM of $2.9 billion | | |
| | | | | | $ | 41.7 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
(In thousands) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Total revenues (1) | | $ | 30,198 |
| | $ | 43,802 |
| | $ | (13,604 | ) | | $ | 54,497 |
| | $ | 83,807 |
| | $ | (29,310 | ) |
Net income (loss) | | (496,000 | ) | | 2,176 |
| | (498,176 | ) | | (477,870 | ) | | 21,972 |
| | (499,842 | ) |
Net income (loss) attributable to Colony Capital, Inc. | | (446,743 | ) | | 2,628 |
| | (449,371 | ) | | (430,384 | ) | | 20,376 |
| | (450,760 | ) |
__________
| |
(1) | FeeIncludes cost reimbursement income is shared betweenfrom CLNC, NRE (prior to its sale in September 2019) and retail companies of $2.9 million and $3.4 million for the Companythree months ended June 30, 2020 and its co-advisor, RXR Realty. |
| |
(2)
| NorthStar/Townsend Institutional Real Estate Fund Inc. (“NorthStar/Townsend”) submitted a registration statement on Form N-2 to2019, respectively, $6.4 million and $6.7 million for the SECsix months ended June 30, 2020 and 2019, which are recorded gross as income and expense in May 2017, which asthe results of November 7, 2017, is not yet effective. Townsend is the advisor for NorthStar/Townsend and an affiliate of Colony NorthStar will act as administrator and sub-advisor for certain investments. |
| |
(3)
| The Townsend investment management business is held for sale as of September 30, 2017.operations. |
SaleSignificant net losses were incurred in 2020. While we recognized a $96.9 million gain, net of Townsend Business
In September 2017, we entered into a definitive agreement to selltax, from the Townsend business for $475sale of our equity investment in RXR Realty in February 2020, this was offset by significant goodwill impairment of $79.0 million subject to certain purchase price adjustments. Net proceeds for our 84% interest after transaction and other expenses is estimated to be approximately $379 million. The sale is expected to close$515.0 million in the fourth quarterfirst and second quarters of 2017 or first quarter2020, respectively, a reversal of 2018.
NRE Management Agreement Amendment
On November 9, 2017, the Company agreedcarried interest allocation and decrease in fee income. Refer to amend and restate its management agreement with NRE effective January 1, 2018. Key termsdiscussion of the amendment include, among other terms: 1) the restructuringvarious components in "—Results of the base management fee, which will change from a fixed base fee to a variable fee based on the European Public Real Estate Association Net
Asset Value ("EPRA NAV" as defined in the agreement); 2) modification of the incentive fee, which will change from being based on Cash Available for Distribution ("CAD" as defined in the agreement) per share to 20% over the excess of the total stockholder return (defined as dividends and stock price appreciation, and subject to a high water mark established when a prior incentive is realized) over a cumulative 10% annual hurdle rate; and 3) reduction of term from an initial twenty year term to a five year term. Under the terms of the amended and restated management agreement, beginning with NRE's 2018 annual stockholders' meeting, the Company will have the right to nominate one director (who is expected to be one of NRE's current directors employed by the Company) to NRE's Board of Directors. In addition, NRE provided the Company with an ownership waiver under NRE’s charter, which allows the Company to purchase up to 45% of NRE’s common stock. In connection with the waiver, the Company agreed that for all matters submitted to a vote of NRE’s stockholders, to the extent the Company owns more than 25% of NRE’s common stock, the Company will vote the excess shares in the same proportion that the remaining NRE shares not owned by the Company are voted. The amendments to NRE’s management agreement and the ownership waiver were approved by a strategic review committee formed earlier this year by NRE's Board of Directors.Operations."
Non-GAAP Supplemental Financial Measures
The Company reports funds from operations ("FFO") as an overall non-GAAP supplemental financial measure. The Company also reports EBITDAre for the digital real estate segment, NOI for the healthcare segment and industrial segments and EBITDANOI Before FF&E Reserve for the hospitality segment, which are supplemental non-GAAP financial measures widely used in the equity REIT industry. FFO, NOI and EBITDAThese non-GAAP measures should not be considered alternatives to GAAP net income as indications of operating performance, or to cash flows from operating activities as measures of liquidity, nor as indications of the availability of funds for our cash needs, including funds available to make distributions. Our calculation of FFO, NOIEBITDAre and EBITDANOI may differ from methodologies utilized by other REITs for similar performance measurements, and, accordingly, may not be comparable to those of other REITs.
Funds from Operations
We calculate FFO in accordance with standards established by the National Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as net income or loss calculated in accordance with GAAP, excluding (i) extraordinary items, as defined by GAAP,GAAP; (ii) gains and losses from sales of depreciable real estate andestate; (iii) impairment write-downs associated with depreciable real estate; and (iv) gains and losses from a change in control in connection with interests in depreciable real estate or in-substance real estate; plus (v) real estate-related depreciation and amortization,amortization; and after(vi) including similar adjustments for unconsolidated partnerships and joint ventures.equity method investments. Included in FFO are gains and losses from sales of assets which are not depreciable real estate such as loans receivable, equity method investments, in unconsolidated joint ventures as well as investments inand equity and debt and other equity securities, as applicable.
We believe that FFO is a meaningful supplemental measure of the operating performance of our business because historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation. Because real estate values fluctuate with market conditions, management considers FFO an appropriate supplemental performance measure by excluding historical cost depreciation, as well as gains or losses related to sales of previously depreciated real estate.estate, and impairment of previously depreciated real estate which is an early recognition of loss on sale.
The following table presents a reconciliation of net income attributable to common stockholders to FFO attributable to common interests in Operating Company and common stockholders. Amounts in the table include our share of activity in unconsolidated ventures.
| | | | Three Months Ended September 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2017 | | 2016 | | 2020 | | 2019 | | 2020 | | 2019 |
Net income attributable to common stockholders | | $ | 1,650 |
| | $ | 22,878 |
| |
Net loss attributable to common stockholders | | | $ | (2,042,790 | ) | | $ | (468,890 | ) | | $ | (2,404,423 | ) | | $ | (571,003 | ) |
Adjustments for FFO attributable to common interests in Operating Company and common stockholders: | | | | | | | | | | | | |
Net income attributable to noncontrolling common interests in Operating Company | | 97 |
| | 4,189 |
| |
Net loss attributable to noncontrolling common interests in Operating Company | | | (225,057 | ) | | (29,989 | ) | | (264,658 | ) | | (36,600 | ) |
Real estate depreciation and amortization | | 146,026 |
| | 46,239 |
| | 131,722 |
| | 159,496 |
| | 262,245 |
| | 313,898 |
|
Impairment of real estate | | 19,610 |
| | 991 |
| | 1,474,262 |
| | 87,600 |
| | 1,782,530 |
| | 113,222 |
|
Gain on sales of real estate | | (72,541 | ) | | (14,970 | ) | |
Loss (gain) on sales of real estate | | | 4,919 |
| | (7,088 | ) | | (3,014 | ) | | (62,322 | ) |
Less: Adjustments attributable to noncontrolling interests in investment entities (1) | | (46,160 | ) | | (13,049 | ) | | (329,601 | ) | | (88,705 | ) | | (411,930 | ) | | (123,979 | ) |
FFO attributable to common interests in Operating Company and common stockholders | | $ | 48,682 |
| | $ | 46,278 |
| | $ | (986,545 | ) | | $ | (347,576 | ) | | $ | (1,039,250 | ) | | $ | (366,784 | ) |
___________________
| |
(1) | For the three months ended September 30, 2017,The components of adjustments attributable to noncontrolling interests in investment entities include $44.0 million of real estate depreciation and amortization, $4.9 million of impairment of real estate, offset by $2.7 million of gain on sales of real estate. For the three months ended September 30, 2016, adjustments attributable to noncontrolling interests in investment entities include $16.0 million of real estate depreciation and amortization, $0.8 million of impairment of real estate, offset by $4.4 million of gain on sales of real estate. The adjustments attributable to noncontrolling interests also reflect the correction of a $0.7 million over-allocation of loss to noncontrolling interests in the threefor FFO are as follows: |
months ended September 30, 2016 that was recorded |
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
FFO adjustments attributable to noncontrolling interests in investment entities: | | | | | | | | |
Real estate depreciation and amortization | | $ | 46,499 |
| | $ | 55,646 |
| | $ | 94,214 |
| | $ | 107,456 |
|
Impairment of real estate | | 279,840 |
| | 37,195 |
| | 319,974 |
| | 51,346 |
|
Loss (gain) on sales of real estate | | 3,262 |
| | (4,136 | ) | | (2,258 | ) | | (34,823 | ) |
| | $ | 329,601 |
| | $ | 88,705 |
| | $ | 411,930 |
| | $ | 123,979 |
|
EBITDAre
We calculate EBITDAre for our digital real estate segment in accordance with standards established by NAREIT, which defines EBITDAre as net income or loss calculated in accordance with GAAP, excluding (i) interest expense; (ii) income tax benefit (expense); (iii) depreciation and amortization; (iv) gains on disposition of depreciated real estate, including gains or losses on change of control; (v) impairment write-downs of depreciated real estate and of investments in unconsolidated affiliates caused by a decrease in value of depreciated real estate in the fourth quarteraffiliate; and (vi) including similar adjustments for equity method investments to reflect the Company's share of 2016. The correction wasEBITDAre of unconsolidated affiliates
EBITDAre represents a widely known supplemental measure of performance, EBITDA, but for real estate entities, which we believe is particularly helpful for generalist investors in REITs. EBITDAre depicts the operating performance of a real estate business independent of its capital structure, leverage and noncash items, which allows for comparability across real estate entities with different capital structure, tax rates and depreciation or amortization policies. Additionally, exclusion of gains on disposition and impairment of depreciated real estate, similar to FFO, also provides a reflection of on-going operating performance and allows for period-over-period comparability.
As with other non-GAAP measures, the usefulness of EBITDAre may be limited. For example, EBITDAre focuses on profitability from operations, and does not materialtake into account financing costs, and capital expenditures needed to net income attributable to common stockholders or FFO attributable to common interests in the Operating Company for the period presented.maintain operating real estate.
NOI and EBITDA
NOI for our healthcare and industrialhospitality segments representsrepresent total property and related income less property operating expenses, adjusted primarily for the effects of (i) straight-line rental income adjustments; and (ii) amortization of acquired above- and below-market lease adjustments to rental income; and (iii) other items such as adjustments forincome, where applicable. For our share of NOI of unconsolidated ventures.
EBITDA for the hospitality segment, represents net income from continuing operationsNOI does not reflect the reserve contributions to fund certain capital expenditures, repair, replacement and refurbishment of furniture, fixtures, and equipment, based on a percentage of hotel revenues, typically 4% to 5%, that segment, excluding interest expense, income tax expense is required under certain debt agreements and/or benefit,franchise and depreciation and amortization.brand-managed hotel agreements.
We believe that NOI and EBITDA areis a useful measuresmeasure of operating performance of our respective real estatehealthcare and hospitality portfolios as they areit is more closely linked to the direct results of operations at the property level. NOI also reflects actual rents received during the period after adjusting for the effects of straight-line rents and amortization of above- and below-market leases; therefore, a comparison of NOI across periods better reflects the trend in occupancy rates and rental rates at our properties.
NOI and EBITDA excludeexcludes historical cost depreciation and amortization, which are based onupon different useful life estimates depending on the age of the properties, as well as adjust for the effects of real estate impairment and gains or losses on sales of depreciated properties, which eliminate differences arising from investment and disposition decisions. This allows for comparability of operating performance of our properties period over period and also against the results of other equity REITs in the same sectors.
Additionally, by excluding corporate level expenses or benefits such as interest expense, any gain or loss on early extinguishment of debt and income taxes, which are incurred by the parent entity and are not directly linked to the operating performance of our properties, NOI and EBITDA provideprovides a measure of operating performance independent of our capital structure and indebtedness.
However, the exclusion of these items as well as others, such as capital expenditures, FF&E reserve and leasing costs, which are necessary to maintain the operating performance of our properties, and transaction costs and administrative costs, may limit the usefulness of NOI and EBITDA.NOI.
