4
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
The following table presents assets and liabilities of securitization trusts and certain real estate properties that have non-controllingnoncontrolling interests as variable interest entities for which the Company is determined to be the primary beneficiary.
| | | | | | | | | | | |
| September 30, 2020 (Unaudited) | | December 31, 2019 |
Assets | | | |
Cash and cash equivalents | $ | 20,471 | | | $ | 14,109 | |
Restricted cash | 22,009 | | | 25,646 | |
Loans and preferred equity held for investment, net | 915,738 | | | 1,016,781 | |
Real estate, net | 415,452 | | | 381,608 | |
Investments in unconsolidated ventures | 303,347 | | | 0 | |
Receivables, net | 27,005 | | | 26,044 | |
Deferred leasing costs and intangible assets, net | 54,392 | | | 36,323 | |
Assets held for sale | 175,902 | | | 102,397 | |
Other assets | 23,598 | | | 26,463 | |
Mortgage loans held in securitization trusts, at fair value | 1,839,390 | | | 1,872,970 | |
Total assets | $ | 3,797,304 | | | $ | 3,502,341 | |
Liabilities | | | |
Securitization bonds payable, net | $ | 834,621 | | | $ | 833,153 | |
Mortgage and other notes payable, net | 500,439 | | | 341,480 | |
Credit facilities | 6,828 | | | 23,882 | |
Accrued and other liabilities | 111,924 | | | 124,969 | |
Intangible liabilities, net | 8,018 | | | 20,230 | |
Liabilities related to assets held for sale | 10,787 | | | 251 | |
Escrow deposits payable | 5,652 | | | 10,485 | |
Mortgage obligations issued by securitization trusts, at fair value | 1,770,924 | | | 1,762,914 | |
Total liabilities | $ | 3,249,193 | | | $ | 3,117,364 | |
|
| | | | | | | |
| March 31, 2018 (Unaudited) | | December 31, 2017 |
Assets | | | |
Cash and cash equivalents | $ | 45,309 |
| | $ | 1,320 |
|
Restricted cash | 29,281 |
| | 24,928 |
|
Loans held for investment, net | 459,882 |
| | 379,305 |
|
Real estate, net | 734,815 |
| | 8,073 |
|
Receivables, net | 48,869 |
| | 11,994 |
|
Deferred leasing costs and intangible assets, net | 69,709 |
| | — |
|
Other assets | 3,197 |
| | 38 |
|
Mortgage loans held in securitization trusts, at fair value | 3,193,298 |
| | — |
|
Total assets | $ | 4,584,360 |
| | $ | 425,658 |
|
Liabilities | | | |
Securitization bonds payable, net | $ | 91,320 |
| | $ | 108,679 |
|
Mortgage and other notes payable, net | 433,054 |
| | — |
|
Accrued and other liabilities | 29,410 |
| | 3,764 |
|
Intangible liabilities, net | 15,562 |
| | — |
|
Escrow deposits payable | 19,260 |
| | 24,928 |
|
Mortgage obligations issued by securitization trusts, at fair value | 3,051,315 |
| | — |
|
Total liabilities | $ | 3,639,921 |
| | $ | 137,371 |
|
The accompanying notes are an integral part of these consolidated financial statements.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in Thousands, Except Per Share Data)
(Unaudited)
| | | | Three Months Ended March 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, | |
| | 2018 | | 2017 | | 2020 | | 2019 | | 2020 | | 2019 | |
Net interest income | | | | | Net interest income | | | | | | | | | |
Interest income | | $ | 36,139 |
| | $ | 35,151 |
| Interest income | | $ | 36,391 | | | $ | 46,991 | | | $ | 122,003 | | | $ | 127,473 | | |
Interest expense on loans held for investment | | (7,415 | ) | | (6,104 | ) | |
Interest expense | | Interest expense | | (13,426) | | | (23,167) | | | (50,915) | | | (63,505) | | |
Interest income on mortgage loans held in securitization trusts | | 25,865 |
| | — |
| Interest income on mortgage loans held in securitization trusts | | 20,462 | | | 22,586 | | | 61,556 | | | 99,718 | | |
Interest expense on mortgage obligations issued by securitization trusts | | (24,278 | ) | | — |
| Interest expense on mortgage obligations issued by securitization trusts | | (18,204) | | | (20,299) | | | (54,627) | | | (91,690) | | |
Net interest income | | 30,311 |
| | 29,047 |
| Net interest income | | 25,223 | | | 26,111 | | | 78,017 | | | 71,996 | | |
| | | | | | |
Property and other income | | | | | Property and other income | | |
Property operating income | | 28,545 |
| | 5,139 |
| Property operating income | | 41,678 | | | 63,492 | | | 137,913 | | | 191,393 | | |
Other income | | 517 |
| | 161 |
| |
Other income (loss) | | Other income (loss) | | 30 | | | 820 | | | 1,079 | | | 1,431 | | |
Total property and other income | | 29,062 |
| | 5,300 |
| Total property and other income | | 41,708 | | | 64,312 | | | 138,992 | | | 192,824 | | |
| | | | | | |
Expenses | | | | | Expenses | | |
Management fee expense | | 8,000 |
| | — |
| Management fee expense | | 7,083 | | | 11,355 | | | 22,235 | | | 34,070 | | |
Property operating expense | | 11,719 |
| | 1,611 |
| Property operating expense | | 15,277 | | | 29,756 | | | 54,119 | | | 86,076 | | |
Transaction, investment and servicing expense | | 30,941 |
| | 701 |
| Transaction, investment and servicing expense | | 1,627 | | | 1,433 | | | 7,668 | | | 3,013 | | |
Interest expense on real estate | | 6,393 |
| | 976 |
| Interest expense on real estate | | 12,205 | | | 14,281 | | | 37,101 | | | 41,786 | | |
Depreciation and amortization | | 18,792 |
| | 2,285 |
| Depreciation and amortization | | 14,770 | | | 25,934 | | | 46,766 | | | 82,853 | | |
Administrative expense (including $285 and $0 of equity-based compensation expense, respectively) | | 3,228 |
| | 3,012 |
| |
Provision for loan losses | | Provision for loan losses | | 10,404 | | | 110,314 | | | 80,285 | | | 220,572 | | |
Impairment of operating real estate | | Impairment of operating real estate | | 3,451 | | | 272,722 | | | 33,512 | | | 282,846 | | |
Administrative expense (including $1,376, $2,910, $3,267 and $7,466 of equity-based compensation expense, respectively) | | Administrative expense (including $1,376, $2,910, $3,267 and $7,466 of equity-based compensation expense, respectively) | | 5,780 | | | 7,732 | | | 19,569 | | | 22,395 | | |
Total expenses | | 79,073 |
| | 8,585 |
| Total expenses | | 70,597 | | | 473,527 | | | 301,255 | | | 773,611 | | |
| | | | | | | | | | | | | |
Other income (loss) | | | | | Other income (loss) | | |
Unrealized gain on mortgage loans and obligations held in securitization trusts, net | | 497 |
| | — |
| |
Other gain on investments, net | | 465 |
| | — |
| |
Income (loss) before equity in earnings of unconsolidated ventures and income taxes | | (18,738 | ) | | 25,762 |
| |
Equity in earnings of unconsolidated ventures | | 15,788 |
| | 6,038 |
| |
Income tax benefit | | 549 |
| | 223 |
| |
Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net | | Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net | | (13,162) | | | (1,976) | | | (41,589) | | | 4,602 | | |
Realized gain on mortgage loans and obligations held in securitization trusts, net | | Realized gain on mortgage loans and obligations held in securitization trusts, net | | 0 | | | 2,724 | | | 0 | | | 2,772 | | |
Other gain (loss), net | | Other gain (loss), net | | 9,680 | | | (2,688) | | | (130,115) | | | (13,829) | | |
Loss before equity in earnings of unconsolidated ventures and income taxes | | Loss before equity in earnings of unconsolidated ventures and income taxes | | (7,148) | | | (385,044) | | | (255,950) | | | (515,246) | | |
Equity in earnings (loss) of unconsolidated ventures | | Equity in earnings (loss) of unconsolidated ventures | | (1,779) | | | (15,905) | | | (69,889) | | | 17,962 | | |
Income tax benefit (expense) | | Income tax benefit (expense) | | 15,357 | | | (1,046) | | | 11,544 | | | (544) | | |
Net income (loss) | | (2,401 | ) | | 32,023 |
| Net income (loss) | | 6,430 | | | (401,995) | | | (314,295) | | | (497,828) | | |
Net (income) loss attributable to noncontrolling interests: | | | | | Net (income) loss attributable to noncontrolling interests: | | |
Investment entities | | (2,370 | ) | | (9,137 | ) | Investment entities | | (1,222) | | | 37,445 | | | 6,362 | | | 38,623 | | |
Operating Partnership | | 57 |
| | — |
| Operating Partnership | | (201) | | | 8,519 | | | 7,109 | | | 10,741 | | |
Net income (loss) attributable to Colony NorthStar Credit Real Estate, Inc. common stockholders | | $ | (4,714 | ) | | $ | 22,886 |
| |
Net income (loss) attributable to Colony Credit Real Estate, Inc. common stockholders | | Net income (loss) attributable to Colony Credit Real Estate, Inc. common stockholders | | $ | 5,007 | | | $ | (356,031) | | | $ | (300,824) | | | $ | (448,464) | | |
| | | | | | | | | | | | | |
Net income (loss) per common share - basic and diluted (Note 17) | | $ | (0.05 | ) | | $ | 0.47 |
| |
Net income (loss) per common share - basic and diluted (Note 18) | | Net income (loss) per common share - basic and diluted (Note 18) | | $ | 0.04 | | | $ | (2.77) | | | $ | (2.34) | | | $ | (3.51) | | |
| | | | | | | | | | | | | |
Weighted average shares of common stock outstanding, basic and diluted (Note 17) | | 98,662 |
| | 44,399 |
| |
| | | | | |
Dividends declared per share of common stock | | $ | 0.29 |
| | $ | — |
| |
Weighted average shares of common stock outstanding - basic and diluted (Note 18) | | Weighted average shares of common stock outstanding - basic and diluted (Note 18) | | 128,583 | | | 128,541 | | | 128,537 | | | 128,341 | | |
The accompanying notes are an integral part of these consolidated financial statements.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in Thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
Net income (loss) | | $ | 6,430 | | | $ | (401,995) | | | $ | (314,295) | | | $ | (497,828) | | | |
Other comprehensive income (loss) | | | | | | | | | | |
Unrealized gain (loss) on real estate securities, available for sale | | 4,291 | | | 5,102 | | | (12,228) | | | 22,723 | | | |
Change in fair value of net investment hedges | | 0 | | | 12,791 | | | 21,764 | | | 21,124 | | | |
Foreign currency translation gain (loss) | | 12,656 | | | (14,445) | | | 4,315 | | | (13,832) | | | |
Total other comprehensive income (loss) | | 16,947 | | | 3,448 | | | 13,851 | | | 30,015 | | | |
Comprehensive income (loss) | | 23,377 | | | (398,547) | | | (300,444) | | | (467,813) | | | |
Comprehensive (income) loss attributable to noncontrolling interests: | | | | | | | | | | |
Investment entities | | (2,138) | | | 37,445 | | | 5,189 | | | 38,623 | | | |
Operating Partnership | | (519) | | | 8,439 | | | 7,091 | | | 10,040 | | | |
Comprehensive income (loss) attributable to common stockholders | | $ | 20,720 | | | $ | (352,663) | | | $ | (288,164) | | | $ | (419,150) | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Net income (loss) | | $ | (2,401 | ) | | $ | 32,023 |
|
Other comprehensive income (loss) | | | | |
Unrealized loss on real estate securities, available for sale | | (1,848 | ) | | — |
|
Total other comprehensive loss | | (1,848 | ) | | — |
|
Comprehensive income (loss) | | (4,249 | ) | | 32,023 |
|
Comprehensive (income) loss attributable to noncontrolling interests: | | | | |
Investment entities | | (2,370 | ) | | (9,137 | ) |
Operating partnership | | 57 |
| | — |
|
Comprehensive income (loss) attributable to common stockholders | | $ | (6,562 | ) | | $ | 22,886 |
|
The accompanying notes are an integral part of these consolidated financial statements.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars and Shares in Thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | | Noncontrolling Interests in Investment Entities | | Noncontrolling Interests in the Operating Partnership | | Total Equity | |
| Class A | | Class B-3 | |
| Shares | | Amount | | Shares | | Amount | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2018 | 83,410 | | | $ | 834 | | | 44,399 | | | $ | 444 | | | $ | 2,899,353 | | | $ | (193,327) | | | $ | (399) | | | $ | 2,706,905 | | | | $ | 72,683 | | | $ | 65,614 | | | $ | 2,845,202 | | |
Contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 24 | | | — | | | 24 | | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (394) | | | — | | | (394) | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Conversion of Class B-3 common stock to Class A common stock | 44,399 | | | 444 | | | (44,399) | | | (444) | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | |
Issuance and amortization of equity-based compensation | 800 | | | 8 | | | — | | | — | | | 1,835 | | | — | | | — | | | 1,843 | | | | — | | | — | | | 1,843 | | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | 13,519 | | | 13,519 | | | | — | | | 324 | | | 13,843 | | |
Dividends and distributions declared ($0.44 per Class A share and $0.15 per Class B-3 share) | — | | | — | | | — | | | — | | | — | | | (55,726) | | | — | | | (55,726) | | | | — | | | (1,340) | | | (57,066) | | |
Shares canceled for tax withholding on vested stock awards | (96) | | | (1) | | | — | | | — | | | (1,496) | | | — | | | — | | | (1,497) | | | | — | | | — | | | (1,497) | | |
Reallocation of equity | — | | | — | | | — | | | — | | | (23) | | | — | | | — | | | (23) | | | | — | | | 23 | | | — | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 14,908 | | | — | | | 14,908 | | | | (298) | | | 347 | | | 14,957 | | |
Balance as of March 31, 2019 | 128,513 | | | $ | 1,285 | | | 0 | | | $ | 0 | | | $ | 2,899,669 | | | $ | (234,145) | | | $ | 13,120 | | | $ | 2,679,929 | | | | $ | 72,015 | | | $ | 64,968 | | | $ | 2,816,912 | | |
Contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 11 | | | — | | | 11 | | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (1,198) | | | — | | | (1,198) | | |
Issuance and amortization of equity-based compensation | 32 | | | — | | | — | | | — | | | 2,713 | | | — | | | — | | | 2,713 | | | | — | | | — | | | 2,713 | | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 12,427 | | | 12,427 | | | | — | | | 297 | | | 12,724 | | |
Dividends and distributions declared ($0.44 per share) | — | | | — | | | — | | | — | | | — | | | (55,912) | | | — | | | (55,912) | | | | — | | | (1,342) | | | (57,254) | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Reallocation of equity | — | | | — | | | — | | | — | | | 744 | | | — | | | — | | | 744 | | | | — | | | (744) | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | (107,341) | | | — | | | (107,341) | | | | (880) | | | (2,569) | | | (110,790) | | |
Balance as of June 30, 2019 | 128,545 | | | $ | 1,285 | | | 0 | | | $ | 0 | | | $ | 2,903,126 | | | $ | (397,398) | | | $ | 25,547 | | | $ | 2,532,560 | | | | $ | 69,948 | | | $ | 60,610 | | | $ | 2,663,118 | | |
Contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 17 | | | — | | | 17 | | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (1,110) | | | — | | | (1,110) | | |
Issuance and amortization of equity-based compensation | — | | | — | | | — | | | — | | | 2,910 | | | — | | | — | | | 2,910 | | | | — | | | — | | | 2,910 | | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 3,368 | | | 3,368 | | | | — | | | 80 | | | 3,448 | | |
Dividends and distributions declared ($0.44 per share) | — | | | — | | | — | | | — | | | — | | | (55,915) | | | — | | | (55,915) | | | | — | | | (1,338) | | | (57,253) | | |
Shares canceled for tax withholding on vested stock awards | (6) | | | — | | | — | | | — | | | (80) | | | — | | | — | | | (80) | | | | — | | | — | | | (80) | | |
Reallocation of equity | — | | | — | | | — | | | — | | | (50) | | | — | | | — | | | (50) | | | | — | | | 50 | | | — | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | (356,031) | | | — | | | (356,031) | | | | (37,445) | | | (8,519) | | | (401,995) | | |
Balance at September 30, 2019 | 128,539 | | | $ | 1,285 | | | 0 | | | $ | 0 | | | $ | 2,905,906 | | | $ | (809,344) | | | $ | 28,915 | | | $ | 2,126,762 | | | | $ | 31,410 | | | $ | 50,883 | | | $ | 2,209,055 | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Company’s Stockholders’ Equity | | Noncontrolling Interests in Investment Entities | | Noncontrolling interests in The OP | | Total Equity |
| Class A | | Class B-3 | |
| Shares | | Amount | | Shares | | Amount | |
Balance as of December 31, 2016 | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | 714,443 |
| | $ | 170,273 |
| | $ | — |
| | $ | 884,716 |
| | $ | 350,848 |
| | $ | — |
| | $ | 1,235,564 |
|
Contributions | — |
| | — |
| | — |
| | — |
| | 354,219 |
| | — |
| | — |
| | 354,219 |
| | 14,537 |
| | — |
| | 368,756 |
|
Distributions | — |
| | — |
| | — |
| | — |
| | (17,276 | ) | | — |
| | — |
| | (17,276 | ) | | (16,333 | ) | | — |
| | (33,609 | ) |
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | 22,886 |
| | — |
| | 22,886 |
| | 9,137 |
| | — |
| | 32,023 |
|
Balance as of March 31, 2017 (Unaudited) | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | 1,051,386 |
| | $ | 193,159 |
| | $ | — |
| | $ | 1,244,545 |
| | $ | 358,189 |
| | $ | — |
| | $ | 1,602,734 |
|
| | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2017 | — |
| | $ | — |
| | — |
| | $ | — |
| | $ | 821,031 |
| | $ | 258,777 |
| | $ | — |
| | $ | 1,079,808 |
| | $ | 327,762 |
| | $ | — |
| | $ | 1,407,570 |
|
Distributions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,003 | ) | | — |
| | (1,003 | ) |
Adjustments related to the Combination | 82,484 |
| | 825 |
| | 44,399 |
| | 444 |
| | 2,073,186 |
| | (79,774 | ) | | — |
| | 1,994,681 |
| | (230,818 | ) | | 73,626 |
| | 1,837,489 |
|
Issuance and amortization of equity-based compensation | 1,004 |
| | 10 |
| | — |
| | — |
| | 275 |
| | — |
| | — |
| | 285 |
| | — |
| | — |
| | 285 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,848 | ) | | (1,848 | ) | | — |
| | — |
| | (1,848 | ) |
Common stock dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | (37,843 | ) | | — |
| | (37,843 | ) | | — |
| | — |
| | (37,843 | ) |
Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | (4,714 | ) | | — |
| | (4,714 | ) | | 2,370 |
| | (57 | ) | | (2,401 | ) |
Balance as of March 31, 2018 (Unaudited) | 83,488 |
| | $ | 835 |
| | 44,399 |
| | $ | 444 |
| | $ | 2,894,492 |
| | $ | 136,446 |
| | $ | (1,848 | ) | | $ | 3,030,369 |
| | $ | 98,311 |
| | $ | 73,569 |
| | $ | 3,202,249 |
|
The accompanying notes are an integral part of these consolidated financial statements.
8
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(in Thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity | | | Noncontrolling Interests in Investment Entities | | Noncontrolling Interests in the Operating Partnership | | Total Equity | |
| Class A | | Class B-3 | |
| Shares | | Amount | | Shares | | Amount | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2019 | 128,539 | | | $ | 1,285 | | | 0 | | | $ | 0 | | | $ | 2,909,181 | | | $ | (819,738) | | | $ | 28,294 | | | $ | 2,119,022 | | | | $ | 31,631 | | | $ | 50,697 | | | $ | 2,201,350 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (11,013) | | | — | | | (11,013) | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuance and amortization of equity-based compensation | — | | | — | | | — | | | — | | | 342 | | | — | | | — | | | 342 | | | | — | | | — | | | 342 | | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | (70,999) | | | (70,999) | | | | — | | | (1,702) | | | (72,701) | | |
Dividends and distributions declared ($0.30 per share) | — | | | — | | | — | | | — | | | — | | | (38,541) | | | — | | | (38,541) | | | | — | | | (922) | | | (39,463) | | |
Shares canceled for tax withholding on vested stock awards | (173) | | | (1) | | | — | | | — | | | (1,686) | | | — | | | — | | | (1,687) | | | | — | | | — | | | (1,687) | | |
Reallocation of equity | — | | | — | | | — | | | — | | | (41) | | | — | | | — | | | (41) | | | | — | | | 41 | | | — | | |
Effect of CECL adoption (see Note 2) | — | | | — | | | — | | | — | | | — | | | (22,644) | | | — | | | (22,644) | | | | — | | | (542) | | | (23,186) | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | (78,772) | | | — | | | (78,772) | | | | 523 | | | (1,892) | | | (80,141) | | |
Balance as of March 31, 2020 | 128,366 | | | $ | 1,284 | | | 0 | | | $ | 0 | | | $ | 2,907,796 | | | $ | (959,695) | | | $ | (42,705) | | | $ | 1,906,680 | | | | $ | 21,141 | | | $ | 45,680 | | | $ | 1,973,501 | | |
Contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 200,467 | | | — | | | 200,467 | | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (3,156) | | | — | | | (3,156) | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuance and amortization of equity-based compensation | 237 | | | 2 | | | — | | | — | | | 1,547 | | | — | | | — | | | 1,549 | | | | — | | | — | | | 1,549 | | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 67,946 | | | 67,946 | | | | 257 | | | 1,404 | | | 69,607 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Shares canceled for tax withholding on vested stock awards | (20) | | | — | | | — | | | — | | | (81) | | | — | | | — | | | (81) | | | | — | | | — | | | (81) | | |
Reallocation of equity | — | | | — | | | — | | | — | | | 1,777 | | | — | | | — | | | 1,777 | | | | — | | | (1,777) | | | — | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Costs of noncontrolling equity | | | — | | | — | | | — | | | (466) | | | — | | | — | | | (466) | | | | — | | | — | | | (466) | | |
Investment by JV partner in consolidated JV and equity reallocation related to that partner’s return (see Note 2) | — | | | — | | | — | | | — | | | (70,439) | | | — | | | — | | | (70,439) | | | | 70,439 | | | — | | | — | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | (227,059) | | | — | | | (227,059) | | | | (8,107) | | | (5,418) | | | (240,584) | | |
Balance as of June 30, 2020 | 128,583 | | | $ | 1,286 | | | 0 | | | $ | 0 | | | $ | 2,840,134 | | | $ | (1,186,754) | | | $ | 25,241 | | | $ | 1,679,907 | | | | $ | 281,041 | | | $ | 39,889 | | | $ | 2,000,837 | | |
Contributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | 27 | | | — | | | 27 | | |
Distributions | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | (8,724) | | | — | | | (8,724) | | |
Issuance and amortization of equity-based compensation | — | | | — | | | — | | | — | | | 1,376 | | | — | | | — | | | 1,376 | | | | — | | | — | | | 1,376 | | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 15,713 | | | 15,713 | | | | 916 | | | 318 | | | 16,947 | | |
Shares canceled for tax withholding on vested stock awards | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | | | | — | | | — | | | (1) | | |
Reallocation of equity | — | | | — | | | — | | | — | | | (296) | | | — | | | — | | | (296) | | | | — | | | 296 | | | — | | |
Costs of noncontrolling equity | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | |
Investment by JV partner in consolidated JV and equity reallocation related to that partner's return (see Note 2) | — | | | — | | | — | | | — | | | 1,679 | | | — | | | — | | | 1,679 | | | | (1,679) | | | — | | | — | | |
Net income (loss) | — | | | — | | | — | | | — | | | — | | | 5,007 | | | — | | | 5,007 | | | | 1,222 | | | 201 | | | 6,430 | | |
Balance as of September 30, 2020 | 128,583 | | | $ | 1,286 | | | 0 | | | $ | 0 | | | $ | 2,842,892 | | | $ | (1,181,747) | | | $ | 40,954 | | | $ | 1,703,385 | | | | $ | 272,803 | | | $ | 40,704 | | | $ | 2,016,892 | | |
The accompanying notes are an integral part of these consolidated financial statements.
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
| | | Three Months Ended March 31, | | Nine Months Ended September 30, | |
| 2018 | | 2017 | | 2020 | | 2019 | |
Cash flows from operating activities: | | | | Cash flows from operating activities: | | | | |
Net income (loss) | $ | (2,401 | ) | | $ | 32,023 |
| Net income (loss) | $ | (314,295) | | | $ | (497,828) | | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | |
Equity in earnings of unconsolidated ventures | (15,788 | ) | | (6,038 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | |
Equity in (earnings) losses of unconsolidated ventures | | Equity in (earnings) losses of unconsolidated ventures | 69,889 | | | (17,962) | | |
Depreciation and amortization | 18,792 |
| | 2,285 |
| Depreciation and amortization | 46,766 | | | 82,853 | | |
Straight-line rental income | (1,373 | ) | | (60 | ) | Straight-line rental income | (3,100) | | | (5,049) | | |
Amortization of above/below market lease values, net | 104 |
| | 67 |
| Amortization of above/below market lease values, net | (409) | | | (2,401) | | |
Amortization of premium/accretion of discount and fees on investments and borrowings, net | (1,772 | ) | | (1,486 | ) | Amortization of premium/accretion of discount and fees on investments and borrowings, net | (7,823) | | | (9,239) | | |
Amortization of deferred financing costs | 384 |
| | 828 |
| Amortization of deferred financing costs | 9,522 | | | 6,803 | | |
Interest accretion on investments | (530 | ) | | (1,878 | ) | |
Amortization of right-of-use lease assets and operating lease liabilities | | Amortization of right-of-use lease assets and operating lease liabilities | 74 | | | 73 | | |
Paid-in-kind interest added to loan principal, net of interest received | | Paid-in-kind interest added to loan principal, net of interest received | 3,856 | | | (5,634) | | |
Distributions of cumulative earnings from unconsolidated ventures | 13,687 |
| | 1,829 |
| Distributions of cumulative earnings from unconsolidated ventures | 13,429 | | | 53,509 | | |
Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net | (497 | ) | | — |
| |
Unrealized (gain) loss on mortgage loans and obligations held in securitization trusts, net | | Unrealized (gain) loss on mortgage loans and obligations held in securitization trusts, net | 41,589 | | | (4,602) | | |
Realized loss on mortgage loans and obligations held in securitization trusts, net | | Realized loss on mortgage loans and obligations held in securitization trusts, net | 0 | | | (2,772) | | |
Realized loss on securities from write-down to fair value | | Realized loss on securities from write-down to fair value | 32,606 | | | 0 | | |
Realized loss on sale of real estate securities, available for sale | | Realized loss on sale of real estate securities, available for sale | 51,889 | | | 0 | | |
Realized gain on sale of real estate | | Realized gain on sale of real estate | (9,240) | | | 0 | | |
Realized loss on sale of loans receivable | | Realized loss on sale of loans receivable | 1,457 | | | 0 | | |
Provision for loan losses | | Provision for loan losses | 80,285 | | | 220,572 | | |
Impairment of operating real estate | | Impairment of operating real estate | 33,512 | | | 282,846 | | |
Amortization of equity-based compensation | 285 |
| | — |
| Amortization of equity-based compensation | 3,265 | | | 7,466 | | |
Mortgage notes above/below market value amortization | (173 | ) | | — |
| Mortgage notes above/below market value amortization | (628) | | | 276 | | |
Deferred income tax (benefit) expense | (88 | ) | | — |
| Deferred income tax (benefit) expense | (397) | | | (3,298) | | |
Other (gain) loss, net | | Other (gain) loss, net | 23,524 | | | 0 | | |
Changes in assets and liabilities: | | | | Changes in assets and liabilities: | | |
Restricted cash | (882 | ) | | 469 |
| |
Receivables, net | 16,572 |
| | — |
| Receivables, net | (30,907) | | | (1,097) | | |
Deferred costs and other assets | (13,883 | ) | | 2,923 |
| Deferred costs and other assets | 7,169 | | | 718 | | |
Due to related party | 3,340 |
| | — |
| Due to related party | (1,824) | | | (792) | | |
Other liabilities | 1,499 |
| | 208 |
| Other liabilities | (5,347) | | | 8,763 | | |
Net cash provided by operating activities | 17,276 |
| | 31,170 |
| Net cash provided by operating activities | 44,862 | | | 113,205 | | |
Cash flows from investing activities: | | | | Cash flows from investing activities: | | |
Origination and funding of loans held for investment, net | (5,059 | ) | | (52,989 | ) | |
Repayment on loans held for investment | 115,724 |
| | 74,371 |
| |
Cash received in the Combination | 225,169 |
| | 6,509 |
| |
Acquisition, origination and funding of loans and preferred equity held for investment, net | | Acquisition, origination and funding of loans and preferred equity held for investment, net | (122,424) | | | (1,250,018) | | |
Repayment on loans and preferred equity held for investment | | Repayment on loans and preferred equity held for investment | 334,208 | | | 426,438 | | |
| Repayment on loans held for sale | | Repayment on loans held for sale | 137,132 | | | 0 | | |
Proceeds from sale of real estate | — |
| | 8,916 |
| Proceeds from sale of real estate | 300,469 | | | 0 | | |
Improvements of real estate | (2,735 | ) | | — |
| |
Cash and restricted cash received related to foreclosure of loans held for investment | | Cash and restricted cash received related to foreclosure of loans held for investment | 0 | | | 3,436 | | |
Acquisition of and additions to real estate, related intangibles and leasing commissions | | Acquisition of and additions to real estate, related intangibles and leasing commissions | (19,749) | | | (16,773) | | |
Investments in unconsolidated ventures | (1,730 | ) | | (4,129 | ) | Investments in unconsolidated ventures | (47,541) | | | (28,344) | | |
Proceeds from sale of investments in unconsolidated ventures | | Proceeds from sale of investments in unconsolidated ventures | 99,985 | | | 115,298 | | |
Distributions in excess of cumulative earnings from unconsolidated ventures | 21,739 |
| | 5,751 |
| Distributions in excess of cumulative earnings from unconsolidated ventures | 25,011 | | | 202,732 | | |
Acquisition of real estate securities, available for sale | (11,762 | ) | | — |
| |
Change in restricted cash | (1,343 | ) | | (142 | ) | |
Net cash provided by investing activities | 340,003 |
| | 38,287 |
| |
| Repayment of real estate securities, available for sale, from sales | | Repayment of real estate securities, available for sale, from sales | 118,586 | | | 0 | | |
Repayment of real estate securities, available for sale, from cost recovery | | Repayment of real estate securities, available for sale, from cost recovery | 3,020 | | | 0 | | |
Repayment of principal in mortgage loans held in securitization trusts | | Repayment of principal in mortgage loans held in securitization trusts | 19,816 | | | 0 | | |
Proceeds from sale of mortgage loans held in securitization trusts | | Proceeds from sale of mortgage loans held in securitization trusts | 0 | | | 39,848 | | |
Net receipts on settlement of derivative instruments | | Net receipts on settlement of derivative instruments | 19,637 | | | 27,699 | | |
Deposit on investments | | Deposit on investments | 0 | | | (372) | | |
Change in escrow deposits | | Change in escrow deposits | (36,855) | | | 20,817 | | |
Net cash provided (used in) by investing activities | | Net cash provided (used in) by investing activities | 831,295 | | | (459,239) | | |
Cash flows from financing activities: | | | | Cash flows from financing activities: | | |
Distributions paid on common stock | (18,849 | ) | | — |
| Distributions paid on common stock | (51,705) | | | (167,452) | | |
Distributions paid on common stock to noncontrolling interests | | Distributions paid on common stock to noncontrolling interests | (922) | | | (4,020) | | |
Shares canceled for tax withholding on vested stock awards | | Shares canceled for tax withholding on vested stock awards | (1,768) | | | (1,576) | | |
Borrowings from mortgage notes | 41,823 |
| | 18,043 |
| Borrowings from mortgage notes | 15,026 | | | 85,660 | | |
Repayment of mortgage notes | (762 | ) | | (64,048 | ) | Repayment of mortgage notes | (156,066) | | | (4,448) | | |
Borrowings from credit facilities | 25,149 |
| | — |
| Borrowings from credit facilities | 255,128 | | | 1,830,412 | | |
Repayment of credit facilities | (71,740 | ) | | — |
| Repayment of credit facilities | (745,729) | | | (1,288,773) | | |
| Repayment of securitization bonds | (17,474 | ) | | — |
| Repayment of securitization bonds | 0 | | | (81,372) | | |
Repayment of mortgage obligations issued by securitization trusts | | Repayment of mortgage obligations issued by securitization trusts | (19,816) | | | 0 | | |
Payment of deferred financing costs | (4,675 | ) | | — |
| Payment of deferred financing costs | (6,943) | | | (7,413) | | |
Contributions | — |
| | 35,956 |
| |
Distributions | (1,003 | ) | | (33,609 | ) | |
Net cash used in financing activities | (47,531 | ) | | (43,658 | ) | |
Net increase in cash and cash equivalents | 309,748 |
| | 25,799 |
| |
Cash and cash equivalents - beginning of period | 25,204 |
| | 13,982 |
| |
Cash and cash equivalents - end of period | $ | 334,952 |
| | $ | 39,781 |
| |
Contributions from noncontrolling interests | | Contributions from noncontrolling interests | 200,028 | | | 52 | | |
Distributions to noncontrolling interests | | Distributions to noncontrolling interests | (22,893) | | | (2,702) | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | (535,660) | | | 358,368 | | |
Effect of exchange rates on cash, cash equivalents and restricted cash | | Effect of exchange rates on cash, cash equivalents and restricted cash | (1,132) | | | 84 | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | 339,365 | | | 12,418 | | |
Cash, cash equivalents and restricted cash - beginning of period | | Cash, cash equivalents and restricted cash - beginning of period | 195,684 | | | 187,463 | | |
Cash, cash equivalents and restricted cash - end of period | | Cash, cash equivalents and restricted cash - end of period | $ | 535,049 | | | $ | 199,881 | | |
The accompanying notes are an integral part of these consolidated financial statements.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in Thousands)
(Unaudited) | | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2020 | | 2019 | | |
Reconciliation of cash, cash equivalents, and restricted cash to consolidated balance sheets | | | | | |
Beginning of the period | | | | | |
Cash and cash equivalents | $ | 69,619 | | | $ | 77,317 | | | |
Restricted cash | 126,065 | | | 110,146 | | | |
Total cash, cash equivalents and restricted cash, beginning of period | $ | 195,684 | | | $ | 187,463 | | | |
| | | | | |
End of the period | | | | | |
Cash and cash equivalents | $ | 461,990 | | | $ | 60,332 | | | |
Restricted cash | 73,059 | | | 139,549 | | | |
Total cash, cash equivalents and restricted cash, end of period | $ | 535,049 | | | $ | 199,881 | | | |
| | | | | | | | | | | | | |
| Nine Months Ended September 30, | | |
| 2020 | | 2019 | | |
| | | | | |
| | | | | |
| | | | | |
Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| | | | | |
| | | | | |
Consolidation of securitization trust (VIE asset/liability additions) | $ | 0 | | | $ | 59,126 | | | |
Deconsolidation of securitization trust (VIE asset/liability reductions) | 0 | | | (1,239,627) | | | |
Accrual of distribution payable | (13,164) | | | 19,087 | | | |
Foreclosure of loans held for investment, net of provision for loan losses | 0 | | | 127,356 | | | |
Right-of-use lease assets and operating lease liabilities | (730) | | | 26,781 | | | |
Assets transferred to held for sale (Note 7) | 0 | | | 183,895 | | | |
Liabilities related to assets held for sale (Note to 7) | 0 | | | 5,487 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Conversion of Class B-3 common stock to Class A common stock | 0 | | | 444 | | | |
| | | | | |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Supplemental disclosure of non-cash investing and financing activities: | | | |
Assets acquired in Combination (refer to Note 3) | $ | 6,916,046 |
| | $ | — |
|
Liabilities assumed in Combination (refer to Note 3) | 4,812,353 |
| | — |
|
Noncontrolling interests assumed in Combination (refer to Note 3) | 82,320 |
| | — |
|
Common stock issued for acquisition of NorthStar I and NorthStar II (refer to Note 3) | 2,021,373 |
| | — |
|
Deconsolidation of certain CLNS Contributed Portfolio investments (refer to Note 2) | 313,133 |
| | — |
|
Secured Financing (refer to Note 4) | 50,314 |
| | — |
|
Other Payables to Manager adjustment (refer to Note 11) | 2,934 |
| | — |
|
Noncontrolling interests in the OP | 73,626 |
| | — |
|
Consolidation of securitization trust (VIE asset / liability) | 134,398 |
| | — |
|
Escrow deposits payable related to loans held for investment | 3,856 |
| | — |
|
Accrual of distribution payable | 18,994 |
| | — |
|
Non-cash distributions related to unconsolidated ventures | — |
| | 933 |
|
Loans held for investment payoff due from servicer | 21,189 |
| | 37,335 |
|
Foreclosure of loans held for investment | — |
| | 8,789 |
|
Assets acquired through the CLNS Merger (refer to Note 2) | — |
| | 485,891 |
|
Liabilities assumed through the CLNS Merger (refer to Note 2) | — |
| | 161,533 |
|
The accompanying notes are an integral part of these consolidated financial statements.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| |
1. | Business and Organization |
1. Business and Organization
Colony NorthStar Credit Real Estate, Inc. (the(together with its consolidated subsidiaries, the “Company”) is a commercial real estate (“CRE”) credit real estate investment trust (“REIT”) focused on originating, acquiring, financing and managing a diversified portfolio consisting primarily of CRE senior mortgage loans, mezzanine loans, preferred equity, debt securitiesinvestments and net leased properties predominantly in the United States. CRE debt investments include seniorprimarily consist of first mortgage loans, which the Company expects to be its primary investment strategy. Additionally, the Company may selectively originate mezzanine loans and make preferred equity and participations in suchinvestments, which may include profit participations. The mezzanine loans and preferred investments equity interests. CRE debt securities primarily consistmay be in conjunction with the Company’s origination of commercial mortgage-backed securities (“CMBS”) (including “B-pieces” of a CMBS securitization pool) or CRE collateralized loan obligations (“CLOs”) (collateralized by pools of CRE debt investments).corresponding first mortgages on the same properties. Net leased properties consist of CRE properties with long-term leases to tenants on a net-lease basis, where such tenants generally will be responsible for property operating expenses such as insurance, utilities, maintenance capital expenditures and real estate taxes. The Company will continue to target net leased equity investments on a selective basis. The Company also currently has investments in CRE debt securities primarily consisting of commercial mortgage-backed securities (“CMBS”) (including “B-pieces” of a CMBS securitization pool) or CRE collateralized loan obligations (“CLOs”) (including the junior tranches thereof, collateralized by pools of CRE debt investments).