Reconciliation of Non-GAAP Financial Measures
The following tables present reconciliations of net income (loss) from continuing operationsloss of the digital real estate segment to EBITDAre, and net loss of the healthcare industrial and hospitality segments to NOI or EBITDA of the respective segments.NOI. | | | | | | | | | | | | | Digital Real Estate | | Healthcare | | Hospitality (1) |
| | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | Three Months Ended June 30, 2020 | | Three Months Ended June 30, | | Three Months Ended June 30, |
(In thousands) | | Healthcare | | Industrial | | Hospitality | | Industrial | |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
Net income (loss) from continuing operations | | $ | (22,318 | ) | | $ | 5,775 |
| | $ | 4,169 |
| | $ | 439 |
| |
Net loss | | | $ | (21,142 | ) | | $ | (680,140 | ) | | $ | (81,520 | ) | | $ | (741,621 | ) | | $ | (3,505 | ) |
Adjustments: | | | | | | | | | | | | | | | | | | |
Straight-line rent revenue and amortization of above- and below-market lease intangibles | | (6,513 | ) | | (2,011 | ) | | (3 | ) | | (608 | ) | |
Straight-line rent and amortization of above- and below-market lease intangibles and ground lease asset | | | — |
| | (8,071 | ) | | (4,817 | ) | | (16 | ) | | 316 |
|
Interest income | | — |
| | (165 | ) | | — |
| | — |
| | — |
| | (71 | ) | | — |
| | — |
| | (6 | ) |
Other income | | | — |
| | — |
| | (36 | ) | | — |
| | (3 | ) |
Interest expense | | 48,586 |
| | 8,803 |
| | 35,351 |
| | 11,532 |
| | 8,170 |
| | 34,699 |
| | 57,135 |
| | 29,889 |
| | 41,591 |
|
Transaction, investment and servicing costs | | 4,631 |
| | 7 |
| | 1,784 |
| | 612 |
| | — |
| | 907 |
| | 9,097 |
| | 799 |
| | 2,712 |
|
Depreciation and amortization | | 44,646 |
| | 29,010 |
| | 34,549 |
| | 22,295 |
| | 28,571 |
| | 36,980 |
| | 40,778 |
| | 35,462 |
| | 37,008 |
|
Provision for loan losses | | 1,588 |
| | — |
| | — |
| | — |
| |
Impairment loss | | 8,250 |
| | 44 |
| | — |
| | — |
| | — |
| | 661,255 |
| | 51,324 |
| | 660,751 |
| | 420 |
|
Compensation and administrative expense | | 1,511 |
| | 2,833 |
| | 1,681 |
| | 2,489 |
| | — |
| | 1,749 |
| | 2,301 |
| | 1,793 |
| | 2,183 |
|
Gain on sale of real estate | | — |
| | — |
| | — |
| | (1,949 | ) | | — |
| | — |
| | — |
| | — |
| | (140 | ) |
Other (gain) loss, net | | (1,971 | ) | | — |
| | 149 |
| | (114 | ) | | — |
| | 342 |
| | 2,261 |
| | (354 | ) | | 114 |
|
Earnings from investments in unconsolidated ventures | | — |
| | (34 | ) | | — |
| | — |
| |
Income tax (benefit) expense | | (408 | ) | | 16 |
| | 1,262 |
| | 31 |
| | (2,673 | ) | | 12,136 |
| | 596 |
| | 6,691 |
| | 2,006 |
|
NOI or EBITDA | | $ | 78,002 |
| | $ | 44,278 |
| | $ | 78,942 |
| | $ | 34,727 |
| |
EBITDAre / NOI / NOI before FF&E Reserve | | | $ | 12,926 |
| | $ | 59,786 |
| | $ | 77,119 |
| | $ | (6,606 | ) | | $ | 82,696 |
|
| | | | | | | | | | | | | Digital Real Estate | | Healthcare | | Hospitality (1) |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 | | Six Months Ended June 30, 2020 | | Six Months Ended June 30, | | Six Months Ended June 30, |
(In thousands) | | Healthcare | | Industrial | | Hospitality | | Industrial | | 2020 | | 2019 | | 2020 | | 2019 |
Net income (loss) from continuing operations | | $ | (42,978 | ) | | $ | 15,394 |
| | $ | 6,303 |
| | $ | 652 |
| |
Net loss | | | $ | (39,437 | ) | | $ | (744,285 | ) | | $ | (88,726 | ) | | $ | (1,037,378 | ) | | $ | (29,582 | ) |
Adjustments: | | | | | | | | | | | | | | | | | | |
Straight-line rent revenue and amortization of above- and below-market lease intangibles | | (21,897 | ) | | (4,824 | ) | | (30 | ) | | (2,410 | ) | |
Straight-line rent and amortization of above- and below-market lease intangibles and ground lease asset | | | — |
| | (12,037 | ) | | (10,044 | ) | | 298 |
| | 626 |
|
Interest income | | — |
| | (165 | ) | | — |
| | — |
| | — |
| | (98 | ) | | — |
| | — |
| | (6 | ) |
Other income | | | — |
| | — |
| | (36 | ) | | — |
| | (3 | ) |
Interest expense | | 137,522 |
| | 29,163 |
| | 98,484 |
| | 30,906 |
| | 17,572 |
| | 74,565 |
| | 104,662 |
| | 69,678 |
| | 83,656 |
|
Transaction, investment and servicing costs | | 9,052 |
| | 33 |
| | 6,570 |
| | 1,038 |
| | — |
| | 3,805 |
| | 12,205 |
| | 2,220 |
| | 4,296 |
|
Depreciation and amortization | | 135,104 |
| | 79,453 |
| | 98,098 |
| | 65,461 |
| | 58,602 |
| | 74,440 |
| | 80,909 |
| | 71,906 |
| | 73,256 |
|
Provision for loan losses | | 1,588 |
|
| — |
|
| — |
| | — |
| |
Impairment loss | | 8,250 |
| | 44 |
| | — |
| | 137 |
| | — |
| | 709,787 |
| | 51,324 |
| | 910,913 |
| | 4,270 |
|
Compensation and administrative expense | | 5,302 |
| | 8,441 |
| | 5,763 |
| | 5,773 |
| | — |
| | 4,232 |
| | 3,954 |
| | 4,300 |
| | 4,087 |
|
Gain on sale of real estate | | — |
| | (8,695 | ) | | — |
| | (2,749 | ) | | — |
| | — |
| | — |
| | — |
| | (279 | ) |
Other (gain) loss, net | | (5,925 | ) | | — |
| | 444 |
| | (213 | ) | | — |
| | 5,993 |
| | 394 |
| | (510 | ) | | 113 |
|
Earnings from investments in unconsolidated ventures | | — |
| | (62 | ) | | — |
| | — |
| |
Income tax (benefit) expense | | 1,624 |
| | 2,164 |
| | 2,209 |
| | 37 |
| | (8,403 | ) | | 12,006 |
| | (1,278 | ) | | 4,812 |
| | 2,842 |
|
NOI or EBITDA | | $ | 227,642 |
| | $ | 120,946 |
| | $ | 217,841 |
| | $ | 98,632 |
| |
EBITDAre / NOI / NOI before FF&E Reserve | | | $ | 28,334 |
| | $ | 128,408 |
| | $ | 153,364 |
| | $ | 26,239 |
| | $ | 143,276 |
|
__________
| |
(1) | NOI for the hospitality segment excludes FF&E Reserve which is determined based on a percentage of hotel revenues. |
Liquidity and Capital Resources
Our financing strategy is to employ investment-specific financing principally on a non-recourse basis with matching terms and currencies, as available and applicable, through first mortgages, senior loan participations or securitizations. In addition to investment-specific financings, we may useSecond Quarter 2020 Update
We have substantially addressed our near-term corporate maturity obligations and have usedenhanced our long-term capital structure and liquidity profile through (i) the June 2020 amendment of our corporate credit facilitiesfacility which right-sizes availability and provides enhanced financial flexibility; and (ii) issuance of $300 million of exchangeable notes by the OP and concurrent repurchase facilitiesof $290 million of convertible notes due in January 2021 which allowed us to reduce our near term maturity obligations while also preserving $300 million of liquidity.
As of August 5, 2020, our liquidity position was approximately $0.9 billion, composed of cash on hand and the full $500 million available under our corporate credit facility. Cash on hand included $252 million of final net proceeds from Wafra's minority investment in our digital investment management business, which provides us with permanent capital for growing our digital business.
None of our investment level financing are recourse to the Company, and instead are secured by underlying commercial real estate or mortgage loans receivable. Generally, we do not apply corporate level cash to service investment level debt.
Additionally, we have begun executing a shorter term basisnew cost reduction program that has to-date addressed annual run-rate cost savings of approximately $38 million, mostly from headcount and publiccompensation related cost reductions.
While the Company is in compliance with its corporate debt covenants and private, securedcurrently has sufficient liquidity to meet its operational needs, general concerns over credit and unsecured debt issuances on a longer term basis.liquidity continue to permeate the financial markets in an economic downturn environment. The Company continues to evaluate opportunities to maintain and strengthen its liquidity position through the current economic recession.
Liquidity Needs and Sources of Liquidity
Our current primary liquidity needs are to fund:
acquisitions of our target assets and related ongoing commitments;
our general partner commitments to our future investment vehicles and co-investment commitments to other investment vehicles;
acquisitions of our target digital assets for our balance sheet and third party capital and related ongoing commitments;
principal and interest payments on our borrowings, including interest obligation on our convertible debt;
our operations, including compensation, administrative and overhead costs;
capital expenditures for our non-digital and digital real estate investments;
distributions to our stockholders;
acquisitions of common stock under our common stock repurchase program;and preferred stockholders (to the extent distributions have not been temporarily suspended); and
income tax liabilities of taxable REIT subsidiaries and of the Company subject to limitations as a REIT.
Our current primary sources of liquidity are:
cash on hand;
our corporate revolving credit facilities;
fees received from our investment management business;facility;
cash flow generated from our investments, both from operations and return of capital;
fees received from our investment management business, including incentive or carried interest payments, if any;
proceeds from full or partial realization of investments;investments and/or businesses, particularly from investments in the Other Equity and Debt segment;
investment-level financing;
proceeds from public or private equity and debt offerings; and
third party capital commitments of sponsored investment vehicles.co-investors in our consolidated investments and/or businesses.
We believe that our capital resources are sufficient to meet our short-term and long-term capital requirements. Distribution requirements imposed on us to qualify as a REIT generally require that we distribute to our stockholders 90% of our taxable income, which constrains our ability to accumulate operating cash flows.
Additional discussions of our liquidity needs and sources of liquidity are presented below.
Liquidity Needs
Investment Commitments
Our share of commitments in connection with our investment activities as of June 30, 2020 include the following:
$38 million of lending commitments to borrowers (subsequent to June 30, 2020, we no longer have funding obligations on $6 million of previously outstanding lending commitments pursuant to an agreement with the borrower);
$50 million to joint venture investments, including ADC loan arrangements accounted for as equity method investments; and
$229 million of remaining capital commitments to Company sponsored and other activities arethird party sponsored funds, of which $135 million is for DCP, our inaugural fund dedicated to a digital strategy.
Generally, we expect to fund our investment commitments through cash on hand and/or proceeds from future asset monetization.
As it relates to our commitment to DCP, our original commitment totals $250 million, of which we have funded $115 million through June 30, 2020. In connection with our strategic partnership with Wafra, Wafra is expected to assume $80 million of our total commitment to DCP. The Wafra transaction is described in “—Contractual Obligations, Commitments and Contingencies."more detail in Note 24 to the consolidated financial statements.
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to pay regular quarterly dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service, if any. If our cash available for distribution is less than our net taxable income, we may be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
Common Stock—Our board of directors declared a dividend of $0.11 per share of common stock for the followingfirst quarter of 2020. The Company suspended dividends on its class A common stock beginning with the second quarter of 2020. Under the terms of the Company's amended credit facility, the Company is restricted from paying common dividends other than to maintain the Company’s status as a REIT or to reduce income tax payments. The Company will continue to monitor its financial performance and liquidity position, and as economic conditions improve, the Company will reevaluate its dividend policy in 2017:consultation with its revolver lending group.
|
| | | | | | | | | |
Declaration Date | | Record Date | | Payment Date | | Dividend Per Share | |
February 23, 2017 | | March 31, 2017 | | April 17, 2017 | | $ | 0.27 |
| (1) |
May 4, 2017 | | June 30, 2017 | | July 17, 2017 | | 0.27 |
| |
August 3, 2017 | | September 30, 2017 | | October 16, 2017 | | 0.27 |
| |
November 2, 2017 | | December 29, 2017 | | January 15, 2018 | | 0.27 |
| |
__________100
| |
(1)
| In connection with the consummation of the Merger, on January 20, 2017, the Company paid a dividend of $0.04444 per share of each Colony and NRF common stock to stockholders of record on January 9, 2017, representing a pro rata dividend for the period from January 1, 2017 through January 10, 2017 on a pre-exchange basis (or $0.03 after giving effect to the Colony exchange ratio of 1.4663). Additionally, the Company declared a dividend of $0.24 per share for the period from January 11, 2017 through March 31, 2017. Accordingly, dividends declared for the first quarter of 2017 per common share is equivalent to $0.27 per share after giving effect to the exchange ratio. |
Preferred Stock—We are required to make quarterly cash distributions on our outstanding preferred stock, with a weighted average dividend rate of 7.16% per annum, as follows:
| | | | Shares Outstanding September 30, 2017 (In thousands) | | Quarterly Cash Distributions | | Shares Outstanding June 30, 2020 (In thousands) | | Quarterly Cash Distributions |
Description | | Dividend Rate Per Annum | | Total (In thousands) | | Per Share | | Dividend Rate Per Annum | | Total (In thousands) | | Per Share |
Series B | | 8.25% | | 6,114 |
| | $ | 3,153 |
| | $ | 0.5156250 |
| |
Series D | | 8.5% | | 8,000 |
| | 4,250 |
| | 0.5312500 |
| |
Series E | | 8.75% | | 10,000 |
| | 5,469 |
| | 0.5468750 |
| |
Series G | | 7.5% | | 3,450 |
| | 1,617 |
| | 0.4687500 |
| | 7.5% | | 3,450 |
| | $ | 1,617 |
| | $ | 0.4687500 |
|
Series H | | 7.125% | | 11,500 |
| | 5,121 |
| | 0.4453125 |
| | 7.125% | | 11,500 |
| | 5,121 |
| | 0.4453125 |
|
Series I | | 7.15% | | 13,800 |
| | 6,167 |
| | 0.4468750 |
| | 7.15% | | 13,800 |
| | 6,167 |
| | 0.4468750 |
|
Series J | | 7.125% | | 12,600 |
| | 5,611 |
| | 0.4453125 |
| | 7.125% | | 12,600 |
| | 5,611 |
| | 0.4453125 |
|
| | 65,464 |
| | $ | 31,388 |
| | | | 41,350 |
| | $ | 18,516 |
| | |
Common Stock Repurchases
On February 23, 2017, our boardIn June 2020, the Board declared dividends on all series of directors authorized a commonpreferred stock repurchase program, pursuant tofor the second quarter of 2020, which we may repurchase up to $300 millionwas paid in July 2020. In August 2020, the Board declared dividends on all series of our outstanding class A commonpreferred stock over a one-year period, andfor the third quarter of which $224.6 million has been repurchased as of September 30, 2017. This is described further in Note 15 to the consolidated financial statements.