The Company was organized in the state of Maryland on August 23, 2017. On September 15, 2017, Colony NorthStar, Inc., (“Colony NorthStar”), a publicly traded REIT listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “CLNS,” made an initial capital contribution of $1,000 to the Company. On January 31, 2018, the Company completed the transactions contemplated by that certain Master Combination Agreement, dated as of August 25, 2017, as amended and restated on November 20, 2017 (the “Combination Agreement,” as further discussed below). The Company intendselected to qualifybe taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year endingended December 31, 2018. Effective June 25, 2018, the Company changed its name from Colony NorthStar Credit Real Estate, Inc. to Colony Credit Real Estate, Inc. Also on June 25, 2018, Colony NorthStar, Inc. changed its name to Colony Capital, Inc. The Company conducts all of its activities and holds substantially all of its assets and liabilities through its operating subsidiary, Credit RE Operating Company, LLC (the “Operating Partnership” or “OP”). At March 31, 2018,September 30, 2020, the Company owned 97.6%97.7% of the OP, as its sole managing member. The remaining 2.4%2.3% is owned primarily by an affiliate of the Company as noncontrolling interests.
The Company is externally managed and has no0 employees. The Company is managed by CLNC Manager, LLC (the “Manager”), a Delaware limited liability company and a wholly-owned and indirect subsidiary of Colony Capital Operating Company, LLC (“CLNSCLNY OP”), a Delaware limited liability company and the operating company of Colony NorthStar.Capital. Colony NorthStarCapital manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies.
The Combination
Pursuant to the Combination Agreement, (i) CLNSCLNY OP contributed and conveyed to the Company a select portfolio of assets and liabilities (the “CLNS“CLNY OP Contributed Portfolio”) of CLNSCLNY OP (the “CLNS“CLNY OP Contribution”), (ii) NRF RED REIT Corp., a Maryland corporation and indirect subsidiary of CLNSCLNY OP (“RED REIT”) contributed and conveyed to the OP a select portfolio of assets and liabilities (the “RED REIT Contributed Portfolio” and, together with the CLNSCLNY OP Contributed Portfolio, the “CLNS“CLNY Contributed Portfolio”) of RED REIT (the “RED REIT Contribution” and, together with the CLNSCLNY OP Contribution, the “CLNS“CLNY Contributions”), (iii) NorthStar Real Estate Income Trust, Inc. (“NorthStar I”), a publicly registered non-traded REIT sponsored and managed by a subsidiary of Colony NorthStar,Capital, merged with and into the Company, with the Company surviving the merger (the “NorthStar I Merger”), (iii)(iv) NorthStar Real Estate Income II, Inc. (“NorthStar II”), a publicly registered non-traded REIT sponsored and managed by a subsidiary of Colony NorthStar,Capital, merged with and into the Company, with the Company surviving the merger (the “NorthStar II Merger” and, together with the NorthStar I Merger, the “Mergers”), and (v) immediately following the Mergers, the Company contributed and conveyed to the OP the CLNSCLNY OP Contributed Portfolio and the equity interests of each of NorthStar Real Estate Income Trust Operating Partnership, LP, a Delaware limited partnership and the operating partnership of NorthStar I, and NorthStar Real Estate Income Operating Partnership II, LP, a Delaware limited partnership and the operating partnership of NorthStar II, then-owned by the Company in exchange for units of membership interest in the OP (the “Company Contribution” and, collectively with the Mergers and the CLNSCLNY Contributions, the “Combination”).
On January 18, 2018, the Combination was approved by the stockholders of NorthStar I and NorthStar II. The Combination closed on January 31, 2018 (the “Closing Date”) and the Company’s Class A common stock, par value $0.01 per share (the “Class A common stock”), began trading on the NYSENew York Stock Exchange (“NYSE”) on February 1, 2018 under the symbol “CLNC.”
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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The Combination is accounted for under the acquisition method for business combinations pursuant to Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, with the Company as the accounting acquirer.
DetailsSegment Realignment
During the third quarter of 2019, the Company realigned the business and reportable segment information to reflect how the Chief Operating Decision Makers (“CODM”) regularly review and manage the business. Refer to Note 17, “Segment Reporting” for further detail.
Impact of COVID-19
Through the third quarter of 2020, countries around the world continue to face healthcare and economic challenges arising from the coronavirus disease 2019, or COVID-19. 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 loans and preferred equity held for investment and real estate investments in the hospitality and retail sectors have experienced or anticipate a myriad of challenges, including, but not limited to: significant declines in operating cash flows of the Combination are described more fullyCompany’s investments which in turn affect their ability to meet debt service and covenant requirements on investment-level debt (non-recourse to the Company); flexible lease payment terms sought by tenants; increased property operating costs such as labor and supplies as a result of COVID-19; potential payment defaults on the Company's loans and preferred equity held for investment; and a distressed market affecting real estate values in general. 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 fallout from COVID-19 continue to affect the valuation of the Company’s financial assets, carried at fair value. The Company’s consideration and assessment of impairment is discussed further in Note 3, “Business Combinations”“Loans and Preferred Equity Held for Investment, net and Loans Held for Sale,” Note 5, “Real Estate Securities, Available for Sale,” Note 6, “Real Estate, net and Real Estate Held for Sale” and Note 14, “Fair Value.”
A prolonged economic downturn as a result of efforts to contain COVID-19 may continue to negatively affect the Company’s financial condition and results of operations. While the extent and duration of the broad effects of COVID-19 on the global economy and the accounting treatment thereofCompany remain unclear, the Company believes it has materially addressed overall recoverability in Note 2, “Summaryvalue across its assets based upon external factors known to date and assumptions using the Company’s best estimate at this time. The Company will continue to monitor the progress of the COVID-19 crisis and reassess its effects on the Company’s results of operations and recoverability in value across its assets as conditions change.
2. Summary of Significant Accounting Policies.”Policies
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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| |
2. | Summary of Significant Accounting Policies |
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 (“U.S. 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, 2018,2020, or for any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the CLNS Investment Entities, NorthStar I and NorthStar II and notes thereto included in, or presented as exhibits to, the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
The consolidated financial statements include the results of operations of Colony NorthStar Credit Real Estate, Inc. and the consolidated CLNS Investment Entities for periods on or prior to the closing of the Combination on January 31, 2018 and the combined operations of Colony NorthStar Credit Real Estate, Inc., NorthStar I and NorthStar II beginning February 1, 2018, following the closing of the Combination.
The assets and liabilities contributed by CLNS to the Company consisted of its ownership interests in certain investment entities (the “CLNS Investment Entities”), ranging from 38% to 100%. The remaining interests in the CLNS Investment Entities are owned by investment vehicles sponsored by Colony NorthStar or third parties and were not contributed to the Company.
The CLNS Contributions were accounted for as a reorganization of entities under common control, since both the Company and CLNS Investment Entities were under common control of Colony NorthStar at the time the contributions were made. Accordingly, the contributed assets and liabilities were recorded at carryover basis and the Company’s financial statements for prior periods were recast to reflect the consolidation of the CLNS Investment Entities as if the contribution had occurred on the date of the earliest period presented. The assets, liabilities and noncontrolling interests of the CLNS Investment Entities in the consolidated financial statements for periods prior to the Combination were carved out of the books and records of Colony NorthStar at their historical carrying amounts. Accordingly, the historical consolidation financial statements were prepared giving consideration to the rules and regulations of the Securities and Exchange Commission (“SEC”) and related guidance provided by the SEC Staff with respect to carve-out financial statements and reflect allocations of certain corporate costs from Colony NorthStar. These charges were based on either specifically identifiable costs incurred on behalf of the CLNS Investment Entities or an allocation of costs estimated to be applicable to the CLNS Investment Entities, primarily based on the relative assets under management of the CLNS Investment Entities to Colony NorthStar’s total assets under management. Such costs do not necessarily reflect what the actual costs would have been if the Company had been operating as a separate stand-alone public entity for periods prior to the Combination.
Following the Combination, the Company reconsidered whether it was the primary beneficiary of certain variable interest entities (“VIEs”), which resulted in the deconsolidation of certain CLNS Investment Entities and the consolidation of certain securitization trusts in which NorthStar I or NorthStar II held an interest, as more fully described below. Accordingly, comparisons of financial information for periods prior the Combination with subsequent periods may not be meaningful.2019.
The Combination
The Combination is accounted for under the acquisition method for business combinations pursuant to ASC Topic 805, Business Combinations. In the Combination, the Company was considered to be the accounting acquirer so all of its assets and liabilities immediately prior to the closing of the Combination are reflected at their historical carrying values. The consideration transferred by the Company established a new accounting basis for the assets acquired, liabilities assumed and noncontrolling interests of NorthStar I and NorthStar II, which were measured at their respective fair values on the Closing Date of the Combination.Date.
Formation of Colony NorthStar
Colony NorthStar was formed through a tri-party merger (the “CLNS Merger”) among Colony Capital, Inc. (“Colony Capital”), NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. (“NRF”), which closed on January 10, 2017 (the “CLNS Merger Closing Date”). Colony Capital was determined to be the accounting acquirer in the CLNS Merger. Accordingly, the combined financial information of the CLNS Investment Entities included herein as of any date or for any periods on or prior to the CLNS Merger Closing Date represent the CLNS Investment Entities from Colony Capital. On the CLNS Merger Closing
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Use of Estimates
Date, the CLNS Investment Entities were reflected by Colony NorthStar at their pre-CLNS Merger carrying values, while the CLNS Investment Entities from NRF were reflected by Colony NorthStar at their CLNS Merger fair values. The resultspreparation of operations of the CLNS Investment Entities from NRF are included in these pre-Combinationconsolidated financial statements effectivein conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from January 11, 2017.those estimates and assumptions.
Principles of Consolidation
The accompanying combinedconsolidated financial statements include the accounts of the Company and theirits controlled subsidiaries and consolidated VIEs.subsidiaries. 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.
The Company consolidates entities in which they haveit has a controlling financial interest by first considering if an entity meets the definition of a VIEvariable 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
Variable Interest Entities—A VIE is an entity that either (i) lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determinationparties; (ii) whose equity holders lack the characteristics of whether an entitya controlling financial interest; or (iii) is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
established with non-substantive voting rights. A VIE must beis consolidated only by its primary beneficiary, which is defined as the party who along with its affiliates and agents has both the: (i)a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly impactaffect the VIE’s economic performance;performance, and (ii)(b) obligation to absorb the losses or right to receive benefits of the VIE or the right to receive the benefits from the VIE, whichthat could be significant to the VIE. The Company determinesalso considers interests held by its related parties, including de facto agents. The Company assesses whether it is the primary beneficiarya member of a VIE by consideringrelated 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 the related party analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment;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 other intereststhe related party to provide financial support; considerationfund operating losses of the VIE; and the similarity and significance of the VIE’s purpose and design, including the risks the VIE was designedbusiness activities to create and pass through to its variable interest holders and the similarity with and significance to the business activitiesthose of the Company and the other interests.related party. The Company reassesses its determination of whether itan entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of a VIE each reporting period. Significant judgments related to these determinations includewhich activities most significantly affect the entities’ performance, and estimates about the current and future fair valuevalues and performance of investmentsassets held by thesethe VIE.
Voting Interest Entities—Unlike VIEs, voting interest entities have sufficient equity to finance their activities and general market conditions.
equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company evaluates its investmentsconsolidates 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 financings, including investmentscircumstances cause a change in unconsolidated venturesthe 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 securitization financing transactions,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 determine whether each investment or financing is a VIE.fair value but continues to be carried at historical cost. The Company analyzes new investments and financings,may also deconsolidate a subsidiary as well as reconsideration events for existing investments and financings,a result of this reassessment, which varymay result in a gain or loss recognized upon deconsolidation depending on typethe carrying values of investment or financing.deconsolidated assets and liabilities compared to the fair value of any interests retained.
As of March 31, 2018,September 30, 2020, the Company has identified certain consolidated and unconsolidated VIEs. Assets of each of the VIEs, other than the OP, may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.
Consolidated VIEs
The Company'sCompany’s operating subsidiary, the 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 the OP, is the managing member of the OP and exercises full responsibility, discretion and control over the day-to-day management of the OP. The
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
noncontrolling interests in the OP do not have 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 the OP to be a VIE. The Company, as managing member, has the power to direct the core activities of the OP that most significantly affect OP'sthe OP’s performance, and through its majority interest in the OP, has both the right to receive benefits from and the obligation to absorb losses of the OP. Accordingly, the Company is the primary beneficiary of the OP and consolidates the OP. As the Company conducts
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
its business and holds its assets and liabilities through the OP, the total assets and liabilities of the OP represent substantially all of the total consolidated assets and liabilities of the Company.Company.
Other consolidated VIEs include the Investing VIEs (as defined and discussed below) and certain operating real estate properties that have noncontrolling interests. The noncontrolling interests in the operating real estate properties represent third party joint venture partners with ownership ranging from 3.5% to 20.0%. These noncontrolling interests do not have substantive kick-out ornor participating rights.
Investing VIEs
The Company’s investments in securitization financing entities (“Investing VIEs”) include subordinate first-loss tranches of securitization trusts, which represent interests in such VIEs. Investing VIEs are structured as pass through entities that receive principal and interest payments from the underlying debt collateral assets and distribute those payments to the securitization trust’s certificate holders, including the most subordinate tranches of the securitization trust. Generally, a securitization trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust, and as such may qualify as the primary beneficiary of the trust.
If it is determined that the Company is the primary beneficiary of an Investing VIE as a result of acquiring the subordinate first-loss tranches of the securitization trust, the Company would consolidate the assets, liabilities, income and expenses of the entire Investing VIE. The assets held by an Investing VIE are restricted and can only be used to fulfill its own obligations. The obligations of an Investing VIE have neither any recourse to the general credit of the Company as the consolidatorconsolidating parent entity of an Investing VIE, nor to any of the Company’s other consolidated entities.
As of March 31, 2018,September 30, 2020, the Company held subordinate tranches of securitization trusts in three2 Investing VIEs for which the Company has determined it is the primary beneficiary because it has the power to direct the activities that most significantly impact the economic performance of the securitization trusts. The Company’s subordinate tranches of the securitization trusts, which represent the retained interest and related interest income, are eliminated in consolidation. In accordance with the Financial Accounting Standards Board (“FASB”) ASC 810, Consolidation,As a result, all of the assets, liabilities (obligations to the certificate holders of the securitization trusts, less the Company’s retained interest from the subordinate tranches of the securitization trusts), income and expenseexpenses of the Investing VIEs are presented in the consolidated financial statements of the Company. As a result,Company although the Company legally owns the subordinate tranches of the securitization trusts only, U.S. GAAP requires the Company to present the assets, liabilities, income and expenses of the entire securitization trust on its consolidated financial statements.only. Regardless of the presentation, the Company’s consolidated financial statements of operations ultimately reflect the net income attributable to its retained interest in the subordinate tranches of the securitization trusts. Refer to Note 7,5, “Real Estate Securities, Available for Sale” for further discussion.
The Company elected the fair value option for the initial recognition of the assets and liabilities of its consolidated Investing VIEs. Interest income and interest expense associated with the Investing VIEs will be recordedare presented separately on the consolidated statements of operations. The Company will separately presentoperations, and the assets and liabilities of its consolidatedthe Investing VIEs are separately presented as “Mortgage loans held in securitization trusts, at fair value” and “Mortgage obligations issued by securitization trusts, at fair value,” respectively, on itsthe consolidated balance sheets. Refer to Note 15,14, “Fair Value” for further discussion.
The Company has adopted guidance issued by the FASB,Financial Accounting Standards Board (“FASB”), allowing the Company to measure both the financial assets and liabilities of a qualifying collateralized financing entity (“CFE”), such as its Investing VIEs, using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. A CFE is a VIE that holds financial assets, issues beneficial interests in those assets and has no more than nominal equity, and the beneficial interests have contractual recourse only to the related assets of the CFE. As the liabilities of the Company’s Investing VIEs are marketable securities with observable trade data, their fair value is more observable and is referenced to determine the fair value forof the assets of its Investing VIEs. Refer to Note 15,14, “Fair Value” for further discussion.
Unconsolidated VIEsUse of Estimates
AsThe preparation of March 31, 2018,consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company identified unconsolidated VIEs relatedand its controlled subsidiaries. The portions of the equity, net income and other comprehensive income of consolidated subsidiaries that are not attributable to its securities investments, indirectthe parent are presented separately as amounts attributable to noncontrolling interests in real estate through real estate private equity funds (“PE Investments”) and CRE debt investments. Assets of each of the VIEs may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
consolidated financial statements.
The following table presentsCompany consolidates entities in which it has a controlling financial interest by first considering if an entity meets the Company’s classification, carrying value and maximum exposuredefinition of unconsolidated VIEs as of March 31, 2018 (dollars in thousands):
|
| | | | | | | | |
| | Carrying Value | | Maximum Exposure to Loss |
Real estate securities, available for sale | | $ | 176,194 |
| | $ | 176,194 |
|
Investments in unconsolidated ventures | | 379,018 |
| | 379,018 |
|
Loans held for investment, net | | 340,448 |
| | 342,600 |
|
Total assets | | $ | 895,660 |
| | $ | 897,812 |
|
Based on management’s analysis,a variable interest entity (“VIE”) for which the Company determined that it is notdeemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of the above VIEs. Accordingly, the VIEs are not consolidated in the Company’s financial statements as of March 31, 2018. The Company did not providevoting interest or through other arrangements.
Variable Interest Entities
Variable Interest Entities—A VIE is an entity that either (i) lacks sufficient equity to finance its activities without additional subordinated financial support tofrom other parties; (ii) whose equity holders lack the unconsolidated VIEs duringcharacteristics 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 three months ended March 31, 2018. As of March 31, 2018, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to the unconsolidated VIEs.
Deconsolidation of the CLNS Investment Entities
Certain CLNS Investment Entities were joint ventures between Colony NorthStar and private funds or other investment vehicles managed by Colony NorthStar (the “Co-Investment Funds”). Colony NorthStar consolidated such CLNS Investment Entities as it was deemed to haveparty who has a controlling financial interest in these CLNS Investment Entities. After assuming Colony NorthStar’s ownershipthe 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 in these CLNS Investment Entitiesheld 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 upon the merger with NorthStar Ibenefits criteria and, NorthStar II,if so, whether the Company doesis most closely associated with the VIE. In performing the related party analysis, the Company considers both qualitative and quantitative factors, including, but not have a controlling financial interest in these CLNS Investment Entities. The Company does not havelimited to: the amount and characteristics of its investment relative to the related party; the Company’s and the related party’s ability to directcontrol or significantly influence key decisions madeof the VIE including consideration of involvement by de facto agents; the directorsobligation or likelihood for the Company or the related party to fund operating losses of these entities northe 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 ita VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of these entities as Colony NorthStar continues to bewhich activities most significantly affect the investment managerentities’ performance, and estimates about the current and future fair values and performance of assets held by the Co-Investment Funds and the directors and officers of these entities continue to be employees of Colony NorthStar. The Company itself is managed by a subsidiary of Colony NorthStar and does not have any employees of its own. Therefore, upon closing of the Combination, the Company deconsolidated the CLNS Investment Entities that are joint ventures with Co-Investment Funds.VIE.
The deconsolidation of these CLNS Investment Entities did not result in any gain or loss to the Company. The following table presents the deconsolidation of the assets and liabilities of certain of the CLNS Investment Entities, and accounting for the Company’s interests in these CLNS Investment Entities as equity method investments as of the Closing Date (dollars in thousands):
|
| | | |
| As of the Closing Date |
Assets | |
Cash and cash equivalents | $ | (11,408 | ) |
Restricted cash | (14,704 | ) |
Loans held for investment, net | (553,678 | ) |
Investments in unconsolidated ventures | 127,062 |
|
Receivables, net | (4,344 | ) |
Other assets | (114 | ) |
Total assets | $ | (457,186 | ) |
Liabilities | |
Mortgage and other notes payable, net | $ | (128,709 | ) |
Accrued and other liabilities | (640 | ) |
Escrow deposits payable | (14,704 | ) |
Total liabilities | (144,053 | ) |
| |
Stockholders’ equity | (313,133 | ) |
Total liabilities and equity | $ | (457,186 | ) |
Voting Interest Entities
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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'sCompany’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 InterestsAs of September 30, 2020, the Company has identified certain consolidated and unconsolidated VIEs. Assets of each of the VIEs, other than the OP, may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.
Noncontrolling InterestsConsolidated VIEs
The Company’s operating subsidiary, the 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 Investment Entities - This representsthe OP, is the managing member of the OP and exercises full responsibility, discretion and control over the day-to-day management of the OP. The
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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noncontrolling interests in the OP do not have substantive liquidation rights, 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 the OP to be a VIE. The Company, as managing member, has the power to direct the core activities of the OP that most significantly affect the OP’s performance, and through its majority interest in the OP, has both the right to receive benefits from and the obligation to absorb losses of the OP. Accordingly, the Company is the primary beneficiary of the OP and consolidates the OP. As the Company conducts its business and holds its assets and liabilities through the OP, the total assets and liabilities of the OP represent substantially all of the total consolidated investment entities held byassets and liabilities of the Company.
Other consolidated VIEs include the Investing VIEs (as defined and discussed below) and certain operating real estate properties that have noncontrolling interests. The noncontrolling interests in the operating real estate properties represent third party joint venture partners with ownership ranging from 3.5% to 20.0%. These noncontrolling interests do not have substantive kick-out nor participating rights.
Investing VIEs
The Company’s investments in securitization financing entities (“Investing VIEs”) include subordinate first-loss tranches of securitization trusts, which represent interests in such VIEs. Investing VIEs are structured as pass through entities that receive principal and priorinterest payments from the underlying debt collateral assets and distribute those payments to the closingsecuritization trust’s certificate holders, including the most subordinate tranches of the Combination,securitization trust. Generally, a securitization trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust, and as such interestsmay qualify as the primary beneficiary of the trust.
If it is determined that the Company is the primary beneficiary of an Investing VIE as a result of acquiring the subordinate first-loss tranches of the securitization trust, the Company would consolidate the assets, liabilities, income and expenses of the entire Investing VIE. The assets held by private funds managed by Colony NorthStar. Allocationan Investing VIE are restricted and can only be used to fulfill its own obligations. The obligations of an Investing VIE have neither any recourse to the general credit of the Company as the consolidating parent entity of an Investing VIE, nor to any of the Company’s other consolidated entities.
As of September 30, 2020, the Company held subordinate tranches of securitization trusts in 2 Investing VIEs for which the Company has determined it is the primary beneficiary because it has the power to direct the activities that most significantly impact the economic performance of the securitization trusts. The Company’s subordinate tranches of the securitization trusts, which represent the retained interest and related interest income, are eliminated in consolidation. As a result, all of the assets, liabilities (obligations to the certificate holders of the securitization trusts, less the Company’s retained interest from the subordinate tranches of the securitization trusts), income and expenses of the Investing VIEs are presented in the consolidated financial statements of the Company although the Company legally owns the subordinate tranches of the securitization trusts only. Regardless of the presentation, the Company’s consolidated financial statements of operations ultimately reflect the 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 the Operating Partnership - This represents membership interests in the OP held by RED REIT. Noncontrolling interests in the OP are allocated a share of net income or loss in the OP based on their weighted average ownershipattributable to its retained interest in the OP during the period. Noncontrolling interests in the OP have the right to require the OP to redeem part or allsubordinate tranches of the membership units in the OP 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 the OP, through the issuance of shares of class A common stock on a one-for-one basis.securitization trusts. Refer to Note 3, “Business Combinations,”5, “Real Estate Securities, Available for Sale” for further discussiondiscussion.
The Company elected the fair value option for the initial recognition of OP membership units. At the endassets and liabilities of each reporting period, noncontrollingits consolidated Investing VIEs. Interest income and interest expense associated with the Investing VIEs are presented separately on the consolidated statements of operations, and the assets and liabilities of the Investing VIEs are separately presented as “Mortgage loans held in securitization trusts, at fair value” and “Mortgage obligations issued by securitization trusts, at fair value,” respectively, on the consolidated balance sheets. Refer to Note 14, “Fair Value” for further discussion.
The Company has adopted guidance issued by the Financial Accounting Standards Board (“FASB”), allowing the Company to measure both the financial assets and liabilities of a qualifying collateralized financing entity (“CFE”), such as its Investing VIEs, using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. A CFE is a VIE that holds financial assets, issues beneficial interests in those assets and has no more than nominal equity, and the OP is adjustedbeneficial interests have contractual recourse only to reflect their ownership percentage in the OP at the endrelated assets of the period, through a reallocation between controllingCFE. As the liabilities of the Company’s Investing VIEs are marketable securities with observable trade data, their fair value is more observable and noncontrolling interests inis referenced to determine fair value of the OP, as applicable.assets of its Investing VIEs. Refer to Note 14, “Fair Value” for further discussion.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries. 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.
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
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 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 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 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.
As of September 30, 2020, the Company has identified certain consolidated and unconsolidated VIEs. Assets of each of the VIEs, other than the OP, may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.
Consolidated VIEs
The Company’s operating subsidiary, the 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 the OP, is the managing member of the OP and exercises full responsibility, discretion and control over the day-to-day management of the OP. The
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noncontrolling interests in the OP do not have substantive liquidation rights, 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 the OP to be a VIE. The Company, as managing member, has the power to direct the core activities of the OP that most significantly affect the OP’s performance, and through its majority interest in the OP, has both the right to receive benefits from and the obligation to absorb losses of the OP. Accordingly, the Company is the primary beneficiary of the OP and consolidates the OP. As the Company conducts its business and holds its assets and liabilities through the OP, the total assets and liabilities of the OP represent substantially all of the total consolidated assets and liabilities of the Company.
Other consolidated VIEs include the Investing VIEs (as defined and discussed below) and certain operating real estate properties that have noncontrolling interests. The noncontrolling interests in the operating real estate properties represent third party joint venture partners with ownership ranging from 3.5% to 20.0%. These noncontrolling interests do not have substantive kick-out nor participating rights.
Investing VIEs
The Company’s investments in securitization financing entities (“Investing VIEs”) include subordinate first-loss tranches of securitization trusts, which represent interests in such VIEs. Investing VIEs are structured as pass through entities that receive principal and interest payments from the underlying debt collateral assets and distribute those payments to the securitization trust’s certificate holders, including the most subordinate tranches of the securitization trust. Generally, a securitization trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust, and as such may qualify as the primary beneficiary of the trust.
If it is determined that the Company is the primary beneficiary of an Investing VIE as a result of acquiring the subordinate first-loss tranches of the securitization trust, the Company would consolidate the assets, liabilities, income and expenses of the entire Investing VIE. The assets held by an Investing VIE are restricted and can only be used to fulfill its own obligations. The obligations of an Investing VIE have neither any recourse to the general credit of the Company as the consolidating parent entity of an Investing VIE, nor to any of the Company’s other consolidated entities.
As of September 30, 2020, the Company held subordinate tranches of securitization trusts in 2 Investing VIEs for which the Company has determined it is the primary beneficiary because it has the power to direct the activities that most significantly impact the economic performance of the securitization trusts. The Company’s subordinate tranches of the securitization trusts, which represent the retained interest and related interest income, are eliminated in consolidation. As a result, all of the assets, liabilities (obligations to the certificate holders of the securitization trusts, less the Company’s retained interest from the subordinate tranches of the securitization trusts), income and expenses of the Investing VIEs are presented in the consolidated financial statements of the Company although the Company legally owns the subordinate tranches of the securitization trusts only. Regardless of the presentation, the Company’s consolidated financial statements of operations ultimately reflect the net income attributable to its retained interest in the subordinate tranches of the securitization trusts. Refer to Note 5, “Real Estate Securities, Available for Sale” for further discussion.
The Company elected the fair value option for the initial recognition of the assets and liabilities of its consolidated Investing VIEs. Interest income and interest expense associated with the Investing VIEs are presented separately on the consolidated statements of operations, and the assets and liabilities of the Investing VIEs are separately presented as “Mortgage loans held in securitization trusts, at fair value” and “Mortgage obligations issued by securitization trusts, at fair value,” respectively, on the consolidated balance sheets. Refer to Note 14, “Fair Value” for further discussion.
The Company has adopted guidance issued by the Financial Accounting Standards Board (“FASB”), allowing the Company to measure both the financial assets and liabilities of a qualifying collateralized financing entity (“CFE”), such as its Investing VIEs, using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. A CFE is a VIE that holds financial assets, issues beneficial interests in those assets and has no more than nominal equity, and the beneficial interests have contractual recourse only to the related assets of the CFE. As the liabilities of the Company’s Investing VIEs are marketable securities with observable trade data, their fair value is more observable and is referenced to determine fair value of the assets of its Investing VIEs. Refer to Note 14, “Fair Value” for further discussion.
Unconsolidated VIEs
As of September 30, 2020, the Company identified unconsolidated VIEs related to its securities investments, indirect interests in real estate through real estate private equity funds (“PE Investments”) and CRE debt investments. Based on management’s
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analysis, the Company determined that it is not the primary beneficiary of the above VIEs. Accordingly, the VIEs are not consolidated in the Company’s financial statements as of September 30, 2020.
Assets of each of the VIEs may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.
The following table presents the Company’s classification, carrying value and maximum exposure of unconsolidated VIEs as of September 30, 2020 (dollars in thousands):
| | | | | | | | | | | | | | |
| | Carrying Value | | Maximum Exposure to Loss |
Real estate securities, available for sale | | $ | 36,250 | | | $ | 31,959 | |
Investments in unconsolidated ventures | | 349,635 | | | 374,279 | |
Loans and preferred equity held for investment, net | | 13,638 | | | 13,638 | |
Total assets | | $ | 399,523 | | | $ | 419,876 | |
The Company did not provide financial support to the unconsolidated VIEs during the nine months ended September 30, 2020. As of September 30, 2020, there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to the unconsolidated VIEs. The maximum exposure to loss of real estate securities, available for sale was determined as the amortized cost as of September 30, 2020. See Note 5, “Real Estate Securities, Available for Sale” for further discussion on fair value of the real estate securities. The maximum exposure to loss of investments in unconsolidated ventures and loans and preferred equity held for investment, net was determined as the carrying value plus any future funding commitments. Refer to Note 3, “Loans and Preferred Equity Held for Investment, net and Loans Held for Sale” and Note 16, “Commitments and Contingencies” for further discussion.
Noncontrolling Interests
Noncontrolling Interests in Investment Entities—This represents interests in consolidated investment entities held by third party joint venture partners and prior to the closing of the Combination, such interests held by private funds managed by Colony Capital. 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 (“HLBV”) basis, where applicable and substantive. HLBV uses a balance sheet approach, which measures each party’s capital account at the end of a period assuming that the subsidiary was liquidated or sold at book value. Each party’s share of the subsidiary’s earnings or loss is calculated by measuring the change in the party’s capital account from the beginning of the period in question to the end of period, adjusting for effects of distributions and new investments.
Noncontrolling Interests in the Operating Partnership—This represents membership interests in the OP held by RED REIT. Noncontrolling interests in the OP are allocated a share of net income or loss in the OP based on their weighted average ownership interest in the OP during the period. Noncontrolling interests in the OP have the right to require the OP to redeem part or all of the membership units in the OP 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 the OP, through the issuance of shares of Class A common stock on a 1-for-one basis. At the end of each reporting period, noncontrolling interests in the OP is adjusted to reflect their ownership percentage in the OP at the end of the period, through a reallocation between controlling and noncontrolling interests in the OP, as applicable.
Comprehensive Income (Loss)
The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and other comprehensive income (“OCI”). The only componentcomponents of OCI isinclude unrealized gain (loss) on CRE debt securities available for sale for which the fair value option was not elected.elected, gain (loss) on derivative instruments used in the Company’s risk management activities used for economic hedging purposes (“designated hedges”), and gain (loss) on foreign currency translation.
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.
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The estimated fair value of financial assets and financial liabilities are categorized into a three-tier hierarchy, prioritized based on the level of transparency in inputs used in the valuation techniques, as follows:
Level 1-Quoted1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2-Observable2—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-At3—At least one assumption or input is unobservable 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 fall 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.
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Fair Value Option
The fair value option provides an option to elect fair value as an alternative measurement for selected financial instruments. Gains and losses on items for which the fair value option has been elected are reported in earnings. 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 the fair value option for PE Investments. The Company has also elected the fair value option to account for the eligible financial assets and liabilities of its consolidated Investing VIEs in order to mitigate potential accounting mismatches between the carrying value of the instruments and the related assets and liabilities to be consolidated. The Company has adopted guidance issued by the FASBmeasurement alternative allowing the Company to measure both the financial assets and financial liabilities of a qualifying CFE it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable.
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.
Net cash paidAsset Acquisitions—For acquisitions that are not deemed to acquirebe businesses, the assets acquired are recognized based on their cost to the Company as the acquirer and no gain or loss is recognized. The cost of assets acquired in a business orgroup is allocated to individual assets is classified as investing activitieswithin the group based on their relative fair values and does not give rise to goodwill. Transaction costs related to the accompanying statementsacquisition of cash flows.assets are included in the cost basis of the assets acquired.
Business Combinations—The Company accounts for acquisitions that qualify as business combinations by applying the acquisition method. Transaction costs related to the 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.
Cash and Cash Equivalents
Short-term, highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The Company did not0t have any cash equivalents at March 31, 2018September 30, 2020 or December 31, 2017.2019. The Company’s cash is held with major financial institutions and may at times exceed federally insured limits.
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Restricted Cash
Restricted cash consists primarily of borrower escrow deposits, tenant escrow deposits and real estate capital expenditure reserves.
Loans and Preferred Equity Held for Investment
The Company originates and purchases loans and preferred equity held for investment. The accounting framework for loans and preferred equity held for investment depends on the Company’s strategy whether to hold or sell the loan, whether the loan was credit-impaired at the time of acquisition, or if the lending arrangement is an acquisition, development and construction loan.
Loans and Preferred Equity Held for Investment (other than Purchased Credit-Impaired Loans)
Loans and preferred equity that the Company has the intent and ability to hold for the foreseeable future are classified as held for investment. Originated loans and preferred equity are recorded at amortized cost, or outstanding unpaid principal balance plus exit fees 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
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incurred by the Company. Purchased loans and preferred equity are recorded at amortized cost, or unpaid principal balance plus purchase premium or less unamortized discount. Costs to purchase loans and preferred equity are expensed as incurred.
Interest Income-InterestIncome—Interest income is recognized based upon contractual interest rate and unpaid principal balance of the loans.loans and preferred equity investments. Net deferred loan fees on originated loans and preferred equity investments are deferred and amortized as adjustments to interest income over the expected life of the loans and preferred equity investments using the effective yield method. Premium or discount on purchased loans and preferred equity investments are amortized as adjustments to interest income over the expected life of the loans and preferred equity investments 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 or preferred equity investment is prepaid, prepayment fees and any excess of proceeds over the carrying amount of the loan areor preferred equity investment is recognized as additional interest income.
Nonaccrual-AccrualThe Company has debt investments in its portfolio that contain a payment-in-kind (“PIK”) provision. Contractual PIK interest, which represents contractually deferred interest added to the loan balance that is due at the end of the loan term, is generally recorded on an accrual basis to the extent such amounts are expected to be collected. The Company will generally cease accruing PIK interest if there is insufficient value to support the accrual or management does not expect the borrower to be able to pay all principal and interest due.
Nonaccrual—Accrual of interest income is suspended on nonaccrual loans.loans and preferred equity investments. Loans and preferred equity investments 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 and preferred equity investments are placed on nonaccrual status. Interest collectioncollected is recognized on nonaccruing loans for whicha cash basis by crediting income when received; or if ultimate collectability of loan and preferred equity principal is uncertain, interest collected 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.and preferred equity carrying value. Loans and preferred equity investments may be restored to accrual status when all principal and interest isare current and full repayment of the remaining contractual principal and interest isare 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.
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 solely 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 that the Company intends to sell or liquidate in the foreseeable future are classified as held for sale. Loans held for sale are carried at 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 of the carrying value of the held for sale loan until the loan is sold, therefore included in the periodic valuation adjustments based on lower of cost 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 thatAt September 30, 2020, the Company will collect less than the contractually required payments. PCIhad 0 loans are recorded at the initial investment in the loans and accreted to the estimated cash flows expected to be collectedclassified as measured at acquisition date. The excess of cash flows expected to be
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collected, measured as of acquisition date, over the estimated fair value represents the accretable yield and is recognized in interest income over the remaining life of the loan using the effective interest method. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected (“nonaccretable difference”) is not recognized as an adjustment of yield, loss accrual or valuation allowance.
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 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 provisionheld 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 significant 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.sale.
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 risks and rewards, 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 held for investment and result in the recognition of interest income. ADC arrangements with characteristics implying real estate joint ventures are presented as investments in
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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, and 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.
Operating Real Estate
Real Estate Acquisitions-Acquisitions—Real estate acquired in acquisitions that are deemed to be business combinations is recorded at the fair values of the acquired components at the time of acquisition, allocated among land, buildings, improvements, equipment and lease-related tangible and identifiable intangible assets and liabilities, including foregoneforgone leasing costs, in-place lease values and above- or below-market lease values. Real estate acquired in acquisitions that are deemed to be asset acquisitions is recorded at the total value of consideration transferred, including transaction costs, and allocated to the acquired components based upon relative fair value. The estimated fair value of acquired land is derived from recent comparable sales 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 areis carried at cost less accumulated depreciation.