2020.
Sources of Liquidity
Cash From Operations
Our investments generate cash, either from operations or as a return of our invested capital. We primarily generate revenue from net operating income of our real estate properties. We also generate interest income from commercial real estate related loans and securities as well as receive periodic distributions from some of our equity investments, in unconsolidated ventures.including our GP co-investments. Such income is partially offset by interest expense associated with non-recourse borrowings againston our investments.
Additionally, we generate fee revenue from our investment management segment through the management of various types of investment products, including both institutional and retail capital.business. Management fee income is generally a predictable and stable revenue stream, while performance basedcarried interest and contractual incentive income isfees are by nature less predictable in amount and timing. Our ability to establish new investment vehicles and raise investor capital depends on general market conditions and availability of attractive investment opportunities as well as availability of debt capital.
Following the onset of COVID-19, our hotel properties in the hospitality segment incurred negative operating cash flows in April and May 2020, recovering to a slight positive operating cash flow in June 2020. As discussed in "—Segment Results—Hospitality", we have taken various steps to minimize operating expenses, as appropriate, in order to minimize operating cash needs. At this time, we do not anticipate allocating material amounts of the Company's own capital to our hospitality portfolios, but may elect to contribute capital on a limited basis, where we determine it would be meaningful to protect the value of these portfolios.
Asset Monetization
We periodically monetize our investments through asset sales that are opportunistic in nature or to recycle capital from non-core assets, in particular, assets in our other equity and debt segment.
Generally, in 2020, we expect a slower pace of dispositions given the current global economic downturn; nevertheless, we do intend to accelerate the sale of these non-core assets where reasonable values can be attained.
Non-Recourse Investment-Level Financing
We have various forms of investment-level financing including securitizations,across our digital real estate, healthcare, hospitality and other equity and debt segments, which are non-recourse to the Company, as described in more detail in Note 1110 to the consolidated financial statements.
Our abilityAs discussed in "—Segment Results—Hospitality," in order to raise and access third party capitalminimize cash needs, we did not make debt service payments on non-recourse debt financing our hotel properties, which resulted in the default of a combined $3.03 billion of debt in our sponsoredhospitality segment and the THL Hotel Portfolio in the other equity and debt segment. We continue to engage in active negotiations with the respective lenders or servicers to seek various relief. We have not and do not intend to apply corporate level cash to service investment vehicles would allow uslevel debt. As noted, the defaulted debt is non-recourse to scale our investment activities by pooling capital to access larger transactions and diversify our investment exposure.the Company.
Corporate Credit Facility
As described in Note 1110 to the consolidated financial statements, the JPM Credit Agreement provides a securedwas amended on June 29, 2020, which reduced aggregate revolving commitments from $750 million to $500 million and increased the interest rate on borrowings from LIBOR plus 2.25% to LIBOR plus 2.5% per annum. The amended terms provide for greater financial covenant flexibility and more borrowing base credit for digital investments. The credit facility is still scheduled to expire in the maximum principal amount
January 2021, with two 6-month extension options. During the extension term(s), the interest rate would increase by 0.25%, and effective March 31, 2021, credit availability would be reduced to $400 million.
The maximum amount available at any time is limited by a borrowing base of certain investment assets. As of November 7, 2017, the borrowing base valuation was sufficient to permit borrowingsdate of up tothis filing, the full $1.0 billion commitment, of which $971.0$500 million wasis available to be drawn.drawn under the credit facility.
The JPM Credit Agreement contains covenants and restrictions requiring us to meet certain financial ratios. We wereAdditionally, through the date of this filing, we are in compliance with theall financial covenants as of September 30, 2017.under the credit facility.
Convertible and Exchangeable Senior Notes
ConvertibleIn July 2020, the OP issued $300.0 million of exchangeable notes with maturity in July 2025 and exchangeable senior notes issued by us and that remain outstanding are described in Note 11bearing interest at 5.75% per annum. Net proceeds from this issuance of $291.0 million was applied to the consolidated financial statements.
In June 2017 and July 2017, we repurchased all $13.0repurchase $289.7 million of the outstanding principal of the 7.25% exchangeable3.875% convertible notes upon exercisefor total purchase price of $289.2 million, including accrued interest. This substantially addresses the January 2021 maturity of the repurchase option by3.875% convertible notes, with $112.8 million principal outstanding as of the note holders.date of this filing, which we expect to address through cash on hand and/or proceeds from future asset monetizations.
On November 2, 2017, we exchanged $2.8 millionAs of the date of this filing, we have total outstanding principal of $626.4 million on our convertible and exchangeable senior notes, with a weighted average of 3.6 years remaining to maturity, and bearing weighted average interest of 5.16% per annum.
Junior Subordinated Debt
Our junior subordinated debt represents an obligation of a subsidiary of the 5.375% exchangeable notes into sharesOP that holds healthcare, hospitality and other non-core assets, as described in more detail in Note 10 to the consolidated financial statements. Colony Capital, Inc. and its operating company, Colony Capital Operating Company, LLC, are not guarantors on the junior subordinated debt. As of June 30, 2020, we have total outstanding principal of $280 million on our class A common stock.junior subordinated debt, with a weighted average of 15.9 years remaining to maturity, and bearing weighted average interest rates of 3.17%.
Public Offerings
We may offer and sell various types of securities under our shelf registration statement. These securities may be issued from time to time at our discretion based on our needs and depending upon market conditions and available pricing.
We issued 13.8 million shares There are no planned public offerings of Series I preferred stock in June 2017 and 12.6 million shares of Series J preferred stock in September 2017 with dividend rates of 7.15% and 7.125% per annum, respectively. We applied the proceeds from the offerings, combined with available cash, to redeem all of the outstanding shares of Series A, Series F and Series C preferred stock and a portion of the outstanding shares of Series B preferred stock. This is discussed in Note 15 to the consolidated financial statements.securities at this time.
Cash Flows
As a result of the Merger, comparisons of the period to period cash flows may not be meaningful. The periods as of and prior to January 10, 2017 represent the pre-merger cash flows of Colony, while the cash flows of NSAM and NRF are incorporated into Colony NorthStar effective from January 11, 2017.
The following table summarizes our cash flow activity for the periods presented:
| | | | Nine Months Ended September 30, | | Six Months Ended June 30, |
(In thousands) | | 2017 | | 2016 | | 2020 | | 2019 |
Net cash provided by (used in): | | | | | | | | |
Operating activities | | $ | 385,493 |
| | $ | 300,719 |
| | $ | 42,312 |
| | $ | 139,151 |
|
Investing activities | | 607,710 |
| | 183,478 |
| | 114,565 |
| | (858,190 | ) |
Financing activities | | (478,377 | ) | | (230,296 | ) | | (329,490 | ) | | 579,735 |
|
Operating Activities
Cash inflows from operating activities are generated primarily through property operating income from our real estate portfolio,investments, interest received from our loans receivable and securities portfolio, distributions of earnings received from unconsolidated ventures,equity investments, and fee income from our investment management business. This is partially offset by payment of operating expenses supporting our various lines of business, including property management and operations, loan servicing and workout of loans in default, investment transaction costs, as well as compensation and general administrative costs.
Our operating activities generated net cash inflows of $385.5$42.3 million and $300.7compared to $139.2 million forin the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The nine
This can be attributed in part to operating cash flows in connection with our industrial business that was sold in December 2019.
Specifically, the six months ended SeptemberJune 30, 20172019 had included the$95.1 million of operating activities of NSAM's investment management business, and the operating activities of NRF'scash inflows from our industrial business. The digital real estate business primarilythat was acquired in healthcare and hospitality. Additionally, we incurred significant paymentsDecember 2019 using proceeds from the industrial sale is a much smaller portfolio, thereby contributing less operating cash flows in comparison.
In contrast, the six months ended June 30, 2020 included the payment of Merger-related costs, including $66.8$39.9 million of success-based fees paid to investment bankers.accrued carried interest compensation in connection with carried interest realized from the sale of our light industrial portfolio.
We believeAdditionally, operating cash flows were negatively affected by the fallout from operations, available cash balancesCOVID-19 in the second quarter of 2020, particularly in our hospitality and our ability to generate cash through short- and long-term borrowings are sufficient to fund our operating liquidity needs.healthcare business, as discussed in "—Segment Results."
Investing Activities
Investing activities include cash outlays for acquisition of real estate, disbursements on new and/or existing loans, and contributions to unconsolidated ventures, which are partially offset by repayments and sales of loan receivables,loans receivable, distributions of capital received from unconsolidated ventures, proceeds from sale of real estate and equity investments, as well as proceeds from maturity or sale of debt securities.
Although the Merger was completed in an all-stock exchange, we assumed certain liabilities of NSAM and NRF which arose as a result of the Merger and were settled shortly after the Closing Date. These amounts included approximately $226.1 million which was paid to former NSAM stockholders, representing a one-time special dividend, and approximately $78.9 million in payroll taxes, representing shares that were canceled and remitted to taxing authorities on behalf of employees whose equity-based compensation was accelerated and fully vested upon closing of the Merger. These amounts, net of $260.6 million of cash assumed, are presented as investing cash outflows in the consolidated statement of cash flows.
Investing activities in the nine months ended September 30, 2017 generated net cash inflow of $607.7 million, resulting from our initiative to monetize non-core investments in 2017. This included the sale of all of our interest in SFR for $500.5 million, net of amounts held in escrow, and proceeds from the sale of various non-core real estate investments totaling $1,340.1 million, of which $664.4 million was from the sale of our manufactured housing portfolio. This was partially offset by various property acquisitions and capital expenditures of $1,194.2 million, including the continuous recycle of capital into newer assets in our industrial portfolio, as well as net cash outlay of $198.6 million on additional contributions and/or new investments in unconsolidated ventures, net of distributions received. Our loan investments generated minimal net cash outflows with receipts, primarily from repayments and sales proceeds totaling $786.0 million and cash outflows for loan disbursements and acquisitions of $821.8 million, of which $538.1 million, net of deposits, was for the acquisition of a distressed loan portfolio in Ireland.
In the nine months ended September 30, 2016, investing activities generated net cash inflowinflows of $183.5$114.6 million as receipts from our loan portfolios, primarily from repayments and proceeds from sales totaling $731.3 million exceededcompared to net cash outflows for loan disbursementsof $858.2 million in the six months ended June 30, 2020 and acquisitions of $430.4 million. Our real estate investing activities resulted in minimal net cash outflow in aggregate with receipts from sale proceeds of $344.3 million and acquisitions and capital expenditures totaling $373.0 million.2019, respectively.
| |
• | Real estate investments—The significant net cash outflows in the six months ended June 30, 2019 was driven by outflows of $1.1 billion for acquisition, net of sales, of real estate; in particular, acquisition of a combined $1.1 billion light and bulk industrial portfolio in February 2019. Our entire light industrial portfolio was sold in December 2019. In contrast, our real estate investment activities in the six months ended June 30, 2020 generated net cash inflows of $38.1 million from sales, net of acquisitions. |
| |
• | Equity investments—Another significant contributor of net cash inflows in the six months ended June 30, 2020 was $203.7 million from our equity investments, driven by $179.1 million net proceeds from sale of our investment in RXR Realty in February 2020 and $87.4 million from recapitalization of our joint venture investment in Albertsons in April 2020, representing amounts recognized as return of investment. In the six months ended June 30, 2019, we had net cash inflows of $30.2 million from equity investments, primarily proceeds from sales. |
| |
• | Debt investments—Lastly, our loan and securities portfolio generated net cash outflows of $116.8 million in the six months ended June 30, 2020 compared to net cash inflows of $230.8 million in the six months ended June 30, 2019 when loan repayments outpaced loan disbursements. |
Financing Activities
We finance our investing activities largely through borrowingsinvestment-level secured by our investmentsdebt along with capital from third party or affiliated co-investors. We also draw upon our corporate credit facility to finance our investing and operating activities, as well as have the ability to raise capital in the public markets through issuances of preferred stock, common stock and debt such as our convertible and exchangeable notes, as well as draw upon our
corporate credit facility, to finance our investing and operating activities.notes. Accordingly, we incur cash outlays for payments on our investment-level and corporate debt, and third party debt, as well as dividends to our preferred and common stockholders, as well as distributions to our noncontrolling interests. We have a common stock repurchase program approved
Financing activities generated net cash outflows of $329.5 million compared to net cash inflows of $579.7 million in 2017 that allows us to repurchase up to $300the six months ended June 30, 2020 and 2019, respectively.