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Costs Capitalized or Expensed-Expensed—Expenditures for ordinary repairs and maintenance are expensed as incurred, while expenditures for significant renovations that improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful lives.
Depreciation-Depreciation—Real estate held for investment, other than land, areis depreciated on a straight-line basis over the estimated useful lives of the assets, as follows:
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Real Estate Assets | | Term |
Building (fee interest) | | 7 to 5348 years |
Building leasehold interests | | Lesser of remaining term of the lease or remaining life of the building |
Building improvements | | Lesser of the useful life or remaining life of the building |
Land improvements | | 61 to 1215 years |
Tenant improvements | | Lesser of the useful life or remaining term of the lease |
Furniture, fixtures and equipment | | 72 to 8 years |
Impairment-TheImpairment—The Company evaluates its real estate held for investment for impairment periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company evaluates cash flows and determines impairmentsreal estate for impairment generally on an individual property basis. In making this determination,If an impairment indicator exists, the Company reviews,evaluates the undiscounted future net cash flows that are expected to be generated by the property, including any estimated proceeds from the eventual disposition of the property. If multiple outcomes are under consideration, the Company may apply a probability-weighted approach to the impairment analysis. Based upon the analysis, if the carrying value of a property exceeds its undiscounted future net cash flows, an impairment loss is recognized for the excess of the carrying value of the property over the estimated fair value of the property. In evaluating and/or measuring impairment, the Company considers, among other things, current and estimated future cash flows associated with each property, 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. Another key consideration in this assessment is the Company’s assumptions about the highest and best use of its real estate investments and its intent and ability to hold them for a reasonable period that would allow for the recovery of their carrying values. If an impairment indicator exists,such assumptions change and the Company evaluates whethershortens its expected hold period, this may result in the expected future undiscounted cash flows is less thanrecognition of impairment losses. During the carrying amount of the asset, and ifthree months ended September 30, 2020, the Company determines thatrecorded impairment related to its operating real estate of $3.5 million to reflect the carrying value is not recoverable, an impairment loss is recordednet proceeds expected to be received based on executed purchase and sale agreements. See Note 6, “Real Estate, net and Real Estate Held for the difference between the estimated fair valueSale” and the carrying amountNote 14, “Fair Value” for further detail.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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Real Estate Held for Sale
Classification as Held for Sale-RealReal 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. At the time a sale is consummated, the excess, if any, of sale price less selling costs over carrying value of the real estate is recognized as a gain.
If circumstances arise that were previously considered unlikely and, 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, and (ii) its estimated fair value at the time the Company decides not to sell.
At September 30, 2020, the Company classified several of its properties in its Legacy, Non-Strategic Portfolio as held for sale. See Note 6, “Real Estate, net and Real Estate Sales-The Company evaluates if real estate sale transactions qualifyHeld for recognition under the full accrual method, considering whether, among other criteria, the buyer’s initialSale,” Note 17, “Segment Reporting” 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.Note 19, “Subsequent Events” for further detail.
Foreclosed Properties
The Company receives foreclosed properties in full or partial settlement of loans held for investment by taking legal title or physical possession of the properties. Foreclosed properties are generally 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 compared toIf the fair value of the property is lower than the carrying value of the loan, after reversing any previouslythe difference is recognized as provision for loan loss provisionand the cumulative loss allowance on the loan are recorded as impairment loss.is charged off. The Company periodically evaluates foreclosed properties for subsequent decrease in fair value, which is recorded as an additional impairment loss. Fair value of foreclosed properties is generally based on third party appraisals, broker price opinions, comparable sales or a combination thereof.
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Real Estate Securities
The Company classifies its CRE securities investments as available for sale on the acquisition date, which are carried at fair value. Unrealized gains (losses) are recorded as a component of accumulated OCI in the consolidated statements of equity. However, the Company has elected the fair value option for certainthe assets and liabilities of its available for sale securities,consolidated Investing VIEs, and as a result, any unrealized gains (losses) on such securitiesthe consolidated Investing VIEs are recorded in unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net in the consolidated statements of operations. As of March 31, 2018,September 30, 2020, the Company held subordinate tranches of three2 securitization trusts, which represent the Company’s retained interest in the securitization trusts, which the Company consolidates under U.S. GAAP. Refer to Note 7,5, “Real Estate Securities, Available for Sale” for further discussion.
Impairment
CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment (“OTTI”) as any change in fair value is recorded in the consolidated statements of operations. Realized losses on such securities are reclassified to realized gain (loss)loss on investmentsmortgage loans and obligations held in securitization trust, net as losses occur.
CRE securities for which the fair value option is not elected are evaluated for OTTIimpairment quarterly. Impairment of a security is considered to be other-than-temporarywhen the fair value is below the amortized cost basis, which is then further analyzed when: (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. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii) or (iii), the security is written down to its fair value and an OTTIimpairment is recognized in the consolidated statements of operations. In all other situations, the case of (iii), the securityunrealized loss is written down to its fair value and the amount of OTTI is then bifurcated into: (a) the amount related to expected credit losses; and (b) the amount related to fair value adjustmentsother factors in excess of expected credit losses. The portion of OTTIimpairment related to expected credit losses is recognized in the consolidated statements of operations.as an allowance for credit losses. The remaining OTTIimpairment related to the valuation adjustmentother factors is recognized as a component of accumulated OCI in the consolidated statements of equity. CRE securities which are not high-credit quality are considered to have an OTTIimpairment if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTIimpairment is then bifurcated as discussed above. As
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During the three and nine months ended September 30, 2020, the Company did not have any OTTI recorded onan impairment loss of $3.4 million and $32.6 million, respectively, related to its CRE securities. The impairment loss is included in other loss, net in the Company’s consolidated statements of operations. Refer to Note 5, “Real Estate Securities, Available for Sale” for further discussion.
Investments in Unconsolidated Ventures
A noncontrolling, unconsolidated ownership interest in an entity may be accounted for using theone of (i) equity method where applicable; (ii) fair value option if elected; (iii) fair value through earnings if fair value is readily determinable, including election of net asset value (“NAV”) practical expedient where applicable; or (iv) for equity investments without readily determinable fair values, the measurement alternative to measure at cost adjusted for any impairment and observable price changes, as applicable.
Fair value changes of equity method orinvestments under the fair value option if elected.are recorded in earnings from investments in unconsolidated ventures. Fair value changes of other equity investments, including adjustments for observable price changes under the measurement alternative, are recorded in other gain (loss).
Equity Method Investments
The Company accounts for investments under the equity method of accounting if they haveit has the ability to exercise significant influence over the operating and financial policies of an entity, but dodoes 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 ratanon-proportionate earnings allocation formula or a preferred return to certain investors. 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 forflows under the cost method. The Company elected the fair value option for certain cost method investments, specifically limited partnership interests in PE Investments. The Company records the change in fair value for their share of the projected future cash flows of such investments in equity incumulative earnings (losses) of unconsolidated ventures. Any change in fair value attributed to market related assumptions is recorded in other gain (loss), net, on the statement of operations.approach.
Other than investments in PE InvestmentsAt September 30, 2020 and investments in senior and mezzanine loans held in joint ventures, all ofDecember 31, 2019, the Company’s investments in unconsolidated ventures at March 31, 2018 were made up of ADC arrangements accounted for as equity method investments. At December 31, 2017, the Company’s investments in unconsolidatedjoint ventures consisted of investments in PE Investments, senior loans, mezzanine loans and preferred equity held in joint ventures, as well as ADC arrangements accounted for as equity method investments.
Impairment-If
Evaluation of impairment applies to equity method investments and equity investments under the measurement alternative. If indicators of impairment exist, the Company performs an evaluation of their equity method investments to assess whetherwill first estimate the fair value of theirits investment. In assessing fair value, the Company generally considers, among others, the estimated enterprise value of the investee or fair value of the investee’s underlying net assets, including net cash flows to be generated by the investee as applicable.
For investments under the measurement alternative, if carrying value of the investment exceeds its fair value, an impairment is deemed to have occurred.
For equity method investments, further consideration is made if a decrease in value of the investment is less thanother-than-temporary to determine if impairment loss should be recognized. Assessment of OTTI involves management judgment, including, but not limited to, consideration of the investee’s financial condition, operating results, business prospects and creditworthiness, the Company’s ability and intent to hold the investment until recovery of its carrying value. Tovalue, or a significant and prolonged decline in traded price of the extentinvestee’s equity security. If management is unable to reasonably assert that an impairment is temporary or believes that the decrease inCompany may not fully recover the carrying value of its investment, then the impairment is considered to be other-than-temporary and an impairment has occurred, the investment isother-than-temporary.
Investments that are other-than-temporarily impaired are written down to itstheir estimated fair value,value. Impairment loss is recorded in earnings from investmentinvestments in unconsolidated ventures.
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ventures for equity method investments and in other gain (loss) for investments under the measurement alternative.
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 areAn indefinite-lived intangible is 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 life in a manner that reflects the pattern in which the intangible is being consumed if readily determinable, such as based upon
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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.
Lease Intangibles—Identifiable intangibles recognized in acquisitions of operating real estate properties generally include in-place leases, above- or below-market leases and deferred leasing costs.costs, all of which have finite lives. 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 isare 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 estimationestimate 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.
Transfers of Financial Assets
Sale accounting for transfers of financial assets requires the transfer of an entire financial asset, a group of financial assets in its entirety or if a component of the financial asset is transferred, that the component meets the definition of a participating interest by havingwith characteristics that mirror 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 requirerequires that the transfer meets the following sale 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, or (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 transferee that it is probable the repurchase will occur.
If sale accounting is 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, or secured borrowing.
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 included 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), net.
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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 investments in foreign subsidiaries or equity method investees whose functional currencies are not U.S. dollars. Changes 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).
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 undesignated 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. Refer to Note 15, “Derivatives” for further discussion on the Company’s derivative and hedging activity.
Financing Costs
Financing costs primarily include debt discounts and premiums as well as deferred financing costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. Costs related to revolving credit facilities are recorded in other assets and are amortized to interest expense using the straight-line basis over the term of the facility. Costs related to other borrowings are recorded net against the carrying value of such borrowings and are amortized to interest expense using the effective interest method. Unamortized deferred financing costs are expensed to realized gain (loss) when the associated facility is repaid before maturity. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not occur.
Revenue Recognition
Property Operating Income
Property operating income includes the following:
Rental Income-RentalIncome—Rental income is recognized on a straight-line basis over the noncancelablenon-cancellable term of the related lease which includes the effects of minimum rent increases and rent abatements under the lease. Rents received in advance are deferred.
When it is determined that 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 tenant improvements owned by the Company, the amount funded by or reimbursed by the tenants are recorded as deferred revenue, which is amortized on 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-InReimbursements—In net lease arrangements, the tenant is generally responsible for operating expenses relatingrelated 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
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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.
Hotel Operating Income-HotelIncome—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.
Real Estate Securities
Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expectedOn a quarterly basis, the Company reviews, and if appropriate, adjusts its cash flow mayprojections based on inputs and analyses received from external sources, internal models, and the Company’s judgment about prepayment rates, the timing and amount of credit losses and other factors. Changes in the amount or timing of cash flows from those originally projected, or from those estimated at the last evaluation date, are considered to be either favorable changes or adverse changes.
Adverse changes in the timing or amount of cash flows on CRE securities could result in the Company recording an increase in the allowance for credit losses. The allowance for credit losses are calculated using a discounted cash flow approach and is measured as the difference between the amortized cost of a CRE security and estimate of cash flows expected to be collected discounted at the effective interest rate used to accrete the CRE security. The allowance for credit losses is recorded as a contra-asset and a reduction in earnings. The allowance for credit losses will be limited to the amount of the unrealized losses on the CRE securities. Any allowance for credit losses in excess of the unrealized losses on the CRE securities are accounted for as a prospective reduction of the effective interest rate. No allowance is recorded for CRE securities in an unrealized gain position. Favorable changes in the discounted cash flow will result in a changereduction in the allowance for credit losses, if any. Any reduction in allowance for credit losses is recorded in earnings. If the allowance for credit losses has been reduced to zero, the remaining favorable changes are reflected as a prospective increase to the yield which is theneffective interest rate.
As of April 1, 2020, the Company has placed its investment grade and non-investment grade rated CRE securities on cost recovery and as a result, has ceased accretion of any discounts to expected maturity and applied retrospectivelyany cash interest received against the CRE securities amortized cost basis. Refer to Note 5, “Real Estate Securities, Available for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectivelySale” for all other securities to recognize interest income.further discussion.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the exchange rate in effect at the balance sheet date and the corresponding results of operations for such entities are translated using the average exchange rate in effect during the period. The resulting foreign currency translation adjustments are recorded as a component of accumulated other comprehensive 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 denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the exchange rate in effect at the balance sheet date and the corresponding results of operations for such entities are remeasured using the average exchange rate in effect during the period. The resulting foreign currency remeasurement adjustments are recorded in other gain (loss), net on investments on the consolidated statements of operations.
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Disclosures of non-USnon-U.S. dollar amounts to be recorded in the future are translated using exchange rates in effect at the date of the most recent balance sheet date.presented.
Equity-Based Compensation
Equity-classified stock awards granted to executive officers and both independent and non-independent directors 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 determined based on the closing price of the Company’s Class A common stock aton the grant date of grant or date of remeasurement. The Company recognizes equity-based compensation expenseand recognized on a straight-line basis over the requisite service period of the awards, with the amount of compensation expense recognized at the end of a reporting period at least equal to the fair value of the portion of the award that has vested through that date. awards.
The compensation expense is adjusted for actual forfeitures upon occurrence. Equity-based compensation is classified within administrative expense in the consolidated statement of operations.
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Earnings Per Share
The Company presents both basic and diluted earnings per share or EPS(“EPS”) using the two-class method. Basic EPS is calculated by dividing earnings allocated to common shareholders, as adjusted for unallocated earnings attributable to certain participating securities, if any, by the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and the effect of potentially dilutive common share equivalents outstanding during the period. 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. The Company has certain share-based payment awards that contain nonforfeitable rights to dividends, which are considered participating securities for the purposes of computing EPS pursuant to the two-class method.
Income Taxes
TheFor U.S. federal income tax purposes, the Company intends to electelected to be taxed as a REIT and to complybeginning with the related provisions of the Internal Revenue Code beginning in its taxable year endingended December 31, 2018. Accordingly,To qualify as a REIT, the Company must continually satisfy tests concerning, among other things, the real estate qualification of sources of its income, the real estate composition and values of its assets, the amounts it distributes to stockholders and the diversity of ownership of its stock.
To the extent that the Company qualifies as a REIT, it generally will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders as long as certain asset, income, distribution and share ownership tests are met.stockholders. The Company believes that all of the criteria to maintain the Company’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax and potential interest and penalties, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company’s accounting policy with respect to interest and penalties is to classify these amounts as a component of income tax expense, where applicable.
The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, U.S. federal income and excise taxes may be due on its undistributed taxable income. The Company also holds investments in Europe which are subject to tax in each local jurisdiction.
The Company made joint elections to treat certain subsidiaries as taxable REIT subsidiaries (“TRS”TRSs”) which may be subject to taxation by U.S. federal, state and local income taxes.authorities. In general, a TRS of the Company may perform non-customary services for tenants, hold assets that the REITCompany cannot hold directly and may engage in most real estate or non-real estate-related business.
Certain subsidiaries of the Company are subject to taxation by U.S. federal, state and local authorities for the periods presented. Income taxes are accounted for by the asset/liability approach in accordance with U.S. GAAP. Deferred taxes, if any, represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. Such amounts arise from differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates in the period during which such changes are enacted. A provision for income tax represents the total of income taxes paid or payable for the current period, plus the change in deferred taxes. Current and deferred taxes are recorded on the portion of earnings (losses) recognized by the Company with respect to its interest in TRSs. Deferred income tax assets and liabilities are calculated based on temporary differences between the Company’s U.S. GAAP consolidated financial statements and the U.S. federal, state and local tax basis of assets and liabilities as of the consolidated balance sheet date. The Company evaluates the realizability of its deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specificindustry-specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic
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environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax benefit (expense) in the consolidated statements of operations.
On December 22, 2017,The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed on March 27, 2020. Among other things, the Tax CutsCARES 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 Jobs Act was enacted, which provides2020 and allowed for a reductioncarryback of net operating losses generated in the U.S. federal corporate income tax rate from 35%years 2018 through 2020 to 21% effective January 1, 2018. At December 31, 2017, the Company recognized a provisional amount of approximately $2.0 million of income tax expense relating to the remeasurement of its deferred tax balances based on the rate at which they are expected to reverse in the future, which is generally 21%. The Company is still analyzing certain aspectseach of the Tax Cuts and Jobs Act and refining their calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
Forpreceding five years. During the three months ended March 31, 2018 and 2017,September 30, 2020 the Company recorded income tax benefits of $0.5 million and $0.2 million, respectively.
Recent Accounting Pronouncements
Revenue Recognition-In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers, which amends existing revenue recognition standards by establishing principles for a single comprehensive model for revenue measurement and recognition, along with enhanced disclosure requirements. Key provisions include, but are not limited to, determining which goods or services are capable of being distinct in a contract to be accounted for separately as a performance obligation and recognizing variable consideration only to the extent that it 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 was originally effective for fiscal years and interim periods beginning after December 15, 2016 for public companies that are not emerging growth companies (“EGCs”) and December 15, 2017 for private companies and public companies that are EGCs. In July 2015, the FASB deferred the effective date of the new standard by one year. Early adoption is permitted but not before the original effective date. 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 will adopt the standard using the modified retrospective approach on January 1, 2019. 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. Evaluationanalysis of the impact of this new guidance is ongoing.
Financial Instruments-In January 2016, the FASB issued ASU No. 2016-01, RecognitionCARES Act on its NOLs and Measurementrecorded a de minimis adjustment in the consolidated statement 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, 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 under application of the measurement alternative, unless these equity securities qualify for the net asset value (“NAV”) practical expedient. This provision eliminates cost method accounting and recognition of unrealized holding gains or losses on equity investments in other comprehensive income. For financial liabilities under the fair value option, changes in fair value resulting from the Company’s own 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. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments, Recognition and Measurement of Financial Assets and Financial Liabilities, which provided several clarifications and amendments to the standard. These include specifying that for equity instruments without readily determinable fair values for which the measurement alternative is applied: (i) adjustments made when an observable transaction occurs for a similar security are intended to reflect the fair value as of the observable transaction date, not as of current reporting date; (ii) the measurement alternative may be discontinued upon an irrevocable election to change to a fair value measurement approach under fair value guidance, which would apply to all identical and similar investments of the same issuer; and (iii) the prospective transition approach for equity securities without readily determinable fair values is applicable only when the measurement alternative is applied. ASU No. 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs. 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 for which the measurement alternative is applied and exit price fair value disclosures for financial instruments measured at amortized cost, which are to be applied prospectively.
operations.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
AsFor the three months ended September 30, 2020 and September 30, 2019, the Company recorded income tax benefit of March 31, 2018, all$15.4 million and income tax expense of $1.0 million, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded income tax benefit of $11.5 million and income tax expense of $0.5 million, respectively. The tax benefit reflected for both the three and nine months ended September 30, 2020 is primarily the result of the Company’s investments in unconsolidated ventures are equity method investmentsCompany finalizing its 2019 federal tax return and the Company does not have any cost method investments nor has the Company elected fair value option on its financial liabilities which fall under the scope of this guidance.