The significant net cash inflows in the six months ended June 30, 2019 was driven by borrowings exceeding debt repayments by $660.3 million, specifically $735 million of our outstanding class A common stock throughborrowings to fund a large industrial portfolio acquisition in February 2018.2019, a majority of which was sold in December 2019.
Net cash usedWhile borrowings exceeded debt repayments in financing activities for the ninesix months ended SeptemberJune 30, 2017 was $478.4 million.
In the second quarter2020 by $224.8 million, primarily due to a net draw of 2017, we refinanced debt with $1.6 billion of outstanding principal in our hotel portfolio at a moderately reduced interest rate and extended their maturity dates.
In addition to financing activities related to our third party borrowings, which are used primarily to fund our real estate and loan investments, other significant financing activities during the nine months ended September 30, 2017 included the following:
sold a minority interest in our healthcare platform for $330$400 million (excluding pre-funded capital expenditures);
terminated a call spread arrangement assumed through the Merger in which we received $21.9 million in settlement, including the release of $15.0 million of cash pledged as collateral;
repurchased 17.3 million shares of our class A common stock for $224.6 million (including commissions);
repurchased all of our 7.25% exchangeable notes for $13.4 million; and
issued 13.8 million shares of Series I preferred stock in June 2017 and 12.6 million shares of Series J preferred stock in September 2017 with dividend rates of 7.15% and 7.125% per annum, respectively. We applied proceeds from the offerings totaling $637.9 million, combined with available cash, to redeem all of the outstanding shares of Series A, Series F and Series C preferred stock and a portion of the outstanding shares of Series B preferred stock for $644.9 million in aggregate.
In 2017, the availability of cash from asset sales resulted in a lower utilization ofon our corporate credit facility, we also settled the December 2019 redemption of our Series B and E preferred stock for working capital purposes.$402.9 million in January 2020 using proceeds from our industrial sale.
ForCash outflows for common stock repurchases were also higher in the ninesix months ended SeptemberJune 30, 2016, our2020 totaling $24.7 million compared to $10.7 million in the six months ended June 30, 2019.
Additionally, net contributions from noncontrolling interests of $97.1 million contributed to overall net cash usedinflows in financing activities was $230.3 million, driven largely by $447.6 million of distributions made tothe six months ended June 30, 2019, while net contributions from noncontrolling interests was much lower at $28.4 million in investment entities, of which a significant portion was related to proceeds from sale of a foreclosed property in Germany.
the six months ended June 30, 2020. Contractual Obligations, Commitments and Contingencies
The following table sets forth our knownThere were no material changes outside the ordinary course of business to the information regarding specified contractual obligations and contingencies on an undiscounted basis ascontained in our Form 10-K for the year ended December 31, 2019.
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
(In thousands) | | Total | | Remaining 2017 | | 2018-2019 | | 2020-2021 | | 2022 and after |
Corporate credit facility (1) | | $ | 11,647 |
| | $ | 894 |
| | $ | 7,097 |
| | $ | 3,656 |
| | $ | — |
|
Convertible and exchangeable senior notes (2) | | 734,932 |
| | 6,586 |
| | 52,688 |
| | 440,241 |
| | 235,417 |
|
Secured and unsecured debt (3) | | 10,582,803 |
| | 890,502 |
| | 6,553,334 |
| | 1,048,240 |
| | 2,090,727 |
|
Securitization bonds payable (4) | | 550,711 |
| | 143,659 |
| | 356,879 |
| | 50,173 |
| | — |
|
Junior subordinated notes | | 501,261 |
| | 2,983 |
| | 23,670 |
| | 23,702 |
| | 450,906 |
|
Ground lease obligations (5) | | 186,228 |
| | 1,592 |
| | 12,920 |
| | 13,011 |
| | 158,705 |
|
Office lease obligations (6) | | 75,972 |
| | 2,493 |
| | 14,961 |
| | 14,946 |
| | 43,572 |
|
| | 12,643,554 |
| | $ | 1,048,709 |
| | $ | 7,021,549 |
| | $ | 1,593,969 |
| | $ | 2,979,327 |
|
Contingent consideration (7) | | 33,681 |
| | | | | | | | |
Lending commitments (8) | | 71,038 |
| | | | | | | | |
Investment commitments (9) | | 192,696 |
| | | | | | | | |
Total | | $ | 12,940,969 |
| | | | | | | | |
__________
| |
(1)
| Future interest payments on our corporate credit facility were estimated based on the applicable index at September 30, 2017 and unused commitment fee of 0.35% per annum, assuming principal is repaid on the initial maturity date of January 2021. See “—Liquidity and Capital Resources." There was no outstanding principal on the corporate credit facility at September 30, 2017.
|
| |
(2)
| The convertible and exchangeable senior notes mature on their respective due dates, unless redeemed, repurchased or exchanged in accordance with their terms prior to such date. Amounts reflect future principal and interest payments through contractual maturity dates of the respective notes. See Note 11 to the Consolidated Financial Statements. |
| |
(3)
| Amounts include minimum principal or principal curtailment based upon cash flows from collateral loans after payment of certain loan servicing fees and monthly interest, as well as fixed or floating rate interest obligations and unused commitment fee on investment level credit facilities, through initial maturity date of the respective secured and unsecured debt. Interest on floating rate debt was determined based on the applicable index at September 30, 2017. Excludes investment-level debt financing related to assets held for sale. See Note 11 to the Consolidated Financial Statements. |
| |
(4)
| The timing of future principal payments was estimated based on expected future cash flows of underlying collateral loans. Repayments are estimated to be earlier than contractual maturity only if proceeds from underlying loans are repaid by the borrowers. |
| |
(5)
| We assumed noncancellable operating ground leases as lessee or sublessee in connection with certain properties acquired. The amounts represent minimum future base rent commitments through initial expiration dates of the respective leases, excluding any contingent rent payments, as well as exclude ground leases which require only nominal annual payments and those associated with real estate held for sale. Rents paid under ground leases are recoverable from tenants. |
| |
(6)
| We lease office space under noncancellable operating leases. The amounts reflect only minimum lease payments and do not project any potential escalation or other lease-related payments. Excludes contractual minimum rental payments on Townsend office leases. |
| |
(7)
| Contingent consideration liability is in connection with the following: |
(i) our acquisition of the investment management business and operations of our former external manager. The amount is payable to certain senior executives of the Company in shares of class A and class B common stock, as well as OP Units, subject to achievement of multi-year performance targets. Although the earnout period expires on June 30, 2018, portions of contingent consideration related to capital raising targets may become due upon achieving those targets. See Note 13 to the Consolidated Financial Statements.
(ii) our acquisition of the THL Hotel Portfolio through a consensual foreclosure. An amount up to $13.0 million is payable to a preferred equity holder of the former borrower based on performance of the THL Hotel Portfolio, subject to meeting certain repayment and return thresholds. See Note 3 to the Consolidated Financial Statements.
The amount presented reflects the aggregate estimated fair value of the contingent considerations at September 30, 2017:
| |
(8)
| Future lending commitments may be subject to certain conditions that borrowers must meet to qualify for such fundings. Commitment amount assumes future fundings meet the terms to qualify for such fundings. Amount presented reflects only our share of investment commitments, excluding commitments attributable to noncontrolling interests. Potential future commitments that we have approved but are not yet legally binding as of September 30, 2017 are not included. See Note 5 to the Consolidated Financial Statements. |
| |
(9)
| Amounts are in connection with our investments in unconsolidated ventures, including ADC arrangements accounted for as equity method investments, property acquisitions as well as commitments to third party-sponsored funds and Company-sponsored funds that are not consolidated. Potential future commitments that we have approved but are not yet legally binding as of September 30, 2017 are not included. See Notes 4 and 6 to the Consolidated Financial Statements. |
Guarantees and Off-Balance Sheet Arrangements
In connection with financing arrangements for certain unconsolidated ventures, we provided customary non-recourse carve-out guarantees. We believe that the likelihood of making any payments under the guarantees is remote and no liability has been recorded as of September 30, 2017.
In connectionaddition, we have entered into guarantee or contribution agreements with certain hotel acquisitions, we entered into guarantee agreements with various hotel franchisors or operating partners, pursuant to which we guaranteed or agreed to contribute to the franchisees’ obligations, including payments of franchise fees and marketing fees, for the term of the agreements, which expire between 2025 and 2030. At September 30, 2017,agreements. We believe that the Company did not havelikelihood of making any obligationspayments under these guarantees.the guarantees is remote.
We have off-balance sheet arrangements with respect to our retained interests in certain deconsolidated N-Star CDOs. In each case, our exposure to loss is limited to the carrying value of our investment.
Risk Management
Risk management is a significant component of our strategy to deliver consistent risk-adjusted returns to our stockholders. Given our need to maintain our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the 1940 Act, we closely monitor our portfolio and actively manage risks associated with, among other things, our assets and interest rates. In addition, theThe risk committee of our board of directors, in consultation with our chief risk officer, internal auditor and other senior management, will periodically reviewreviews our policies with respect to risk assessment and risk management, including key risks to which we are subject, including credit risk, liquidity risk, financing risk, foreign currency risk and market risk, and the steps that management has taken to monitor and control such risks. The audit committee of our board of directors will maintainmaintains oversight of financial reporting risk matters.
Underwriting and Investment Process
Prior to makingIn connection with executing any equitynew investment in digital assets for our balance sheet or debta managed investment vehicle, our underwriting team in conjunction with third-party providers, undertakes a rigorous asset-levelcomprehensive due diligence process involving intensive data collection and analysis, to ensure that we understand fully the stateall of the market and the risk-reward profile of the asset. Inmaterial risks involved with making such investment, in addition we evaluate material
to related accounting, legal, financial and business issues surrounding such investment. These issues andissues. If the risks are built intocan be sufficiently mitigated in relation to the valuationpotential return, we will pursue the investment on behalf of an asset and ultimate pricingour balance sheet and/or investment vehicles, subject to approval from the applicable investment committee, composed of an investment.senior executives of the Company.
During theSpecifically, as part of our underwriting process, we evaluate and review the following data, including, but not limited to: property financial data including historichistorical and budgeted financial statements, liquiditytenant or customer quality, lease terms and structure, renewal probability, capital expenditure plans, property operating metrics (including occupancy, leasing activity, lease expirations, sales information, tenant credit review, tenant delinquency reports, operating expense efficiencypipeline, technical/energy requirements and property management efficacy)supply, local and local real estatemacroeconomic market conditions, including vacancy rates, absorption, new supply, rent levelsESG, leverage and comparable sale transactions, as applicable. For debt investments, we also analyze metrics such as loan-to-collateral value ratios, debt service coverage ratios, debt yields, sponsor credit ratings and performance history.
In addition to evaluating the merits of any particular proposed investment, we evaluate the diversification of our or a particular managed investment vehicle’s portfolio of assets.assets, as the case may be. Prior to making a final investment decision, we determine whether a target asset will cause ourthe portfolio of assets to be too heavily concentrated with, or cause too much risk exposure to, any one digital real estate sector, geographic region, source of cash flow such as tenants or borrowers, or other geopolitical issues. If we determine that a proposed investment presents excessive concentration risk, we may decide not to pursue an otherwise attractive investment.
AssetAllocation Procedures
We currently manage, and may in the future manage, REITs and other entities that have investment and/or rate of return objectives similar to our own or to other investment vehicles that we manage. In order to address the risk of potential conflicts of interest among us and our managed investment vehicles, we have implemented an investment allocation policy consistent with our duty as a registered investment adviser to treat our managed investment vehicles fairly and equitably over time. Pursuant to this policy, investment allocation decisions are based on a suitability assessment involving a review of numerous factors, including the particular source of capital’s investment objectives, available cash, diversification/concentration, leverage policy, the size of the investment, tax, anticipated pipeline of suitable investments and fund life.
Portfolio Management
The comprehensive portfolio management process generally includes day-to-day oversight by the Company's portfolio management and servicing team, regular management meetings and quarterly creditasset review process. These processes are designed to enable management to evaluate and proactively identify asset-specific creditinvestment-specific issues and trends on a portfolio-wide basis for both assets on our balance sheet and assets of the companies within our investment management business. Nevertheless, we cannot be certain that such review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from investments that are not identified during these credit reviews.
We use many methods to actively manage our credit risk to preserve our income and capital, in orderincluding, but not limited to, minimize credit losses that could decrease income and portfolio value. For commercial real estate equity and debt investments, frequent re-underwriting andmaintaining dialogue with tenants, operators, partners and/or borrowers and performing regular inspections of our collateral and owned properties have proven to be an effective process for identifying issues early.properties. With respect to our healthcare properties, we consider the impact of regulatory changes on operator performance and property values. During thea quarterly credit review, or more frequently as necessary, investments are monitored and identified for possible asset impairment andor loan loss reserves, as appropriate,applicable, based upon several factors, including missed or late contractual payments, significant declines in collateralproperty operating performance and other data which may indicate a potential issue in our ability to recover our invested capital from an investment. In addition, we seek tomay utilize services of certain strategic partnerships and joint ventures with third parties with relevant expertise in commercial real estate or other sectors and markets to assist our portfolio management.
Given our needIn order to maintain our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the 1940 Act, and in order to maximize returns and manage portfolio risk, we may dispose of an asset earlier than anticipated or hold an asset longer than anticipated if we determine it to be appropriate depending upon prevailing market conditions or factors regarding a particular asset. We can provide no assurances, however, that we will be successful in identifying or managing all of the risks associated with acquiring, holding or disposing of a particular asset or that we will not realize losses on certain assets.
Interest Rate and Foreign Currency Hedging
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the 1940 Act, we may mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. The goal of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets.
In addition, because we are exposed to foreign currency exchange rate fluctuations, we employ foreign currency risk management strategies, including the use of, among others, currency hedges, and matched currency financing.
We can provide no assurances, however, that our efforts to manage interest rate and foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.
Financing Strategy
Our financing strategy is to employ investment-specific financing principally on a non-recourse basis with matching terms and currencies, as available and applicable, through first mortgages, senior loan participations or securitizations. In addition to investment-specific financings, we may use and have used credit facilities on a shorter term basis and repurchase facilities and public and private, secured and unsecured debt issuances on a longer term basis. The amount of leverage we use is based on our assessment of a variety of factors, including, among others, the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in our portfolio, the ability to raise additional equity to reduce leverage and create liquidity for future investments, the availability of credit at favorable prices or at all, the credit quality of our assets, our outlook for borrowing costs relative to the income earned on our assets and financial covenants within our credit facilities. Our decision to use leverage to finance our assets is at our discretion and not subject to the approval of our stockholders.
We currently expect to target an overall leverage rate of approximately 50% or less. To the extent that we use leverage in the future, we may mitigate interest rate risk through utilization of hedging instruments, primarily interest rate swap and cap agreements, to serve as a hedge against future interest rate increases on our borrowings.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
CertainOther than adoption of new accounting standards, in particular, Topic 326Financial Instruments—Credit Losses, which are discussed in Note 2 to our consolidated financial statements in Item 1 of this Quarterly Report, there have been no changes to our critical accounting policies are considered to beor those of our unconsolidated joint ventures since the filing of our Annual Report on Form 10-K for the year ended December 31, 2019.
The application of critical accounting policies. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s subjective and complex judgments, and for which the impact of changes inrequired significant management judgment, estimates and assumptions could have a material effectare discussed further in the following notes to the consolidated financial statements.
Impairment of real estate—Note 4
Other-than-temporary impairment on our financial statements. equity method investments—Note 6
Fair value measurement of loans receivable under fair value option—Note 12
Credit loss on available for sale debt securities—Note 6
Impairment of goodwill and intangible assets—Note 7
We believe that all of the underlying decisions and assessments upon which our financial statements are basedapplied were reasonable at the time made, based upon information available to us at that time.
We highlight below certain sections of our accounting policies that we believe are critical based on Due to the inherently judgmental nature of our operationsthe various projections and require management judgment. Refer to discussionassumptions used, the unpredictability of these significant accounting policieseconomic and market conditions, and the uncertainties over the duration and severity of the resulting economic effects of COVID-19, actual results may differ from estimates, and changes in Note 2 toestimates and assumptions could have a material effect on our consolidated financial statements included in Item 1 of this Quarterly Report.the future.
Principles of consolidation—VIE assessment
Business combinations—evaluation of whether definition of a business is met; valuation of assets acquired, liabilities assumed and noncontrolling interests; purchase price allocation
Real estate assets—valuation of real estate and related intangibles at acquisition; classification as held for sale, impairment assessment; recognition of gain on sale of real estate
Loans receivable—nonaccrual policy; assessment of loan impairment and allowance for loan losses; accounting for PCI loans, including estimate of expected cash flows; accounting for ADC loans
Investments in unconsolidated ventures—impairment assessment
Securities—OTTI assessment; accounting for PCI debt securities
Identifiable intangibles—impairment assessment
Goodwill—assignment to reporting units; impairment assessment
Transfers of financial assets—qualification for sale accounting
Income taxes—assessment of deferred taxes and uncertain tax positions
Recent Accounting Updates
RecentThe impact of accounting updatesstandards adopted in 2020 and the potential impact of accounting standards to be adopted in the future are includeddescribed in Note 2 to our consolidated financial statements in Item 1 of this Quarterly Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk includes the exposure to loss resulting from changes in interest rates, credit curve spreads, foreign currency exchange rates, commodity prices, equity prices and credit risk in our underlying investments. Our primary market risks are credit risk, interest rate risk, credit curve spread risk, foreign currency risk and inflation, either directly or indirectly through our investments in unconsolidated ventures.
Credit Risk
We are subject to the credit risk of the tenant/operators of our properties. We seek to undertake a rigorous credit evaluation of each tenant and healthcare operator prior to acquiring properties. This analysis includes an extensive due diligence investigation of the tenant/operator’s business as well as an assessment of the strategic importance of the underlying real estate to the tenant/operator’s core business operations. Where appropriate, we may seek to augment the tenant/operator’s commitment to the facility by structuring various credit enhancement mechanisms into thetheir management assessments, where applicable, and underlying leases. These mechanisms could include security deposit requirements or guarantees from entities we deem creditworthy.
In addition, our investment in loans receivable is subject to a high degree of credit risk through exposure to loss from loan defaults. Default rates are subject to a wide variety of factors, including, but not limited to, borrower financial condition, property performance, property management, supply/demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the U.S. economy and other factors beyond our control. All loans are subject to a certain probability of default. We manage credit risk through the underwriting process, acquiring our investments at the appropriate discount to face value, if any, and establishing loss assumptions. We also carefully monitor
the performance of the loans, including those held through our joint venture investments, as well as external factors that may affect their value.
For more information, see Item 2, “Management's Discussion and Analysis—Risk Management.”
Interest Rate and Credit Curve Spread Risk
Interest rate risk relates to the risk that the future cash flow of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Credit curve spread risk is highly sensitive to the dynamics of the markets for loans and securities we hold. Excessive supply of these assets combined with reduced demand will cause the market to require a higher yield. This demand for higher yield will cause the market to use a higher spread over the U.S. Treasury securities yield curve, or other benchmark interest rates, to value these assets.
As U.S. Treasury securities are priced to a higher yield and/or the spread to U.S. Treasuries used to price the assets increases, the price at which we could sell some of our fixed rate financial assets may decline. Conversely, as U.S. Treasury securities are priced to a lower yield and/or the spread to U.S. Treasuries used to price the assets decreases, the value of our fixed rate financial assets may increase. Fluctuations in LIBOR and/or any alternative reference rate may affect the amount of interest income we earn on our floating rate borrowings and interest expense we incur on borrowings indexed to LIBOR,such reference rate, including under credit facilities and investment-level financing.
In connection with the Merger, we assumed a $2 billion notional forward starting interest rate swap intended to hedge against future refinancing costs of certain mortgage debt assumed in the Merger. The interest rate swap is currently out of the money and may be subject to future margin calls. If an early termination event were to occur with respect to the swap, we would be required to pay the termination value to our counterparty. As of November 7, 2017, the termination value was approximately $171.9 million. This interest rate swap does not qualify for hedge accounting, therefore, unrealized gains (losses) resulting from fair value changes at the end of each reporting period are recognized in earnings. As of November 7, 2017, a hypothetical 100 basis point increase or decrease in the 10-year treasury forward curve applied to our interest rate swap would result in an unrealized gain of approximately $173.8 million or unrealized loss of $199.7 million.
We utilize a variety of financial instruments on some of our investments, including interest rate swaps, caps, floors and other interest rate exchange contracts, in order to limit the effects of fluctuations in interest rates on our operations. The use of these types of derivatives to hedge interest-earning assets and/or interest-bearing liabilities carries certain risks, including the risk that losses on a hedge position will reduce the funds available for distribution and that such losses may exceed the amount invested in such instruments. A hedge may not perform its intended purpose of offsetting losses of rising interest rates. Moreover, with respect to certain of the instruments used as hedges, we are exposed to the risk that the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position. If we anticipate that the income from any such hedging transaction will not be qualifying income for REIT income purposes, we may conduct all or part of our hedging activities through a to-be-formed corporate subsidiary that is fully subject to federal corporate income taxation. Our profitability may be adversely affected during any period as a result of changing interest rates.
We have financing arrangements with various financial institutions bearing variable rate interest indexed primarily to 1 and 3-month LIBOR and 1 and 3-month Euribor. We limit our exposure to interest rate increases for our debt primarily through the use of interest rate caps. At June 30, 2020, we did not have any outstanding interest rate swap positions. The interest rate sensitivity table below illustrates the hypothetical impact of changes in the index rates in 1% increments on our interest expense in a one year period, assuming no changes in our debt principal as it stood at June 30, 2020, and taking into account the effects of interest rate caps and contractual floors on indices. The maximum decrease in the
interest rates is assumed to be the actual applicable indices at June 30, 2020, all of which were under 1% at June 30, 2020.
|
| | | | | | | | | | | | |
($ in thousands) | | +2.00% | | +1.00% | | Maximum Decrease in Applicable Index |
Increase (decrease) in interest expense | | $ | 164,968 |
| | $ | 83,906 |
| | $ | (12,925 | ) |
Amount attributable to noncontrolling interests in investment entities | | 44,945 |
| | 23,082 |
| | (3,123 | ) |
Amount attributable to Operating Company | | $ | 120,023 |
| | $ | 60,824 |
| | $ | (9,802 | ) |
Foreign Currency Risk
We have foreign currency rate exposures related to our foreign currency-denominated investments.investments held predominantly by our foreign subsidiaries and to a lesser extent, by U.S. subsidiaries. Changes in foreign currency rates can adversely affect the fair values and earnings of our non-U.S. holdings. We generally mitigate this foreign currency risk by utilizing currency instruments to hedge the capital portion ofour net investments in our foreign currency risk. The types of hedging instruments that we may employ on our foreign currency denominated investments aresubsidiaries. We had previously employed forwards and costless collars (buying a protective put while writing an out-of the-money covered call with a strike price at which the premium received is equal to the premium of the protective put purchased) which involved no initial capital outlay. The puts are generally structuredoutlay as hedging instruments on our foreign subsidiary investments. During the quarter ended June 30, 2020, we settled all our outstanding foreign currency hedges and replaced them with strike prices up to 10% lower than our cost basis in such investments, thereby limiting any foreign exchange fluctuations to up to 10% of the original capital invested.put options purchased through upfront premiums.
At SeptemberJune 30, 2017,2020, we had approximately €498.2 million, £237.7 million, CHF0.2€491.8 million and NOK 802.4£267.6 million or a total of $1,008.1 million,$0.9 billion, in net investments in our European investments.subsidiaries. A 1% change in these foreign currency rates would result in a $10.1$8.5 millionincrease or decrease in translation gain or loss included in other comprehensive income. At September 30, 2017,income in connection with investments in our share of net tax-effected accumulated foreign exchangeEuropean subsidiaries, and a $0.3 million gain on the European investments was approximately $24.7 million, net of effect of hedging.or loss in earnings in connection with a GBP denominated loan receivable held by a U.S subsidiary.
A summary of the foreign exchange contracts in place at SeptemberJune 30, 2017,2020, including notional amountamounts and key terms, is included in Note 1211 to the consolidated financial statements. The maturity dates of these instruments
approximate the projected dates of related cash flows for specific investments. Termination or maturity of currency hedging instruments may result in an obligation for payment to or from the counterparty to the hedging agreement. We are exposed to credit loss in the event of non-performance by counterparties for these contracts. To manage this risk, we select major international banks and financial institutions as counterparties and perform a quarterly review of the financial health and stability of our trading counterparties. Based on our review at SeptemberJune 30, 2017,2020, we do not expect any counterparty to default on its obligations.