The Company will adopt the new guidance on January 1, 2019. Evaluation of the impact of this new guidance is ongoing, but at this time the Company 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. As lessee, a right-of-use asset and corresponding liability for future obligations under a leasing arrangement would be recognized on balance sheet. 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. 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,determining it would be considered a financing transactionable to the buyer/lessor. 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.
ASU No. 2016-02 is effective for fiscalcarryback certain tax capital losses to prior years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs. 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. Full retrospective application is prohibited. The FASB has subsequently issued and proposed several amendments to the standard, including approving an amendment to provide optional transitional relief to apply the effective date of the new lease standard as the date of initial application in transition instead of the earliest comparative period presented, as well as to provide certain practical expedients, which include not segregating non-lease components from the related lease components but to account for those components as a single lease component by class of underlying assets.
The Company intends to adopt the package of practical expedients under the guidance, which provides exemptions from having to reassess whether any expired or expiring contracts contain leases, revisit lease classification for any expired or expiring leases and reassess initial direct costs for any existing leases.
When the approved amendment is issued by the FASB, the Company expects to adopt the transition option, in which case, the cumulative effect adjustment to the opening balance of retained earnings will be recognized as of the effective date of adoption, including new disclosures, rather than as of the earliest period presented, and are not required for prior comparative periods. In addition, the Company expects to make an accounting policy election to treat lease and related non-lease componentsresulting in a contract as a single performance obligation to the extent that the timing and patternprojected refund of revenue recognition are the same for the lease and non-lease components and the combined single lease component is classified as an operating lease.$12.9 million.
Evaluation of the impact of this new guidance to the Company is ongoing.Accounting Standards Adopted in 2020
Credit Losses-Losses - In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-CreditInstruments-Credit Losses,, which amends the credit impairment model for financial instruments. The Company adopted ASU 2016-13 using the modified retrospective method on January 1, 2020.
The existing incurred loss model will behas been 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 AFSavailable-for-sale (“AFS”) debt securities, unrealized credit losses will beare 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 behas been 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 bewas amended to conform to the new impairment models for HTM and AFS debt securities. Expanded disclosures
Upon adoption of ASU 2016-13 on January 1, 2020 the Company recorded the following (dollars in thousands):
| | | | | | | | |
| | Impact of ASU 2016-13 Adoption |
Assets: | | |
CECL reserve on Loans and preferred equity held for investment, net | | $ | 21,093 | |
Liabilities: | | |
CECL reserve on Accrued and other liabilities | | 2,093 | |
Total Impact of ASU 2016-13 adoption on Accumulated deficit | | $ | 23,186 | |
The following discussion highlights changes to the Company’s accounting policies as a result of this adoption.
CECL reserve
The CECL reserve for the Company’s financial instruments carried at amortized cost and off-balance sheet credit riskexposures, such as loans, loan commitments and trade receivables represents a lifetime estimate of expected credit losses. Factors considered by the Company when determining the CECL reserve include credit quality indicators byloan-specific characteristics such as loan-to-value (“LTV”) ratio, vintage for financing receivablesyear, loan term, property type, occupancy and net investment in leases. Transition will generally begeographic location, financial performance of the borrower, expected payments of principal and interest, as well as internal or external information relating to past events, current conditions and reasonable and supportable forecasts.
The CECL reserve is measured on a modified retrospectivecollective (pool) basis with prospective applicationwhen similar risk characteristics exist for other-than-temporarily impaired debt securities and purchased credit impaired assets. ASU No. 2016-13multiple financial instruments. If similar risk characteristics do not exist, the Company measures the CECL reserve on an individual instrument basis. The determination of whether a particular financial instrument should be included in a pool can change over time. If a financial asset’s risk characteristics change, the Company evaluates whether it is effectiveappropriate to continue to keep the financial instrument in its existing pool or evaluate it individually.
In measuring the CECL reserve for fiscal years and interim periods beginning after December 15, 2019financial instruments that share similar risk characteristics, the Company primarily applies a probability of default (“PD”)/loss given default (“LGD”) model for public companiesinstruments that are not EGCs and December 15, 2020 for private companies and public companies that are EGCs. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company expects that recognition of credit losses will generally be accelerated undercollectively assessed, whereby the CECL model. Evaluationreserve is calculated as the product of PD, LGD and exposure at default (“EAD”). The Company’s model principally utilizes historical loss rates derived from a commercial mortgage backed securities database with historical losses from 1998 through September 2020 provided by a third party, Trepp LLC, forecasting the impactloss parameters using a scenario-based statistical approach over a reasonable and supportable forecast period of this new guidance is ongoing.
Cash Flow Classifications- In August 2016, the FASB issued ASU No. 2016-15, Statementtwelve months, followed by a straight-line reversion period of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which is intendedtwelve-months back to reduce diversity in practice in certain classifications on the statement of
average historical losses.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
cash flows. This guidance addresses eight typesFor financial instruments assessed outside of cash flows, which includes clarifying how the predominance principle should be appliedPD/LGD model on an individual basis, including 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 from equity method investees using eitherit is probable that the cumulative earnings or nature of distributions approach, among others. Transition will generally be on a retrospective basis. ASU No. 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs. Early adoption is permitted, provided that all amendments within the guidance are adopted in the same period. The Company will adoptbe unable to collect the new guidancefull payment of principal and interest on January 1, 2019. Upon adoption,the instrument, the Company anticipates making an accounting policy election for classification of distributions from its equity method investees usingapplies a discounted cash flow (“DCF”) methodology. For financial instruments where the cumulative earnings approach.
Restricted Cash- In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents with restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, this ASU requires disclosure of a reconciliation between the totals in the statement of cash flows and the related captions in the balance sheet. The new guidance also requires disclosure of 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. 2016-18borrower is effective for fiscal years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs, to be applied retrospectively, with early adoption permitted. If early adopted in an interim period, adjustments are to be reflected as of the beginning of the fiscal year of adoption. As of March 31, 2018, the Company has $117.4 million of restricted cash that will be subject to changes in presentation on the statement of cash flows. The Company will adopt the new guidance on January 1, 2019.
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 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 ofexperiencing 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 for public companies that are not EGCs and January 1, 2019 for private companies and public companies that are EGCs, with early adoption permitted 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.
The Company will adopt the new guidance on January 1, 2019 using the modified retrospective approach, consistent with the adoption of the new revenue standard. Under the new standard, if a partial interest in real estate is sold to noncustomers or contributed to unconsolidated ventures, and a noncontrolling interest in the asset is retained, such transactions could result in a larger gain on sale. The adoption of this standard could have a material impact to the results of operations in a period that a significant partial interest in real estate is sold. There were no such sales in the three months ended March 31, 2018.
The Combination
On the Closing Date, the Combination of the CLNS Contributed Portfolio, NorthStar I and NorthStar II was completed, creating CLNC.
In consideration for the contribution of the CLNS Contributed Portfolio, CLNS OP received approximately 44.4 million shares of the Company’s Class B-3 common stock (the “CLNC B-3 Common Stock”) and a subsidiary of CLNS OP received approximately 3.1 million common membership units in the OP (“CLNC OP Units”). The CLNC B-3 Common Stock will automatically convert to Class A common stock of the Company on a one-for-one basis upon the close of trading on February 1, 2019. The CLNC OP
Units are redeemable for cash, or at the Company’s election, the Company’s Class A common stock on a one-for-one basis, in the sole discretion of the Company. Subject to certain limited exceptions, CLNS OP has agreed that it and its affiliates will not make any transfers of the CLNC OP Units to non-affiliates of CLNS OP until the one year anniversary of the closing of the Combination, unless such transfer is approved by a majority of the Company’s board of directors, including a majority of the independent directors. In connection with the merger of NorthStar I and NorthStar II into the Company, their respective stockholders received shares of the Company’s Class A common stock based on pre-determined exchange ratios. Following the foregoing transaction, the Company contributed the CLNS Contributed Portfolio and the operating partnerships of NorthStar I and NorthStar II to the OP in exchange for ownership interests in the OP. Upon the closing of the Combination, CLNS OP and its affiliates, NorthStar I stockholders and NorthStar II stockholders each owned approximately 37%, 32% and 31%, respectively, of the Company on a fully diluted basis.
Prior to the closing of the Combination, a special dividend was declared by NorthStar I, which generated the lesser amount of cash leakage, in order to true up the agreed contribution values of NorthStar I and NorthStar II in relation to each other. In addition, following the CLNS Contributions, but prior to the effective time of the Combination, there was a cash settlement between the Company and Colony NorthStar for the difference between (i) the sum of (a) the loss in value of NorthStar I and NorthStar II as a result of the distributions made by NorthStar I and NorthStar II in excess of FFO (as such term is defined in the Combination Agreement) from July 1, 2017 through the day immediately preceding the Closing Date (excluding the dividend payment made by each of NorthStar I and NorthStar II on July 1, 2017), (b) FFO for the CLNS Investment Entities from July 1, 2017 through the day immediately preceding the closing date, (c) cash contributions or contributions of certain intercompany receivables made to the CLNS Investment Entities from July 1, 2017 through the day immediately preceding the Closing Date, and (d) 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 Date, excluding that certain distribution made by the CLNS Investment Entities in July 2017 relating to the partial repayment of a certain investment (collectively, “CLNS true-up adjustment”). The settlement of the CLNS true-up adjustment resulted in a payment of approximately $55 million from Colony NorthStar to the Company.
The Combination is accounted under the acquisition method for business combinations with the CLNS Investment Entities as the accounting acquirer for purposes of the financial information set forth herein. Refer to Note 2, “Summary of Significant Accounting Policies” for further discussion on the accounting treatment of the Combination.
Combination Consideration
Each share of NorthStar I and NorthStar II common stock issued and outstanding immediately prior to the effective time of the Combination was converted into the right to receive 0.3532 shares (the “NorthStar I Exchange Ratio”) and 0.3511 shares (the “NorthStar II Exchange Ratio”), respectively of the Company’s Class A common stock, plus cash in lieu of fractional shares. Approximately 21,000 shares of NorthStar I restricted common stock and 25,000 shares of NorthStar II restricted common stock automatically vested in connection with the Combination and the holders thereof were entitled to receive the same equity exchange as the other holders of NorthStar I and NorthStar II common stock, respectively.
The Company acquired all of the common stock of NorthStar I and NorthStar II through the exchange of all such outstanding shares into shares of Class A common stockdifficulty based on the pre-determined NorthStar I Exchange RatioCompany’s assessment at the reporting date and NorthStar II Exchange Ratio, respectively. As the Combination was a stock-for-stock exchange (except for cash consideration for fractional shares), fair valuerepayment is expected to be provided substantially through the operation or sale of the considerationcollateral, the Company may elect to be transferred was dependent uponuse as a practical expedient the fair value of the Companycollateral at the Closing Datereporting date when determining the provision for loan losses.
In developing the CECL reserve for its loans and preferred equity held for investment, the Company considers the risk rating of each loan and preferred equity as a key credit quality indicator. The risk ratings are based on a variety of factors, including, without limitation, underlying real estate performance and asset value, values of comparable properties, durability and quality of property cash flows, sponsor experience and financial wherewithal, and the existence of a risk-mitigating loan structure. Additional key considerations include loan-to-value ratios, debt service coverage ratios, loan structure, real estate and credit market dynamics, and risk of default or principal loss. Based on a five-point scale, the Company’s loans and preferred equity held for investment are rated “1” through “5,” from less risk to greater risk, and the ratings are updated quarterly. At the time of origination or purchase, loans and preferred equity held for investment are ranked as a “3” and will move accordingly going forward based on the ratings which are defined as follows:
1.Very Low Risk-The loan is performing as agreed. The underlying property performance has exceeded underwritten expectations with very strong net operating income (”NOI”), debt service coverage ratio, debt yield and occupancy metrics. Sponsor is investment grade, very well capitalized, and employs very experienced management team.
2.Low Risk-The loan is performing as agreed. The underlying property performance has met or exceeds underwritten expectations with high occupancy at market rents, resulting in consistent cash flow to service the debt. Strong sponsor that is well capitalized with experienced management team.
3.Average Risk-The loan is performing as agreed. The underlying property performance is consistent with underwriting expectations. The property generates adequate cash flow to service the debt, and/or there is enough reserve or loan structure to provide time for sponsor to execute the business plan. Sponsor has routinely met its obligations and has experience owning/operating similar real estate.
4.High Risk/Delinquent/Potential for Loss-The loan is in excess of 30 days delinquent and/or has a risk of a principal loss. The underlying property performance is behind underwritten expectations. Loan covenants may require occasional waivers/modifications. Sponsor has been unable to execute its business plan and local market fundamentals have deteriorated. Operating cash flow is not sufficient to service the debt and debt service payments may be coming from sponsor equity/loan reserves.
5.Impaired/Defaulted/Loss Likely-The loan is in default or a default is imminent, and has a high risk of a principal loss, or has incurred a principal loss. The underlying property performance is significantly worse than underwritten expectation and sponsor has failed to execute its business plan. The property has significant vacancy and current cash flow does not support debt service. Local market fundamentals have significantly deteriorated resulting in depressed comparable property valuations versus underwriting.
The Company also considers qualitative and environmental factors, including, but not limited to, economic and business conditions, nature and volume of the Combination.
Fair valueloan portfolio, lending terms, volume and severity of past due loans, concentration of credit and changes in the level of such concentrations in its determination of the merger consideration wasCECL reserve.
The Company has elected to not measure a CECL reserve for accrued interest receivable as it is reversed against interest income when a loan or preferred equity investment is placed on nonaccrual status. Loans and preferred equity investments are charged off against the provision for loan losses when all or a portion of the principal amount is determined to be uncollectible.
Changes in the CECL reserve for the Company’s financial instruments are recorded in provision for loan losses on the Statement of Operations with a corresponding offset to the loans and preferred equity held for investment or as follows (dollarsa component of other liabilities for future loan fundings recorded on the Company’s consolidated balance sheets. See Note 3, “Loans and Preferred Equity Held for Investment, net and Loans Held for Sale” for further detail.
Troubled Debt Restructuring (“TDR”)—The Company classifies an individual financial instrument as a TDR when it has a reasonable expectation that the financial instrument’s contractual terms will be modified in thousands, except exchange ratio and price per share):a manner that grants concession to the borrower who is experiencing financial difficulty. Concessions could include term extensions, payment deferrals, interest
27
|
| | | | | | | | | | | | |
| | NorthStar I | | NorthStar II | | Total |
Outstanding shares of common stock at January 31, 2018 (1) | | 119,333 |
| | 114,943 |
| | |
Exchange ratio (2) | | 0.3532 |
| | 0.3511 |
| | |
Shares of Class A common stock issued in the mergers (3) | | 42,149 |
| | 40,356 |
| | 82,505 |
|
Fair value consideration per share (4) | | $ | 24.50 |
| | $ | 24.50 |
| | $ | 24.50 |
|
Fair value of NorthStar I and NorthStar II consideration | | $ | 1,032,651 |
| | $ | 988,722 |
| | $ | 2,021,373 |
|
| |
(1) | Includes 21,000 and 25,000 shares of common stock of NorthStar I and NorthStar II equity awards, respectively, that vested in connection with the consummation of the Combination. |
| |
(2) | Represents the pre-determined exchange ratio of 0.3532 NorthStar I shares and 0.3511 NorthStar II shares per one share of the Company’s Class A common stock. |
| |
(3) | Includes the issuance of fractional shares, aggregating to approximately 21,000 shares, for which holders received cash in lieu of the fractional shares. |
| |
(4) | Represents the estimated per share fair value of the Company at the Closing Date of the Combination. |
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
rate reductions, principal forgiveness, forbearance, or other actions designed to maximize the Company’s collection on the financial instrument. The Company determines the CECL reserve for financial instruments that are TDRs individually.
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 following table presents a preliminary allocationASU 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 the balance sheet date, as well as the 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 Combination consideration to assets acquired, liabilities assumedfair value hierarchy, as well as amounts and noncontrolling interestsreason 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 NorthStar I and NorthStar II based on their respective estimatedLevel 3 fair values should be as of the Closing Date.
The estimated fair valuesreporting date and allocationrequiring disclosures of the Combination consideration presented belowtiming of liquidity events for investments measured under the 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 preliminaryto 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 basedthe 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 the related party under common control and considers such indirect interest in the VIE held by the related party under common control on information available asa proportionate basis, rather than its entirety. Transition is generally on a modified retrospective basis, with the cumulative effect adjusted to retained earnings at the beginning of the Closing Date asearliest 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 Company continues to evaluate the underlying inputs and assumptions. Accordingly, these preliminary estimates 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 asFASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Closing Date. Preliminary fair values assigned toEffects of Reference Rate Reform on Financial Reporting. The guidance in Topic 848 is optional, the assets acquired, liabilities assumedelection of which provides temporary relief for the accounting effects on contracts, hedging relationships and noncontrolling interests of NorthStar I and NorthStar IIother transactions impacted by the transition from interbank offered rates (such as of the Closing Date were as follows (dollars in thousands):
|
| | | | | | | | | | | | |
| | January 31, 2018 |
| | NorthStar I | | NorthStar II | | Total |
Merger consideration | | $ | 1,032,651 |
| | $ | 988,722 |
| | $ | 2,021,373 |
|
Allocation of merger consideration: | | | | | | |
Assets acquired | | | | | | |
Cash and cash equivalents | | $ | 130,197 |
| | $ | 51,360 |
| | $ | 181,557 |
|
Restricted cash | | 30,564 |
| | 61,313 |
| | 91,877 |
|
Loans held for investment | | 521,462 |
| | 728,271 |
| | 1,249,733 |
|
Real estate securities, available for sale, at fair value | | 100,731 |
| | 64,793 |
| | 165,524 |
|
Real estate, net | | 790,996 |
| | 492,317 |
| | 1,283,313 |
|
Investments in unconsolidated ventures | | 67,899 |
| | 375,694 |
| | 443,593 |
|
Receivables, net | | 12,363 |
| | 11,479 |
| | 23,842 |
|
Deferred leasing costs and intangible assets, net | | 74,243 |
| | 37,090 |
| | 111,333 |
|
Other assets | | 16,407 |
| | 21,668 |
| | 38,075 |
|
Mortgage loans held in securitization trusts, at fair value | | 1,894,404 |
| | 1,432,795 |
| | 3,327,199 |
|
Total assets acquired | | 3,639,266 |
| | 3,276,780 |
| | 6,916,046 |
|
Liabilities assumed | | | | | | |
Securitization bonds payable, net | | — |
| | 80,825 |
| | 80,825 |
|
Mortgage and other notes payable, net | | 399,131 |
| | 382,485 |
| | 781,616 |
|
Credit facilities | | 293,340 |
| | 355,529 |
| | 648,869 |
|
Due to related party | | 4,533 |
| | 1,842 |
| | 6,375 |
|
Accrued and other liabilities | | 21,640 |
| | 18,219 |
| | 39,859 |
|
Intangible liabilities, net | | 17,931 |
| | 1,808 |
| | 19,739 |
|
Escrow deposits payable | | 12,994 |
| | 36,362 |
| | 49,356 |
|
Mortgage obligations issued by securitization trusts, at fair value | | 1,784,223 |
| | 1,401,491 |
| | 3,185,714 |
|
Total liabilities assumed | | 2,533,792 |
| | 2,278,561 |
| | 4,812,353 |
|
Noncontrolling interests | | 72,823 |
| | 9,497 |
| | 82,320 |
|
Fair value of net assets acquired | | $ | 1,032,651 |
| | $ | 988,722 |
| | $ | 2,021,373 |
|
Fair value of other assets acquired, liabilities assumed and noncontrolling interests were estimated as follows:
Real Estate and Related Intangibles—Fair value is based on the income approach which includes a direct capitalization method with overall capitalization rates ranging between 6.5% and 8.3%. Real estate fair value was allocated to tangible assets such as land, building and leaseholds, tenant and land improvements as well as identified intangible assets and liabilities such as above- and below-market leases, and in-place lease value. Useful lives of the intangibles acquired range from 1 year to 10 years.