Inflation
Many of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Furthermore, our financial statements are prepared in accordance with U.S. GAAP and our distributions as determined by our board of directors will be primarily based on our taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair value without considering inflation.
ITEMItem 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
As required by Rule 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at SeptemberJune 30, 2017.2020.
Changes in Internal Control over Financial Reporting
As a result of the Merger, we are in the process of integrating the systems, processes and internal controls of Colony, NSAM and NRF, and we expect the integration to be sufficiently completed at the end of the current fiscal year. We will continue to review our internal control practices for the combined company in consideration of future integration and post-merger activities.
Except as described above in the preceding paragraph, during the quarter ended September 30, 2017, there wasThere have been no changechanges in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended June 30, 2020 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. We continue to evaluate the policies, processes, systems and operations of DataBank that was acquired in December 2019.
PART II—OTHER INFORMATION
ITEMItem 1. Legal Proceedings.
The Company may be involved in litigations and claims in the ordinary course of business. As of SeptemberJune 30, 2017,2020, the Company was not involved in any material legal proceedings.
ITEMItem 1A. Risk Factors.
Risks RelatedFor a discussion of our potential risks and uncertainties, please refer to the Proposed Combination among“Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2019, which is available on the SEC’s website at www.sec.gov. The Company NorthStar I and NorthStar II
We cannot be sureis providing the following additional risk factors to supplement the risk factors included in Item 1A. of the market priceAnnual Report:
The current pandemic of the Colony NorthStar Credit common stock we will receive as consideration fornovel coronavirus (COVID-19) and the volatility it has created, has significantly disrupted our contributionbusiness and is expected to continue to significantly, and may materially adversely, impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our stockholders. Future outbreaks of highly infectious or contagious diseases or other public health crises could have similar adverse effects on our business.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The impact of the CLNS Contributed Portfolio.outbreak has been rapidly evolving and, as cases of COVID-19 have continued to be identified, many countries, including the United States, have reacted by instituting quarantines, restricting and banning travel or transportation, mandating business and school closures, limiting size of gatherings and canceling sporting, business and other events and conferences.
Upon completionWhile our company continues to pivot to a digitally-focused strategy, a significant portion of our assets consist of, and our revenues are derived from, real estate investments, including healthcare and hospitality assets. The COVID-19 pandemic has impacted states and cities where we and our tenants operate our and their respective healthcare, hospitality and other businesses and where our properties are located. The preventative measures taken to alleviate the public health crisis, including significant restrictions on travel between the United States and specific countries, and “shelter-in-place” or “stay-at-home” orders issued by local, state and federal authorities, has significantly disrupted global travel and supply chains, and has adversely impacted global commercial activity across many industries, including in particular the travel, group meeting and conference, lodging and hospitality industries, and has disrupted, and is anticipated to further disrupt, operations and businesses in the healthcare industries, as discussed further below. Furthermore, although certain countries and U.S. states began to ease stay-at-home restrictions towards the end of the Combination, we will receive sharessecond quarter of Colony NorthStar Credit's Class A common stock (or Class B common stock2020, resurgences in the eventnumbers of a listing without an initial public offering). We anticipate that Colony NorthStar Credit’s Class A common stock will be traded on a national securities exchange; however, priorcases of COVID-19 have subsequently led to the Combination, therereinstatement, or potential for reinstatement, of such restrictions.
The occupancy rates of and revenues generated by our hospitality properties depends on the ability and willingness of guests to travel to our hotels. The spread of COVID-19 has not beenonly decreased guests’ willingness to travel, but also prevented guests from traveling to visit or stay at our hotels as a result of federal travel, social distancing or mandated “shelter-in-place” or “stay-at-home” orders and even as such orders have begun to be lifted in the United States, demand for travel has and is expected to continue to be adversely impacted. Similarly, some tenants in our medical office buildings within our healthcare portfolio have and may continue to seek concessions from us for paying lease charges as a result of such restrictions. In addition, COVID-19 has impacted occupancy at our healthcare properties, as inquiries, tours and move-ins have all declined.
In addition, COVID-19 has had an adverse impact on the business and financial condition of publicly-traded mortgage REITs, including CLNC, the Company’s managed mortgage REIT and in which it owns an approximate 36% interest. The borrowers of CLNC’s real estate debt investments, including in the office, industrial, multifamily and hotel industries, have and will notcontinue to be an established public trading market for Colony NorthStar Credit's common stock. The market priceaffected to the extent that COVID-19’s continued spread reduces occupancy, increases the cost of Colony NorthStar Credit's class A common stock followingoperation, results in limited hours or necessitates the Combination will be unknown untilclosure of such properties. In addition,
governmental measures, such as quarantines, states of emergencies, restrictions on travel, stay-at-home orders, and other measures taken to curb the commencement of trading of Colony NorthStar Credit's class A common stock upon the consummationspread of the Combination. The valueCOVID-19 may negatively impact the ability of Colony NorthStar Credit's class B commonCLNC’s borrowers or tenants to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect CLNC's loan investments and operating results. Many mortgage REITs have suspended dividends to stockholders. In April 2020, CLNC announced that to conserve available liquidity, it would suspend its monthly stock will be based ondividend beginning with the market price of Colony NorthStar Credit's class A common stock at the time that the applicable class of Colony NorthStar Credit's class B common stock converts to Colony NorthStar Credit's class A common stock.
The number of Colony NorthStar Credit shares we will receive in consideration formonthly period ending April 30, 2020. As a result, our contribution of the CLNS Contributed Portfolio is fixed and generallyCLNC investment will not be adjusted for changes ingenerate any dividend income and it is uncertain as to when, if ever, CLNC will resume paying distributions to stockholders, including us. In addition, the value of the assets and liabilities that comprise the CLNS Contributed Portfolio.
If the CombinationCompany’s Core FFO is completed, we will receive a fixed number of Colony NorthStar Credit's class A common stock (or Colony NorthStar Credit's class B common stock in the event of a listing without an initial public offering) in consideration for the CLNS Contributed Portfolio.
The number of shares of Colony NorthStar Credit's class A common stock (or Colony NorthStar Credit's class B common stock in the event of a listing without an initial public offering) is fixed and may be adjusted only under certain limited circumstances as set forth in the combination agreement and will not be adjusted to reflect any changes in the value of the assets and liabilities that comprise the CLNS Contributed Portfolio between the signing of the combination agreement and the closing of the Combination. However, immediately prior to the closing of the Combination, Colony NorthStar Credit will, if necessary, declare a special distribution to us in an amount that is intended to provide us a true up for the difference between (i) the sum of (a) the loss in value of NorthStar I and NorthStar IIdirectly impacted by CLNC’s performance as a result of the distributions made by NorthStar ICompany's ownership interest in CLNC and, NorthStar IIto the extent CLNC continues to experience operational challenges as a result of COVID-19, our Core FFO will similarly be adversely impacted.
Further, CLNC's stock price fell significantly in March and April 2020 due to the significant volatility in equity markets resulting from COVID-19. Along with other publicly traded mortgage REITs, CLNC has seen a rebound in its stock price in May and June 2020, but its stock continues to trade below pre-COVID-19 levels. At June 30, 2020 (prior to any impairment), the carrying value of our CLNC investment was $611 million, or $12.75 per share, which was in excess of fundsits market value of $337 million. With increasing uncertainty over the extent and duration of the COVID-19 pandemic, and the timeline for a recovery in the U.S economy, the Company believes that it is unlikely that the shortfall in market value relative to carrying value of its investment in CLNC would recover in the near term. As a result, the Company recognized an $275 million other-than-temporary impairment on its CLNC investment in the second quarter 2020, which was in addition to the $228 million other-than-temporary impairment on its CLNC investment recognized in the second quarter 2019. If the trading price of CLNC's class A common stock were to suffer further declines, to levels below our current carrying value for a prolonged period of time, as a result of COVID-19 or otherwise, an additional other-than-temporary impairment may be recognized in the future.
The difficult market and economic conditions created by COVID-19 are expected to adversely impact our ability to effectuate our business objectives and strategies. A key component of our business strategy is to monetize certain non-digital, non-core assets in our other equity & debt segment. Many experts predict that the outbreak will trigger, or may have already triggered, a prolonged period of global economic slowdown or a global recession. A sustained downturn in the U.S. economy could negatively impact our ability to consummate asset monetizations within the timeframe and at the values previously anticipated. In addition, the ability to raise capital for our current or anticipated digital-focused investment vehicles may be delayed or adversely impacted by the market and economic conditions which could prevent us from executing our digital pivot and growing our digital business.
The inability to consummate asset monetizations could adversely affect our liquidity and ability to meet our debt obligations or pay dividends to stockholders. For example, in May 2020, we announced the suspension of our common stock dividend for the second quarter of 2020 as the Company's board of directors and management believe it is prudent to conserve cash during the current period of uncertainty. In addition, in connection with the recent amendment to the Company’s corporate credit facility, we are prohibited from, among other things, paying dividends, other than (i) paying dividends to maintain the Company’s REIT status, (ii) reducing the payment of income taxes and (iii) paying dividends on the Company’s preferred stock. As a result, for the term of the corporate credit facility, the Company is prohibited from paying dividends on its common stock, subject to certain limited exceptions. Nonetheless, all permissible distributions are made at the discretion of the Company's board of directors in accordance with Maryland law and depend on our financial condition; debt and equity capital available to us; our expectations for future capital requirements and operating performance; restrictive covenants in our financial or other contractual arrangements, including those in our corporate credit facility; maintenance of our REIT qualification; restrictions under Maryland law; and other factors as our board of directors may deem relevant from time to time.
As a result of these and other factors, we expect our cash flows generated by our real estate investments, particularly in the hospitality and healthcare industries, to be negatively impacted. Because a substantial portion of our income is derived from these businesses as well as our proceeds from asset monetizations, our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations and our ability to pay dividends and other distributions to our stockholders has been and will continue to be adversely affected if revenues at our hospitality and healthcare properties continue to decline or we are unable to complete certain asset monetizations.
In addition, as COVID-19 has demonstrated the global economy's dependence on digital real estate and infrastructure, the Company has determined to accelerate its shift to a digitally-focused strategy. In doing so, the Company may dispose of its legacy assets and portfolios and continue to focus on the growth of the Company's investment management business focused on digital real estate and infrastructure. This transition may be inconsistent with the Company's status as a REIT. If the Company ceases to qualify as a REIT, it would become subject to U.S. federal income tax on its net taxable income and generally would no longer be required to distribute any of the Company’s
net taxable income to Colony stockholders, which may have adverse consequences on the Company’s total return to Colony stockholders.
Furthermore, our corporate credit facility requires us to maintain various financial covenants, including minimum tangible net worth, liquidity levels and financial ratios. The recent amendment to our corporate credit facility, among other things, modified certain financial covenants and reduced the aggregate amount of revolving commitments available under the corporate credit facility. Notwithstanding such amendment, based on the decline in performance in our hospitality and healthcare portfolios we are currently experiencing as a result of the COVID-19 pandemic and given the limited visibility to the future recovery of demand in the hospitality industry, there is a range of possible outcomes which may result in a breach of certain financial covenants prior to the initial maturity of January 2021. In addition, if we determine to exercise our initial extension option on the corporate credit facility, the aggregate amount of revolving commitments available under the corporate credit facility will be reduced to $400 million on March 31, 2021. To the extent that we are unable to effectuate asset monetizations in our other equity and debt segment as discussed above, we may be forced to allocate capital to repaying any outstanding balance on the corporate credit facility (either at the initial maturity, in connection with an extension on March 31, 2021, or the final maturity) that otherwise may have been used to invest in and grow the Company's digital real estate and infrastructure business. If we anticipate a potential breach, we expect to seek an amendment or waiver from July 1, 2017 throughour lenders. There is no assurance that our efforts to obtain such an amendment or waiver would be successful. Furthermore, any amendment or waiver may lead to increased costs, decreased borrowing capacity, increased interest rates, additional restrictive covenants and other similar lender protections. The occurrence of any of the day immediately precedingforegoing could materially and adversely impact our liquidity and business operations.
Additionally, non-recourse mortgage debt in the closinghospitality, healthcare and other real estate equity segment with aggregate outstanding principal of $3.28 billion as of the date of this report was either in payment default or was not in compliance with certain debt and/or lease covenants, as discussed further below. Other than with respect to certain healthcare and hospitality portfolio described below, the Combination (excludingCompany is in active negotiations with the respective lenders to execute forbearances or debt modifications; however, there is no assurance that our efforts to obtain forbearances or debt modifications will be successful. For example, as of the date of this report and as further described below, we have consensually transferred certain healthcare assets to lenders in exchange for a release of $158 million in borrowings secured by such assets and receivers have started to be appointed at various assets within the Inland Hotel Portfolio. In addition, we have entered into customary non-recourse carve-out guarantees, which provide for these otherwise non-recourse borrowings to become partially or fully recourse against certain of the Company's affiliates in connection with certain limited trigger or "bad boy" events. Although we believe that “bad boy” carve-out guaranties are not guaranties of payment in the event of foreclosure or other actions of the foreclosing lender that are beyond the borrower’s control, some lenders in the real estate industry have recently sought to make claims for payment under such guaranties. In the event such a claim were made against us under a “bad boy” carve-out guaranty, following foreclosure on mortgages or related loans, and such claim were successful, our business and financial results could be materially adversely affected.