Loans held for investment—Fair value is determined by comparing the current yield to the estimated yield for newly originated loans with similar credit riskLondon Interbank Offered Rate, 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 interestLIBOR) that are expected to be collected, which include considerationdiscontinued by the end of borrower2021 to alternative reference rates (such as Secured Overnight Financing Rate, or sponsor credit,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 well as operating resultsa continuation of the underlying collateral. Forexisting 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 loans held for investment, NorthStar II has a contractual rightexceptions to equity-like participation or other ownership intereststhe general approach in the underlying collateral which was considered in calculating the fair valueASC 740, Income Taxes, and clarifies certain aspects of the loans heldguidance for investment.
Investmentsmore consistent application. The simplifications relate to intraperiod tax allocations when there is a loss in Unconsolidated Ventures—Fair value iscontinuing 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 timing and amountincome. The ASU also provides new guidance that clarifies the accounting for transactions resulting in a step-up in tax basis of expected future cash flows for income as well as realization eventsgoodwill, among other changes. Transition is generally prospective, other than the provision related to outside basis difference which is on a modified retrospective basis with the cumulative effect adjusted to retained earnings at the beginning of the underlying assetsperiod 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 investees. Investments in unconsolidated ventures includesFASB 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 preferred
result of an observable transaction, an equity investment under the
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
measurement alternative is transitioned into equity method and vice versa, an equity method investment accounted for as an ADC arrangement, as well as anis transitioned into measurement alternative, the investment in a joint venture which holds a mezzanine loan.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 boththe resulting investments was based on the outstanding principal value plus the undiscounted value of any applicable contractual exit fees associated with the investments. The ADC arrangement has an equity-like participation which was considered in its fair value. The capitalization rate used was 6.8%.
Securities—Fair valueupon eventual settlement or exercise. ASU No. 2020-01 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.
Debt—The fair value of debt was determined by either comparing the contractual interest rate to the interest rate for newly originated debt with similar credit risk or the market rate at which a third party might expect to assume such debt or based on discounted cash flow (“DCF”) 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. All of the debt was priced consistent with current interest rates attainable for similarly situated investments, and therefore was attributed a value equal to each debt’s outstanding principal amount less any applicable premium or discount on the secured debt.
Noncontrolling Interests—NorthStar I’s noncontrolling interests are attributable to the minority ownership interests of its operating partners in its CRE properties. The estimated value of NorthStar I’s noncontrolling interests represents the minority owner’s pro rata share of the estimated net book value of the CRE properties, as determined in accordance with the above description of the valuation process for real estate and related intangibles. NorthStar II’s noncontrolling interest is attributable to the minority ownership interest of its operating partner in its Bothell, Washington office portfolio. The estimated value of NorthStar II’s noncontrolling interest represents the operating partner’s pro rata share of the estimated net book value of the portfolio, as determined in accordance with the above description of the valuation process for real estate and related intangibles. The major classes of intangible assets and liabilities include leasing commissions, above- and below-market lease values and in-place lease values.
Results of NorthStar I and NorthStar II
For the three months ended March 31, 2018, the Company’s results of operations included contributions from the acquired business of NorthStar I and NorthStar II as follows (dollars in thousands):
|
| | | | | | | | | | | | |
| | February 1, 2018 to March 31, 2018 |
| | NorthStar I | | NorthStar II | | Total |
Total revenues | | $ | 37,312 |
| | $ | 39,207 |
| | $ | 76,519 |
|
| | | | | |
|
Net income (loss) attributable to common stockholders | | (2,175 | ) | | 8,626 |
| | 6,451 |
|
Combination-Related Costs
Transaction costs of $30.2 million were incurred in connection with the Combination in the three months ended March 31, 2018, consisting largely of professional fees for legal, financial advisory, accounting and consulting services. Approximately $24.3 million of the transaction costs represent fees paid to investment bankers that were contingent upon consummation of the Combination.
Additionally, the Company also incurred $5.9 million of other Combination-related costs during the three months ended March 31, 2018.
Combination-related costs are expensed as incurred and such costs expensed by NorthStar I and NorthStar II prior to the Closing Date were excluded from the Company's results of operations.
Pro Forma Financial Information (Unaudited)
The following table presents pro forma financial information of the Company as if the Combination had been consummated onapplied prospectively, effective January 1, 2017.2021, with early adoption permitted in an interim period. The pro forma financial information includesCompany is currently evaluating the pro forma impact of purchasethis 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 (1) simplifies an issuer’s accounting adjustments primarily relatedfor convertible instruments as a single unit of account; (2) allows more contracts on an entity’s own equity to fair value adjustmentsqualify for equity classification and depreciationmore embedded derivatives meeting the derivative scope exception; and amortization, and excludes Combination-related expenses of $30.2 million(3) simplifies diluted earnings per share (“EPS”) computation.
•The guidance eliminates the requirement to separate embedded conversion features in convertible instruments, except for (1) a convertible instrument that contains features requiring bifurcation as a derivative under ASC 815 or (2) a convertible debt instrument that was issued at a substantial premium.
•Under the three months ended March 31, 2018. The pro forma financial information, however, does not reflect any potential benefitsnew guidance, certain conditions under Subtopic ASC 815-40 that may result in contracts being settled in cash rather than shares and therefore preclude (1) equity classification for contracts on an entity’s own equity; and (2) embedded derivatives from realizationqualifying for the derivative scope exception, have been removed; for example, the requirement that equity contracts permit settlement in unregistered shares unless such contracts explicitly require settlement in cash if registered shares are unavailable. The guidance also clarifies that freestanding contracts on an entity’s own equity that do not qualify for equity classification under the indexation criteria (ASC 815-4015) or settlement criteria (ASC 815-40-25) are to be measured at fair value through earnings, even if they do not meet the definition of a derivative under ASC 815.
•The ASU also amends certain guidance on computation of diluted EPS for convertible instruments and contracts on an entity’s own equity that results in a more dilutive EPS, including (1) requiring the if converted method to be applied for all convertible instruments (the treasury stock method is no longer available), and (2) removing the ability to rebut the presumption of share settlement for contracts that may be settled in cash or stock and that are not liability classified share based payments.
•Expanded disclosures are required, including but not limited to, (1) terms and features of convertible instruments and contracts on entity’s own equity; and (2) information about events, conditions, and circumstances that could affect amount or timing of future cost savings from operating efficiencies,cash flows related to these instruments or other incremental synergies expectedcontracts; and in the period of adoption (3) nature of and reason for the change in accounting principle; and (4) effects of the change on EPS.
Upon adoption, a one-time election may be made to result fromapply the Combination.fair value option for any liability-classified convertible securities.
Adoption of the new standard may be made either on a full retrospective approach or a modified retrospective approach, with cumulative effect adjustment recorded to beginning retained earnings. ASU No. 2020-06 is effective January 1, 2022, with early adoption permitted on beginning January 1, 2021. The Company is currently evaluating the effects of this new guidance.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The pro forma financial information is presented3. Loans and Preferred Equity Held for illustrative purposes only and is not necessarily indicative of the results of operations of the Company had the Combination been completed on January 1, 2017, nor indicative of future results of operations of the Company (dollars in thousands, except per share data):Investment, net
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Pro forma: | | | | |
Total revenues | | $ | 136,038 |
| | $ | 123,426 |
|
Net income (loss) attributable to Colony NorthStar Credit Real Estate, Inc. | | 37,628 |
| | 49,196 |
|
Net income (loss) attributable to common stockholders | | 35,229 |
| | 39,852 |
|
Earnings (loss) per common share: | | | | |
Basic | | $ | 0.27 |
| | $ | 0.31 |
|
Diluted | | $ | 0.27 |
| | $ | 0.31 |
|
| |
4. | Loans Held for Investment, net |
The following table provides a summary of the Company’s loans and preferred equity held for investment, net (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 (Unaudited) | | December 31, 2017 |
| | 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 | | $ | 16,240 |
| | $ | 16,159 |
| | 10.5 | % | | 6.0 | | $ | 471,669 |
| | $ | 463,748 |
| | 8.3 | % | | 2.0 |
|
Mezzanine loans | | 116,231 |
| | 116,152 |
| | 13.1 | % | | 5.1 | | 141,931 |
| | 141,828 |
| | 13.2 | % | | 3.2 |
|
| | 132,471 |
| | 132,311 |
| | | | | | 613,600 |
| | 605,576 |
| | | | |
Variable rate | | | | | | | | | | | | | | | | |
Mortgage loans | | $ | 1,039,007 |
| | $ | 1,046,581 |
| | 6.6 | % | | 3.1 | | $ | 260,366 |
| | $ | 260,932 |
| | 8.1 | % | | 2.3 |
|
Securitized loans(1) | | 497,849 |
| | 501,055 |
| | 6.9 | % | | 0.9 | | 377,939 |
| | 379,670 |
| | 6.7 | % | | 0.3 |
|
Mezzanine loans | | 109,821 |
| | 110,014 |
| | 10.1 | % | | 3.4 | | 34,391 |
| | 34,279 |
| | 9.8 | % | | 1.3 |
|
Preferred equity interests | | 26,488 |
| | 26,774 |
| | 14.2 | % | | 1.7 | | — |
| | — |
| | — |
| | — |
|
| | 1,673,165 |
| | 1,684,424 |
| | | | | | 672,696 |
| | 674,881 |
| | | | |
| | 1,805,636 |
| | 1,816,735 |
| | | | | | 1,286,296 |
| | 1,280,457 |
| | | | |
PCI Loans | | | | | | | | | | | | | | | | |
Mortgage loans | | — |
| | — |
| | | | | | 21,444 |
| | 20,844 |
| | | | |
| | | | | | | | | | | | | | | | |
Allowance for loan losses | | NA |
| | (517 | ) | | | | | | NA |
| | (517 | ) | | | | |
Loans held for investment, net | | $ | 1,805,636 |
| | $ | 1,816,218 |
| | | | | | $ | 1,307,740 |
| | $ | 1,300,784 |
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
| | Unpaid Principal Balance | | Carrying Value | | Weighted Average Coupon(1) | | Weighted Average Maturity in Years | | Unpaid Principal Balance | | Carrying Value | | Weighted Average Coupon(1) | | Weighted Average Maturity in Years |
Fixed rate | | | | | | | | | | | | | | | | |
Mezzanine loans | | $ | 150,335 | | | $ | 149,678 | | | 12.8 | % | | 4.2 | | $ | 223,395 | | | $ | 222,503 | | | 12.8 | % | | 4.2 |
Preferred equity interests | | 18,350 | | | 18,350 | | | 15.0 | % | | 2.9 | | 115,384 | | | 115,313 | | | 12.5 | % | | 6.9 |
Other loans(2) | | 13,692 | | | 13,607 | | | 15.0 | % | | 3.7 | | 12,572 | | | 12,448 | | | 15.0 | % | | 4.4 |
| | 182,377 | | | 181,635 | | | | | | | 351,351 | | | 350,264 | | | | | |
Variable rate | | | | | | | | | | | | | | | | |
Senior loans | | 974,207 | | | 971,963 | | | 5.5 | % | | 3.4 | | 1,462,467 | | | 1,457,738 | | | 6.0 | % | | 3.8 |
Securitized loans(3) | | 972,687 | | | 970,473 | | | 5.1 | % | | 3.6 | | 1,006,495 | | | 1,002,696 | | | 5.2 | % | | 4.2 |
Mezzanine loans | | 18,178 | | | 18,298 | | | 9.4 | % | | 2.2 | | 38,110 | | | 38,258 | | | 11.4 | % | | 2.0 |
Preferred equity interests | | 1,569 | | | 1,569 | | | 5.3 | % | | 0.3 | | — | | | — | | | — | | | — | |
| | 1,966,641 | | | 1,962,303 | | | | | | | 2,507,072 | | | 2,498,692 | | | | | |
Loans and preferred equity held for investment | | 2,149,018 | | | 2,143,938 | | | | | | | 2,858,423 | | | 2,848,956 | | | | | |
| | | | | | | | | | | | | | | | |
Allowance for loan losses | | NA | | (40,524) | | | | | | | NA | | (272,624) | | | | | |
Loans and preferred equity held for investment, net | | $ | 2,149,018 | | | $ | 2,103,414 | | | | | | | $ | 2,858,423 | | | $ | 2,576,332 | | | | | |
(1)Calculated based on contractual interest rate.
(2)Includes one corporate term loan secured by the borrower’s limited partnership interests in a fund at September 30, 2020 and December 31, 2019.
(3)Represents loans transferred into securitization trusts that are consolidated by the Company.
As of September 30, 2020, the weighted average maturity, including extensions, of loans and preferred equity investments was 3.6 years.
The Company had $7.6 million and $9.8 million of interest receivable related to its loans and preferred equity held for investment, net as of September 30, 2020 and December 31, 2019, respectively. This is included in receivables, net on the Company’s consolidated balance sheets.
Activity relating to the Company’s loans and preferred equity held for investment, net was as follows (dollars in thousands):
| | | | | | | | | | |
(1) | Represents
| Carrying Value | | |
Balance at January 1, 2020 | | $ | 2,576,332 | | | |
Acquisitions/originations/additional funding | | 121,309 | | | |
Loan maturities/principal repayments | | (373,285) | | | |
| | | | |
Transfer to loans transferred into securitization trusts that are consolidated by the Company.held for sale | | (154,370) | | | |
Discount accretion/premium amortization | | 6,047 | | | |
Capitalized interest | | (3,856) | | | |
Provision for loan losses(1) | | (86,329) | | | |
Effect of CECL adoption(2) | | (21,093) | | | |
| | | | |
| | | | |
Charge-off | | 38,659 | | | |
Balance at September 30, 2020 | | $ | 2,103,414 | | | |
(1)Provision for loan losses includes $5.2 million for a loan that was subsequently transferred to held for sale during the second quarter of 2020 and the net provision recorded upon loan repayment totaling $1.8 million during the nine months ended September 30, 2020. Additionally, provision for loan losses excludes $1.0 million determined by the Company’s PD/LGD model for unfunded commitments reported on the consolidated statement of operations, with a corresponding offset to other liabilities recorded on the Company’s consolidated balance sheets.
(2)Calculated by the Company’s PD/LGD model upon CECL adoption on January 1, 2020. See Note 2, “Summary of Significant Accounting Polices” for further details.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Activity relating to the Company’s loans held for investments, net was as follows (dollars in thousands):
|
| | | | |
| | Carrying Value |
Balance at January 1, 2018 | | $ | 1,300,784 |
|
Loans held for investment acquired in the Combination (refer to Note 3) | | 1,249,733 |
|
Deconsolidation of investment entities(1) | | (553,678 | ) |
Acquisitions/originations/additional funding | | 5,059 |
|
Loan maturities/principal repayments | | (136,913 | ) |
Combination adjustment(2) | | (50,314 | ) |
Discount accretion/premium amortization | | 1,017 |
|
Capitalized interest | | 530 |
|
Balance at March 31, 2018 | | $ | 1,816,218 |
|
| |
(1) | Represents loans held for investment, net which were deconsolidated as a result of the Combination. Refer to Note 2, “Summary of Significant Accounting Policies,” for further detail. |
| |
(2) | Represents a loan held for investment, net that was previously sold by the CLNS Investment Entities to NorthStar I and was treated as a secured financing by the CLNS Investment Entities. This loan was eliminated as a result of the Combination. |
Nonaccrual and Past Due Loans and Preferred Equity
Non-PCI loansLoans and preferred equity 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. At September 30, 2020, all loans and preferred equity held for investment remained current on interest payments.
In March 2018, the borrower on the Company’s $260.2 million4 NY hospitality loanloans in its Legacy, Non-Strategic Portfolio failed to make itsall required interest payment. Thepayments and the loans were placed on nonaccrual status. These 4 loans are secured by the same collateral. During 2018, the Company has placedrecorded $53.8 million of provision for loan losses to reflect the loan on non-accrual status and has commenced discussions withestimated value to be recovered from the borrower to resolvefollowing a sale. During 2019, the matter. NoCompany recorded an additional provision for loan loss of $154.3 million based on significant deterioration in the NY hospitality market, feedback from the sales process and the estimated value to be recovered from the borrower following a potential sale. During the three months ended March 31, 2020, the significant detrimental impact of COVID-19 on the U.S. hospitality industry further contributed to the deterioration of the Company’s 4 NY hospitality loans and as such the Company recorded an additional provision for loan losses of $36.8 million. During the three months ended June 30, 2020, the Company completed a discounted payoff of the NY hospitality loans and related investment interests.
Within its Legacy, Non-Strategic Portfolio, the Company previously held other loans secured by regional malls that were sold during the nine months ended September 30, 2020:
•The Company placed 1 loan secured by a regional mall (“Midwest Regional Mall”) on nonaccrual status during 2019 as collectability of the principal was uncertain; as such, interest collected is recognized using the cost recovery method by applying interest collected as a reduction to loan carrying value. The Company recorded $10.6 million of impairment related to Midwest Regional Mall and transferred the loan to held for sale during 2019. During the three months ended June 30, 2020 the Midwest Regional Mall was sold. The Company received $8.3 million in gross proceeds and recognized a gain of $3.7 million.
•During 2018, the Company recorded $8.8 million of provision for loan losses on one loan secured by a regional mall (“Northeast Regional Mall B”) to reflect the estimated fair value of the collateral. During 2019, the Company recognized additional provision for loan losses of $10.5 million on Northeast Regional Mall B. The additional provisions were based on then-current and prospective leasing activity to reflect the estimated fair value of the collateral. During the three months ended March 31, 2020, the Northeast Regional Mall was sold. The Company received $9.2 million in gross proceeds and recognized a gain of $1.8 million.
•Also, during 2019, the Company separately recognized provision for loan losses of $18.5 million on 2 loans secured by 1 regional mall (“West Regional Mall”) to reflect the estimated fair value of the collateral. During the three months ended June 30, 2020 the West Regional Mall loan was sold. The Company received $23.5 million in gross proceeds and recognized a gain of $6.5 million.