In addition, the COVID-19 pandemic, or a future pandemic, could have material and adverse effects on our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations and has, and may continue to have, a material and adverse effect on our ability to pay dividends and other distributions to our stockholders due to, among other factors:
difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis and our tenants/borrowers’ abilities to fund their business operations and meet their obligations to us;
difficulty raising capital and attracting investors at our current and any future managed investment vehicles due to the volatility and instability in global financial markets may constrain the success of our managed investment vehicles and consequently our ability to sustain and grow our investment management business;
the financial impact has and could continue to negatively impact our ability to pay dividends to our stockholders or could result in a determination to reduce the size of one or more dividends, such as is the case with (i) our decision to suspend the dividend payment made byon our common stock for the second quarter of 2020 and (ii) certain restrictions on our ability to pay dividends on our common stock pursuant to the recent amendment to our corporate credit facility;
the financial impact could negatively impact our future compliance with financial covenants of our corporate credit facility and other debt agreements and could result in a default and potentially an acceleration of indebtedness, which non-compliance could also negatively impact our ability to make additional borrowings under our revolving credit facility or otherwise pay dividends to our stockholders;
the worsening of estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions as it relates to one or more of our adversely impacted properties could result in the recognition of substantial impairment charges imposed on our assets;
the credit quality of our tenants/borrowers could be negatively impacted and we may significantly increase our allowance for doubtful accounts;
a general decline in business activity and demand for real estate transactions could adversely affect our ability or desire to grow our digital business or dispose of non-core assets as part of our asset monetization and digital pivot strategy;
potential impairments on our real estate assets or ceasing to own real estate assets as a result of foreclosure or otherwise may impact our ability to maintain our REIT qualification or are exemption from the 1940 Act;
CLNC's trading price and the impact on the carrying value of the Company's investment in CLNC, including whether the Company will recognize further other-than-temporary impairments on such CLNC investment in addition to those recognized in the second quarter 2020;
we have and may continue to implement reductions in our workforce, which could adversely impact our ability to conduct our operations effectively;
unanticipated costs and operating expenses and decreased anticipated revenue related to compliance with regulations, such as inability to litigate non-paying tenants, additional expenses related to staff working remotely, requirements to provide employees with additional mandatory paid time off and increased expenses related to sanitation measures performed at each of NorthStar Iour properties, as well as additional expenses incurred to protect the welfare of our employees, such as expanded access to health services;
our level of dependence on the Internet, stemming from employees working remotely, and NorthStar IIincreases in malware campaigns and phishing attacks preying on July 1, 2017), (b) fundsthe uncertainties surrounding COVID-19, which may increase our vulnerability to cyber attacks;
increased risk of litigation, particularly with respect to our healthcare properties, related to the COVID-19 pandemic;
we, and in particular the success of our pivot to a digital real estate and infrastructure focused strategy, depend, to a significant extent, upon the efforts of our senior management team, including DBH’s key personnel. If one or more members of our senior management team or the DBH team become sick with COVID-19, the loss of services of such member could adversely affect our business; and
the potential negative impact on the health of our personnel, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption.
Moreover, the impact of COVID-19 pandemic may also exacerbate many of the risks identified under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Risks Related to Our Hospitality Business. The effects of the COVID-19 pandemic on the hospitality industry are unprecedented with global demand for lodging drastically reduced and occupancy levels reaching historic lows. Many hotels have had to temporarily suspend operations or operate at reduced levels. As of the date of this report, all of our hotel properties remain open but are operating at reduced levels; however, we may determine or be required to temporarily suspend the operations at hotels in the future as a result of the COVID-19 pandemic.
In addition, in order to reduce operating costs and improve efficiency, hotel operators, including our hotel operators, have furloughed a substantial number of personnel and may, in the future, furlough more of its personnel. Such steps and other hotel personnel work schedule changes that may be made in the future to reduce costs for us or our hotel operators or franchisors, may have other consequences such as negatively impacting the reputation and demand for our hotels or operational challenges if our operators are unable to re-hire furloughed personnel, all of which could have an adverse impact on our ability to improve performance and operations at our hotels when the COVID-19 pandemic subsides. In addition, if we are unable to access capital to make physical improvements to our hotels, the quality of our hotels may suffer, which may negatively impact demand for our hotels. Our third-party hotel managers may also face demands or requests from labor unions for additional compensation or other terms as a result of COVID-19 that could increase costs, and while we do not directly employ or manage employees at our hotels, we could incur costs in connection with such labor disputes or disruptions as our COVID-19 mitigation plans are implemented. We cannot predict when business levels will return to normalized levels when the effects of the pandemic subside. There also can be no guarantee that the demand for lodging, and consumer confidence in travel
generally, will recover as quickly as other industries. As a result, the revenues from our hospitality portfolio have declined significantly and we expect this trend to continue.
Furthermore, we have significant non-recourse borrowings outstanding on our hospitality properties (including the THL Hotel Portfolio). As of the date of this report, $3.03 billion in aggregate principal amount of such borrowings (representing the majority of borrowings on our hospitality properties) is in default as a result of the failure to make interest payments in light of the impact COVID-19 has had on our hospitality properties. In addition, as of the date of this report, we received notices of acceleration with respect to an aggregate of $1.6 billion of such borrowings (including borrowings on the Inland Portfolio). Further, we were not successful in our negotiations with the lender of the mortgage debt collateralized by a portfolio of 48 extended stay and select service hotel properties known as the Inland Portfolio, and receivers have been or are expected to be appointed for all of the assets in the Inland Portfolio. During the period while the receivers are in place, we will no longer be in control of the operations of the investment entitiesInland Portfolio even while still owning the assets. We are in active discussions with the lenders on our other non-recourse borrowings in our hospitality portfolio and for certain hospitality properties, we have entered into forbearance agreements permitting us not to make interest payments for a specified period of time. However, if we are unable to restructure these borrowings or receive forbearance or other accommodations from our lenders, we may be required to repay outstanding obligations, including penalties, prior to the stated maturity, be subject to cash flow sweeps or potentially have assets foreclosed upon. For the quarter ended June 30, 2020, we incurred $728 million in impairments on hospitality properties (including the THL Hotel Portfolio) primarily related to assets which subsidiariesare anticipated to be divested or sold in the near term and have fair market values below their respective carrying values. Moreover, depending on, among other factors, the status of ongoing negotiations with lenders, our anticipated holding periods for such assets and cash flow projections, we may take additional impairments on hospitality properties.
In addition, we have agreed to guarantee or contribute to guaranteed payments of franchise fees and marketing fees to our hotel franchisors. In certain instances, such guarantee or contribution agreements may also include an obligation to pay liquidated damages to the hotel franchisor on an early termination of the Company own interestsapplicable franchise agreement. In the event that a lender forecloses on our hospitality properties (including in the case of the Inland Portfolio which is currently in or expected to be contributedin receivership), we may not be released from these payment guarantees or liquidated damages obligations and we may not have any control over whether a franchise agreement is terminated.
Risks Related to Colony NorthStar Credit (the “CLNS Investment Entities”)Our Healthcare Business. We anticipate that the impact of the COVID-19 pandemic will vary by asset class within our healthcare portfolio. Many of the tenants in our medical office buildings suspended non-essential activities, and accordingly sought rent relief. In our senior housing and skilled nursing facilities, occupancy, which is the primary driver of revenues, has declined and may continue to decline during the pandemic as limitations on admissions and fewer inquiries and tours have caused a significant reduction in move-ins, while COVID-19 at the same time increases the risk of resident illness and move-outs. In addition, operating costs at our senior housing and skilled nursing facilities have increased to secure adequate staffing and personal protective equipment. We do not know to what extent, if any, federal relief programs may alleviate these concerns. We will be directly impacted by these factors in our RIDEA assets, or indirectly impacted in our net leased assets as these factors influence our tenants’ ability and willingness to pay rent. We may be forced to restructure tenants’ long-term lease obligations or suffer adverse consequences from July 1, 2017 through the day immediately precedingbankruptcy, insolvency or financial deterioration of one or more of our tenants, operators, borrowers or managers. As a result, we expect a significant decline in revenues, net operating income and cash flow generated by operations from our healthcare portfolio.
We have significant non-recourse borrowings outstanding on our healthcare properties. As of the closing date of this report, we have conveyed to an affiliate of our lender a portfolio of 36 assets in a consensual transfer to obtain a release on $158 million in aggregate principal amount in borrowings (as discussed above) and have another $45 million in aggregate principal amount of such borrowings in default. As the Combination, (c)impact of COVID-19 continues to influence performance at our healthcare properties, we may experience additional defaults and may be subject to cash contributions or contributionsflow sweeps. Any such defaults will negatively impact our liquidity and may increase our risk of loss associated with our healthcare properties. We have entered into forbearance agreements suspending debt service payments for a limited period of time for certain portfolios, subject to satisfaction of certain intercompany receivables madeconditions, and are in active discussions with other lenders, where necessary, regarding deferral of payment obligations and forbearance/waiver of non-payments defaults for failure to satisfy certain financial or other covenants. However, if COVID-19 continues to impact performance and we are unable to obtain accommodations from our lenders, we may be required to repay outstanding obligations, including penalties, prior to the CLNS Investment Entities from July 1, 2017 throughstated maturity, or potentially have assets foreclosed upon.
From time to time, we are involved in legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits arising out of our alleged actions or the day immediately preceding the closing datealleged actions of our tenants and operators for which such tenants and operators have agreed to indemnify, defend and hold us harmless. We may be subject to increased
risk of litigation and liability claims as a result of the CombinationCOVID-19 pandemic and (d)our operating partners’ response efforts. Some of these claims may result in large damage awards, which may not be sufficiently covered by insurance or indemnity obligations. Any such litigation may have a material adverse effect on our business, results of operations and financial condition.
Given the expected present value of certain unreimbursed operating expenses of NorthStar I and NorthStar II paid on each company’s behalf by their respective advisors, and (ii) cash distributions made by the CLNS Investment Entities from July 1, 2017 through the day immediately preceding the closing dateongoing nature of the Combination, excludingoutbreak, at this time we cannot reasonably estimate the magnitude of the ultimate impact that certain distribution madeCOVID-19 will have on our business, financial performance and operating results. We believe COVID-19’s adverse impact on our business, financial performance and operating results will be significantly driven by a number of factors that we are unable to predict or control, including, for example: the CLNS Investment Entities in July 2017 relatingseverity and duration of the pandemic; the pandemic’s impact on the U.S. and global economies; the timing, scope and effectiveness of additional governmental responses to the partial repaymentpandemic; the timing and speed of economic recovery, including the availability of a certain investment.treatment or vaccination for COVID-19; and the negative impact on our fund investors, vendors and other business partners that may indirectly adversely affect us.
Completion
We may not realize the anticipated benefits of the CombinationWafra strategic partnership.
The strategic partnership with Wafra in our Digital IM Business is subjectexpected to many conditions and if these conditions are not satisfied or waived, the Combination will not be completed.
Completion of the Combination is subjectresult in certain benefits to many conditions that must be satisfied or waived under the combination agreement for the Combination to be completedus, including, among others, receipt of approval of the stockholders of NorthStar Iproviding us with liquidity to pursue strategic digital investments and NorthStar II.
In addition, each of the parties may terminate the combination agreementgrow our digital assets under certain circumstances, including, among other reasons, if the Combination is not completed by the outside date (as set forth in the combination agreement).
management as well as enhancing our ability to accelerate our digital transformation. There can be no assurance, thathowever, regarding when or the conditionsextent to the closing of the Combinationwhich we will be satisfied or waived. For example, Colony NorthStar Credit’s ability to qualify as a REIT depends, in part, on its acquisition of NorthStar I’s and NorthStar II’s qualifying REIT assets in the Combination. Accordingly, for Colony NorthStar Credit’s counsel to deliver the REIT qualification opinion that is a condition to the closing of the Combination, Colony NorthStar Credit must be able to project,realize these and its counselany other benefits we expect from the transaction, which may be difficult, unpredictable and subject to reasonably assume, that Colony NorthStar Credit will satisfydelays. For example, Wafra has agreed to pay contingent consideration of approximately $29.9 million if the REIT income and asset tests for the entire taxable yearDigital IM Business meets certain performance criteria as of the Combination. Accordingly,December 31, 2020; however, there can be no assurance that the CombinationDigital IM Business will satisfy such criteria in order for the additional consideration to be completed.earned by the Company.
If the Combination does not occur, we may incur payment obligationsIn addition, pursuant to the others.strategic partnership documentation, in the event that certain post-closing regulatory approvals are not received by July 17, 2021 (which period may be extended for up to an additional three months under certain circumstances), we will have the right to redeem the entirety of Wafra's equity investment (in which case, the carried interest participation rights acquired by Wafra will terminate), and we will have the right to cancel the warrants issued to Wafra. Further, pursuant to the strategic partnership documentation, Wafra has certain redemption rights which, if exercised, would require the Company to repurchase Wafra's equity investment, carried interest participation rights and warrants. Wafra's redemption rights are triggered upon the occurrence of certain events including key person or cause events under the governing documentation of certain Digital Colony investment vehicles and, for a limited period, upon Marc Ganzi, the Company's CEO and President, and Ben Jenkins, the Chairman and Chief Investment Officer of the Company's digital segment, ceasing to fulfill certain time and attention commitments to the Digital IM Business. If such redemption rights are exercised (either by the Company in connection with the failure to obtain post-closing regulatory approvals or by Wafra in connection with a key person or cause event), Wafra will also have a redemption right with respect to any sponsor commitments previously made to the Company's funds and vehicles. No assurance can be given that such redemption events, if triggered, would arise at a time when the Company will have the cash on hand or other available liquidity (including availability under the Company's corporate credit facility) to satisfy the redemptions, which could result in the Company being forced to allocate capital away from other potential opportunities or uses that we would otherwise consider to be the most effective use of such capital.
If the combination agreement is terminatedAdditionally, under certain circumstances we may be required to pay NorthStar I and NorthStar II certain termination feesfollowing such time as our Digital IM Business comprises 90% or transaction expenses of up to $10 million each (depending on the specific circumstances), NorthStar I may be required to pay us and NorthStar II certain termination fees or transaction expenses of up to $10 million each (depending on the specific circumstances) and NorthStar II may be required to pay us or NorthStar I certain termination fees, as applicable, or transaction expenses of up to $10 million each (depending on the specific circumstances).
If the Combination is approved by the NorthStar I and NorthStar II stockholders, the date on which we will receive Colony NorthStar Credit common stock is uncertain.
Even if the Combination is approved by the NorthStar I and NorthStar II stockholders, the date on which the Combination is consummated and we receive Colony NorthStar Credit common stock will remain uncertain, and may not occur at all. Although it is expected that the Combination will be consummated the first quarter of 2018, the completion datemore of the Combination might be later than expected dueCompany’s assets, we have agreed to delays in satisfyinguse commercially reasonable efforts to cooperate with Wafra to facilitate the conditions toconversion of Wafra’s equity investment into the closing of the Combination (including the listing by Colony NorthStar Credit of its classCompany's Class A common stock on a national securities exchange) or other unforeseen events. In addition, therestock. There can be no assuranceassurances that such conversion would occur or on what terms and conditions such conversion would occur, including whether such conversion, if it did occur in the future, would have any adverse impact on the Company, the Company’s stock price, governance and other matters.
If any or all of the risks described above, including the risk that the Combination will be completed even ifredemption obligations are triggered, were to materialize, the required stockholder approvals are obtained.
Failure to complete the Combination could negatively affect our value and our future business andCompany’s results of operations, financial results.
If the combination agreement is terminated and the Combination is not completed for any reason, including as a result of the NorthStar I stockholders’ position and/or NorthStar II stockholders’ failing to approve the necessary proposals, our ongoing businessliquidity could be materially and adversely affected and, without realizing any of the benefits of having completed the Combination, may be subject to several risks, including that:affected.
we may experience negative reactions from our investors;
we will be required to pay certain costs relating to the Combination, whether or not the Combination is completed, and, depending on the circumstances relating to a termination, may be required to pay certain termination fees or transaction expenses; and
our management’s focus and resources may be diverted from operational matters and other strategic opportunities while working to implement the Combination.114
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ITEMItem 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
IssuanceRecent Sales of EquityUnregistered Securities; Use of Proceeds from Registered Securities Upon
Redemption of Membership Units in OP ("OP Units")—Holders of OP Units
In February 2017, we issued 45,371 have the right to require the OP to redeem all or a portion of their OP Units for cash or, at our option, shares of our class A common stock upon redemption of an equal number of our OP Units, of which 31,171 OP Units were held by FHB Holding LLC (which is controlled by certain of our employees) and 14,200 OP Units were allocated between two educational institutions that heldon a one-for-one basis. During the OP Units prior to their respective redemption requests. Such institutions received the OP Units as a charitable contribution from FHB Holdings LLC.
In April 2017,three months ended June 30, 2020, we issued 1,053,306 shares of our class A common stock upon redemption of an equal number of our OP Units, of which 607,841 OP Units were held by limited liability companies controlled by Thomas J. Barrack, Jr. and 445,465 OP Units were held by FHB Holdings LLC. In connection with such redemption of OP Units, we issued 28,166 shares of our class A common stock upon conversion of an equal number of shares of our class B common stock.
In May 2017, we issued 287,035 shares of our class A common stock upon redemption of an equal number of our OP Units held collectively by an educational institution and a religious institution, who in turn had received such units as charitable contributions from Colony Capital, LLC (which is controlled by certain members of our senior management).
In August 2017, we issued 295,201 shares of our class A common stock upon redemption of an equal number of our OP Units held by certain of our employees.
Such shares of class A common stock were issued and sold in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the "Securities Act").
Issuance of Equity Securities Upon Exchange of Notes
In August 2017, we issued 207,739184,395 shares of our class A common stock to an educational institution pursuant to a holderredemption request for the same number of the 5.375% exchangeable notes upon exchange by such holder of $2,500,000 of outstanding principal on the 5.375% exchangeable notes. No consideration was received by the Company upon exchange of the 5.375% exchangeable notes for shares of our class A common stock.OP Units. Such shares of class A common stock were issued in reliance on Section 4(a)(2) of the Securities Act.Act of 1933, as amended.
Issuer RepurchasePurchases of Equity Securities by Issuer and Affiliated Purchasers
The number and weighted average price per shareCompany's common stock repurchase program expired in May 2020. There were no purchases by the Company of shares purchasedits class A common stock in the second quarter ended September 30, 2017 is set forth in the table below:of 2020.
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Period | | Total Number of Shares Purchased | | Weighted Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | | Dollar Value of Shares that May Yet Be Purchased Under the Program (1) |
July 1, 2017 through July 31, 2017
| | — |
| | N/A |
| | — |
| | $ | 132,014,594 |
|
August 1, 2017 through August 31, 2017 | | 1,388,432 |
| | $ | 13.08 |
| | 1,388,432 |
| | 113,855,223 |
|
September 1, 2017 through September 30, 2017 | | 2,974,145 |
| | 12.93 |
| | 2,974,145 |
| | 75,387,959 |
|
Total | | 4,362,577 |
| | $ | 12.98 |
| | 4,362,577 |
| | 75,387,959 |
|
__________
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(1)
| The Company's common stock repurchase program was announced by the Company on February 28, 2017. Pursuant to the common stock repurchase program, the Company may repurchase up to $300 million of the Company's class A common stock over a one-year period. |
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ITEMItem 3. | Defaults Upon Senior Securities. |
None.
ITEMItem 4. Mine Safety Disclosures.
Not applicable.
ITEMItem 5. Other Information.
Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.None.
On November 7, 2017, David Hamamoto delivered a Notice of Resignation to the Company, effective as of January 11, 2018, by which Mr. Hamamoto tendered his voluntary resignation of all director and officer positions held with the Company, its affiliates, subsidiaries and any other entity in which the Company or its affiliates is the manager or serves in a similar capacity. Mr. Hamamoto’s resignation did not involve a disagreement with the Company or any matter relating to the Company’s operations, policies or practices.On November 7, 2017, the Board of Directors appointed Richard B. Saltzman, the Company’s Chief Executive Officer & President, as a director to fill the vacancy created by Mr. Hamamoto’s resignation. The appointment of Mr. Saltzman will be effective concurrently with the effective date of Mr. Hamamoto’s resignation.
ITEMItem 6. Exhibits.
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Exhibit Number | | Description |
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3.1 | | Master Combination Agreement, dated asArticles of August 25, 2017, among Colony Capital Operating Company, LLC, NRF RED REIT Corp., NorthStar Real Estate Income Trust, Inc., NorthStar Real Estate Income Trust Operating Partnership, LP, NorthStar Real Estate Income II, Inc., NorthStar Real Estate Income Operating Partnership II, LP,Amendment and Restatement of Colony NorthStar, Credit Real Estate, Inc. and Credit RE Operating Company, LLC (incorporated by reference to Exhibit 2.13.1 to Colony NorthStar, Inc.’sthe Company’s Current Report on Form 8-K filed on August 28,January 10, 2017) |
3.2 | | |
3.3 | | |
3.4 | | |
3.5 | | |
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4.2 | | Amendment No. 2 to the Third Amended and Restated Limited Liability Company Agreement |
4.3 | | |
10.1* | | |
10.2 | | Fourth Amendment, No. 3dated as of June 29, 2020, to the ThirdSecond Amended and Restated Limited Liability CompanyCredit Agreement dated as of January 10, 2017 among Colony Capital Operating Company, LLC, the Subsidiary Borrowers from time to time party thereto, the several lenders from time to time parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 1, 2020) |
10.3 | | Investment Agreement, dated as of October 18, 2017July 7, 2020, by and among Colony Valhalla Partners I-A Holdings, L.P., a Delaware limited partnership, Colony Valhalla Partners I-B Holdings, L.P., a Delaware limited partnership, Colony Valhalla Partners II Holdings, L.P., a Delaware limited partnership, CBRE Caledon Valhalla Aggregator Holdings LP, a Delaware limited partnership and Vantage Data Centers Holdings, LLC, a Delaware limited liability company (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 13, 2020) |
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Exhibit Number | | Description |
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10.4* | | |
10.5 | | Carry Investment Agreement, dated as of July 17, 2020, by and among W-Catalina (C) LLC, Colony Capital Operating Company, LLC, Colony DCP (CI) Bermuda, LP, a Bermuda limited partnership, Colony DCP (CI) GP, LLC (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on July 23, 2020) |
10.6 | | Investor Rights Agreement, dated as of July 17, 2020, by and among Colony Capital, Inc., Colony Capital Operating Company, LLC, Colony Capital Digital Holdco, LLC, Colony DC Manager, LLC and W-Catalina (S) LLC (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed on July 23, 2020) |
10.7 | | Carried Interest Participation Agreement, dated as of July 17, 2020, by and among Colony DCP (CI) Bermuda, LP, Colony DCP (CI) GP, LLC, Colony Capital, Inc., Colony Capital Operating Company, LLC, W-Catalina (S) LLC and W-Catalina (C) LLC (incorporated by reference to Exhibit 10.4 to the Company's Current Report on Form 8-K filed on July 23, 2020) |
10.8 | | |
10.9 | | |
10.10 | | |
10.11* | | |
10.12* | | Assignment and Contribution Agreement, dated as of July 22, 2020, by and among Marc Ganzi, Benjamin Jenkins, MCG Analog, LLC, the Ganzi Extended Family Trust, BJJ Analog, LLC, DB Aviator Manager Rollover Holdings, L.P., DCR YieldCo Holdings, LP and DCR and Aviator Holdings GP, LLC |
10.13* | | Amended and Restated Partnership Agreement of DB Aviator Manager Rollover Holdings, L.P., dated as of July 22, 2020, by and among Colony Valhalla GP, LLC, Colony Capital Acquisitions, LLC, MCG Analog, LLC, Ganzi Extended Family Trust, BJJ Analog, LLC and Valhalla Management Holdings, LLC |
31.1* | | |
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101*101.INS** | | Financial statements from the Quarterly Report on Form 10-Q of Colony NorthStar, Inc. for the quarter ended September 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (1) Condensed Consolidated Balance Sheets, (2) Condensed Consolidated Statements of Operations, (3) Condensed Consolidated Statements of Comprehensive Income, (4) Condensed Consolidated Statements of Equity, (5) Condensed Consolidated Statements of Cash Flows and (6) Notes to Condensed Consolidated Financial Statements.Instance Document |
101.SCH | | Inline XBRL Taxonomy Extension Schema |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase |
104** | | Cover Page Interactive Data File |
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** | Pursuant to Rule 406T of Regulation S-T,The document does not appear in the interactive data files on Exhibit 101 heretoInteractive Data File because its XBRL tags are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 ofembedded within the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.Inline XBRL document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: November 9, 2017 August 10, 2020
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COLONY NORTHSTAR,CAPITAL, INC. |
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By: | | /s/ Richard B. SaltzmanMarc C. Ganzi |
| | Richard B. SaltzmanMarc C. Ganzi |
| | Chief Executive Officer and President (Principal Executive Officer) |
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By: | | /s/ Darren J. TangenJacky Wu |
| | Darren J. TangenJacky Wu |
| | Chief Financial Officer (Principal Financial Officer) |
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By: | | /s/ Neale Redington |
| | Neale Redington |
| | Chief Accounting Officer (Principal Accounting Officer) |