•Furthermore, during 2019, the Company recognized a $26.7 million provision for loan losses on 3 loans to 2 separate borrowers (“South Regional Mall A” and “South Regional Mall B”) to reflect the estimated fair value of the collateral. During the three months ended March 31, 2020, the Company accepted a discounted payoff of South Regional Mall A. The Company received $22.0 million in gross proceeds and recognized a loss of $1.6 million. Additionally, during the three months ended March 31, 2018 as2020, South Regional Mall B was sold. The Company received $13.5 million in gross proceeds and recognized a gain of $8.7 million.
Within its Core Portfolio:
•The Company placed 1 loan secured by a hotel in Bloomington, Minnesota (“Midwest Hospitality”) on nonaccrual status due to a borrower default during the fourth quarter of 2019. During the three months ended March 31, 2020 the Company believes sufficientrecognized a $2.3 million provision for loan loss on the Midwest Hospitality loan to reflect the estimated fair value of the collateral, which was based on feedback from the sales process and the estimated value exists to coverbe recovered from the outstandingborrower following a potential sale. The Company had been sweeping cash from the hotel to amortize the unpaid principal balance of the loan. During the three months ended September 30, 2020 the hotel property securing this loan balances. These discussions typically include numerous points of negotiation aswas sold and the Company received $24.5 million in gross proceeds and concurrently provided a bridge loan in the amount of $19.5 million to a new borrower, work towardssecured by Midwest Hospitality.
•Additionally, the Company had a settlement or other alternative resolution, which can impact the potential for loan repayment or receipt of collateral.
The following table provides an aging summary of non-PCI loans held for investment at carrying values beforetotal $20.9 million allowance for loan losses (dollars 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 / Nonaccrual (1) | | Total Non-PCI Loans |
March 31, 2018 (Unaudited) | | $ | 1,384,599 |
|
| $ | — |
|
| $ | — |
|
| $ | 432,136 |
|
| $ | 1,816,735 |
|
December 31, 2017 | | 1,101,522 |
| | 144,241 |
| | 7,929 |
| | 26,765 |
| | 1,280,457 |
|
| |
(1) | Loans held for investment with a total carrying valuerecorded as of $42.2 million which were 90 days or more past due repaid in full subsequent to March 31, 2018. |
Troubled Debt Restructuring
At March 31, 2018 and December 31, 2017, there was one mezzanine loan previously modified in a TDR with carrying value before2020, which included an $8.8 million allowance for loan losses of $28.6 million. The loan had been modified in 2015. The Company also has three other loans with a combined carrying value of $108.5 million that are cross-defaulted with the TDR loan to the same borrower. Two loans matured in November 2017resulting from CECL adoption and were in default at both March 31, 2018 and December 31, 2017, while the third loan remains current. All four loans are collateralized with 27 office, retail, multifamily and industrial properties with an estimated aggregate fair value of approximately $137.1 million. In February 2018, the borrower and the Company entered into a forebearance agreement to allow both parties to review the exit strategy for a period through the end of May 2018, which may be extended at the Company’s option for an additional 90 day period. No$12.1 million provision for loan loss was made at March 31, 2018 or December 31, 2017 on the two defaulted loans as the Company believes there is sufficient collateral value to cover the outstanding loan balances in aggregate. The Company has no additional commitments to lend to the borrower with the TDR loan.
There were no loans modified as TDRslosses recognition during the three months ended March 31, 2018 and year ended December 31, 2017.
2020, on 1 loan secured by 6
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
suburban office buildings (“Northeast Office Portfolio”). During the three months ended September 30, 2020 the Company received gross proceeds of $80.7 million in a discounted payoff of the Northeast Office Portfolio which was equal to the carrying value of the loan, net of current provision for loan losses. As such, no additional provision for loan losses were required at September 30, 2020.
Non-PCI •Also, during the three months ended June 30, 2020 the Company classified 1 loan secured by a hospitality asset in San Diego, California (“West Hospitality”) as held for sale and recognized a net loss of $32.8 million to reflect the expected proceeds to be collected in a sale of the loan. The Company had recorded a $5.2 million allowance for loan losses as of March 31, 2020, which included a $2.6 million allowance for loan losses resulting from CECL adoption and an additional $2.6 million provision for loan losses recognized for West Hospitality during the three months ended March 31, 2020. In connection with transferring the loan to held for sale during the current quarter, the Company reversed out the $5.2 million from provision for loan losses line item and recorded a $38.0 million in other loss, net. During the three months ended September 30, 2020 the West Hospitality loan was sold. The Company received $105.2 million in gross proceeds and will recognize an additional loss of $1.5 million.
•Furthermore, the Company had a total $1.6 million allowance for loan losses recorded as of September 30, 2020, which included a $0.1 million allowance for loan losses resulting from CECL adoption and an additional $1.5 million provision for loan losses recognition recorded during the first and second quarters of 2020, on 1 loan secured by the borrowers limited partner interests in a fund (“Corporate Term loan”). Subsequent to September 30, 2020 the Company received gross proceeds of $12.1 million in a discounted payoff of the Corporate Term loan which was equal to the carrying value of the loan, net of current provision for loan losses. As such, no additional provision for loan losses were required at September 30, 2020.
The following table provides an aging summary of loans and preferred equity held for investment at carrying values before allowance for loan losses, if any (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Current or Less Than 30 Days Past Due | | 30-59 Days Past Due(1) | | 60-89 Days Past Due | | 90 Days or More Past Due(2) | | Total Loans |
September 30, 2020 | | $ | 2,143,938 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 2,143,938 | |
December 31, 2019 | | 2,558,505 | | | 32,322 | | | 0 | | | 258,129 | | | 2,848,956 | |
(1)At December 31, 2019, 30-59 days past due includes 1 loan (Midwest Hospitality) that was placed on nonaccrual status during the fourth quarter of 2019 following a borrower default. During the three months ended September 30, 2020, Midwest Hospitality was repaid in a discounted payoff at which time the Company provided a bridge loan totaling $19.5 million to a new borrower.
(2)At December 31, 2019, 90 days or more past due loans includes 4 NY hospitality loans to the same borrower and secured by the same collateral with combined carrying value before allowance for loan losses of $258.1 million on nonaccrual status. All other loans in this table remain current on interest payments. The Company completed a discounted payoff of the 4 NY hospitality loans in April 2020.
Impaired Loans - 2019
Non-PCI loansLoans 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 impairedImpaired loans include predominantly loans under nonaccrual, performing and nonperforming TDRs.TDRs, as well as loans in maturity default. The following table presents non-PCI impaired loans at the respective reporting datesDecember 31, 2019 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Unpaid Principal Balance(1) | | Gross Carrying Value | | |
| | | With Allowance for Loan Losses(2) | | Without Allowance for Loan Losses | | Total(2) | | Allowance for Loan Losses |
December 31, 2019 | | $ | 408,058 | | | $ | 377,421 | | | $ | 32,322 | | | $ | 409,743 | | | $ | 272,624 | |
(1)Includes 4 NY hospitality loans to the same borrower and secured by the same collateral with combined unpaid principal balance of $257.2 million and gross carrying value of $258.1 million on nonaccrual status. All other loans included in this table remain current on interest payments. The Company completed a discounted payoff of the 4 NY hospitality loans in April 2020.
(2)Includes unpaid principal balance plus any applicable exit fees less net deferred loan fees.
Upon adoption of ASU 2016-13 the incurred loss model has been replaced with a lifetime current expected credit loss model for the Company’s loans carried at amortized cost, and as such all loans in the Company’s portfolio maintain an allowance for loan losses at September 30, 2020. See Note 2 “Summary of Significant Accounting Policies—Accounting Standards Adopted in 2020—Credit Losses” for further details.
|
| | | | | | | | | | | | | | | | | | | | |
| | Unpaid Principal Balance | | Gross Carrying Value | | |
| | | With Allowance for Loan Losses | | Without Allowance for Loan Losses | | Total | | Allowance for Loan Losses |
March 31, 2018 (Unaudited) | | $ | 430,053 |
|
| $ | 42,176 |
|
| $ | 389,960 |
|
| $ | 432,136 |
|
| $ | 517 |
|
December 31, 2017 | | 215,997 |
| | 42,176 |
| | 175,090 |
| | 217,266 |
| | 517 |
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The average carrying value and interest income recognized on non-PCI impaired loans for the three and nine months ended September 30, 2019 were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | | |
| | 2019 | | 2019 | | | |
Average carrying value before allowance for loan losses | | $ | 356,753 | | | $ | 426,195 | | | | |
Interest income | | 2,737 | | | 8,282 | | | | |
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Average carrying value before allowance for loan losses | | $ | 385,067 |
| | $ | 40,066 |
|
Interest income | | 3,758 |
| | 756 |
|
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.
Changes in accretable yield of PCI loans were as follows (dollars in thousands):
|
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Beginning accretable yield | | $ | 726 |
| | $ | 5,929 |
|
Changes in accretable yield(1) | | (605 | ) | | (572 | ) |
Accretion recognized in earnings | | (121 | ) | | (1,522 | ) |
Ending accretable yield | | $ | — |
| | $ | 3,835 |
|
| |
(1) | Change in accretable yield during the three months ended March 31, 2018 is a result of the deconsolidation of certain CLNS Contributed Portfolio investments. |
Allowance for Loan Losses
As of March 31, 2018 and December 31, 20172019, the allowance for loan losses was $0.5$272.6 million related to $42.2$409.7 million in carrying value of non-PCI loans.
Changes in allowance for loan losses on non-PCI loans are presented below (dollars in thousands):
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2020 | | 2019 | | |
Allowance for loan losses at beginning of period | | $ | 272,624 | | | $ | 109,328 | | | |
Effect of CECL adoption(1) | | 21,093 | | | 0 | | | |
| | | | | | |
Provision for loan losses(2) | | 86,329 | | | 220,572 | | | |
Charge-off | | (38,659) | | | (46,692) | | | |
| | | | | | |
Transfer to loans held for sale | | (300,863) | | | 0 | | | |
Allowance for loan losses at end of period(3) | | $ | 40,524 | | | $ | 283,208 | | | |
(1)Calculated by the Company’s PD/LGD model upon CECL adoption on January 1, 2020. See Note 2, “Summary of Significant Accounting Policies” for further details. |
| | | | | | | | |
| | Three Months Ended March 31, |
| | 2018 | | 2017 |
Allowance for loan losses at beginning of period | | $ | (517 | ) | | $ | (3,386 | ) |
Provision for loan losses | | — |
| | — |
|
Charge-off | | — |
| | 3,210 |
|
Allowance for loan losses at end of period | | $ | (517 | ) | | $ | (176 | ) |
(2)Provision for loan losses includes $5.2 million for a loan that was subsequently transferred to held for sale during the second quarter of 2020 and net provision recorded upon loan repayment totaling $1.8 million during the nine months ended September 30, 2020. Additionally, provision for loan losses excludes $1.0 million determined by the Company’s PD/LGD model for unfunded commitments reported on the consolidated statement of operations, with a corresponding offset to other liabilities recorded on the Company’s consolidated balance sheets.As(3)At September 30, 2020, includes $38.9 million related to the Company’s PD/LGD model and $1.6 million related to the corporate term loan, which was evaluated individually. See further discussion in “Nonaccrual and Past Due Loans and Preferred Equity.”
Loans and Preferred Equity Held for Sale
The following table summarizes the Company’s assets held for sale related to loans and preferred equity (dollars in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Assets | | | | |
Loans and preferred equity held for investment, net | | $ | 0 | | | $ | 5,016 | |
Total assets held for sale | | $ | 0 | | | $ | 5,016 | |
At September 30, 2020, the Company did not classify any of Marchits loans as held for sale. There were 0 assets held for sale that constituted discontinued operations as of September 30, 2020 and December 31, 2018, the weighted average maturity, including extensions, of CRE debt investments was 2.7 years.2019.
Credit Quality Monitoring
CRE debtLoan and preferred equity investments are typically loans secured by direct senior priority liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its debtloan and preferred equity investments at least quarterly and differentiates the relative credit quality principally based on: (i)
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
whether the borrower is currently paying contractual debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity.
As of March 31, 2018,September 30, 2020, there were seven real estate debt0 loans and preferred equity investments with contractual payments past due. The remaining CRE debt investmentsdue and all loans were performing in accordance with the contractual terms of their governing documents and were categorized as performing loans. There were seven real estate debt investments5 loans held for investment with contractual payments past due as of December 31, 2017.2019. For the threenine months ended March 31, 2018, noSeptember 30, 2020, 0 debt investment contributed more than 10.0% of interest income.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table provides a summary by carrying values before any allowance for loan losses of the Company’s loans and preferred equity held for investment by year of origination and credit quality risk ranking (dollars in thousands). Refer to Note 2, “Summary of Significant Accounting Policies—Accounting Standards Adopted in 2020—Credit Losses” for loans risk ranking definitions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
Senior loans | | | | | | | | | | | | | | |
Risk Rankings: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
3 | | $ | 19,500 | | | $ | 371,654 | | | $ | 279,223 | | | $ | 33,660 | | | $ | 0 | | | $ | 0 | | | $ | 704,037 | |
4 | | 0 | | | 835,205 | | | 403,194 | | | 0 | | | 0 | | | 0 | | | 1,238,399 | |
| | | | | | | | | | | | | | |
Total Senior loans | | 19,500 | | | 1,206,859 | | | 682,417 | | | 33,660 | | | 0 | | | 0 | | | 1,942,436 | |
| | | | | | | | | | | | | | |
Mezzanine loans | | | | | | | | | | | | | | |
Risk Rankings: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
4 | | 0 | | | 95,848 | | | 55,484 | | | 12,120 | | | 0 | | | 4,524 | | | 167,976 | |
| | | | | | | | | | | | | | |
Total Mezzanine loans | | 0 | | | 95,848 | | | 55,484 | | | 12,120 | | | 0 | | | 4,524 | | | 167,976 | |
| | | | | | | | | | | | | | |
Preferred equity interests and other | | | | | | | | | | | | | | |
Risk Rankings: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
4 | | 1,569 | | | 0 | | | 18,350 | | | 0 | | | 0 | | | 0 | | | 19,919 | |
5 | | 0 | | | 13,607 | | | 0 | | | 0 | | | 0 | | | 0 | | | 13,607 | |
| | | | | | | | | | | | | | |
Total Preferred equity interests and other | | 1,569 | | | 13,607 | | | 18,350 | | | 0 | | | 0 | | | 0 | | | 33,526 | |
| | | | | | | | | | | | | | |
Total Loans and preferred equity held for investment | | $ | 21,069 | | | $ | 1,316,314 | | | $ | 756,251 | | | $ | 45,780 | | | $ | 0 | | | $ | 4,524 | | | $ | 2,143,938 | |
The Company considers several risk factors when assigning risk ratings each quarter. Beginning with the quarter ended March 31, 2020, average risk ranking was impacted by the current and potential future effects of the COVID-19 pandemic, resulting in a number of assets moving from average risk (3) to high risk (4).
For the three months ended September 30, 2020, the Company believes the extended impact of the COVID-19 pandemic remains uncertain, and therefore continues to represent a significant risk to our portfolio. As such, the current period average rating is 3.7, which is consistent with the first half of 2020.
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 March 31, 2018,September 30, 2020, assuming the terms to qualify for future fundings, if any, havehad been met, total gross unfunded lending commitments was $53.6were $173.2 million. Refer to Note 16, “Commitments and Contingencies” for further details. At September 30, 2020, the Company recorded a $1.2 million allowance for mortgage loans, $12.5 millionlending commitments in accrued and other liabilities on its consolidated balance sheets in accordance with the credit losses accounting standard No. 2016-13. See Note 2, “Summary of Significant Accounting Policies” for securitized loans, and $2.2 million for preferred equity interests. Future funding commitments were $19.2 million for mortgage loans at December 31, 2017.further details.
| |
5. | Investments in Unconsolidated Ventures |
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Investments in Unconsolidated Ventures
Summary
The Company’s investments in unconsolidated ventures represent noncontrolling equity interests in various entities, as follows (dollars in thousands):
|
| | | | | | | | |
| | March 31, 2018 (Unaudited) | | December 31, 2017 |
Equity method investments | | | | |
Investment ventures | | $ | 498,973 |
| | $ | 179,303 |
|
| | 498,973 |
| | 179,303 |
|
Investments under fair value option | | | | |
Private funds | | 257,495 |
| | 24,417 |
|
| | $ | 756,468 |
| | $ | 203,720 |
|
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Equity method investments | | $ | 417,464 | | | $ | 585,022 | |
| | | | |
Investments under fair value option | | 7,093 | | | 10,283 | |
Investments in Unconsolidated Ventures | | $ | 424,557 | | | $ | 595,305 | |
Equity Method Investments
Investment Ventures
Certain of the Company’s equity method investments are structured as joint ventures with one or more private funds or other investment vehicles managed by the Colony NorthStarCapital with third party joint venture partners. These investment entities are generally capitalized through equity contributions from the members, although certain investments are leveraged through various financing arrangements.
The assets of the equity method investment entities may only be used to settle the liabilities of these entities and there is no recourse to the general credit of the Company nor 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. The Company’s exposure to the investment entities is limited to its equity method investment balance as of March 31, 2018September 30, 2020 and December 31, 2017,2019, respectively.
As discussed in Note 2, “Summary of Significant Accounting Policies”, certain of the CLNS Investment Entities were deconsolidated by the Company upon closing of the Combination and accounted for as investments in unconsolidated ventures. The Company’s investments accounted for under the equity method are summarized below (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | Carrying Value |
Investments | | Description | | September 30, 2020 | | December 31, 2019 |
ADC investments(1)(2)(3) | | Interests in 3 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 | | $ | 57,452 | | | $ | 59,576 | |
Other investment ventures(1)(4) | | Interests in 8 investments, each with less than $189.7 million carrying value at September 30, 2020 | | 360,012 | | | 525,446 | |
(1)The Company’s ownership interest in ADC investments and other investment ventures varies and 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 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)The Company owns varying levels of stated equity interests in certain ADC investments, as well as profit participation interests in real estate ventures without a stated ownership interest in other ADC investments.
(3)Includes 2 investments with a carrying value of $57.4 million that were contributed to a preferred financing arrangement. See Note 13, “Noncontrolling Interests,” for further information.
(4)Includes 5 investments with a carrying value of $245.9 million that were contributed to a preferred financing arrangement. See Note 13, “Noncontrolling Interests,” for further information.
Impairment
Within the Company’s Legacy, Non-Strategic Portfolio:
•During 2019, the Company recognized its proportionate share of impairment loss totaling $14.7 million on 1 senior loan secured by a regional mall (“Southeast Regional Mall”). Southeast Regional Mall was sold during the three months ended March 31, 2020 and the Company received $13.4 million in gross sales proceeds and recognized a gain of $1.6 million.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | | | Ownership Interest(1) at March 31, 2018 | | Carrying Value |
Investments | | Description | | | March 31, 2018 (Unaudited) | | December 31, 2017 |
ADC investments | | Interests in eight 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 | | Various(2) | | $ | 320,991 |
| | $ | 179,303 |
|
Other investment ventures | | Interests in 10 investments, each with less than $60.4 million carrying value at March 31, 2018 | | Various | | 177,982 |
| | — |
|
•Also during 2019, the Company recorded its proportionate share of impairment loss totaling $16.1 million on 2 loans and an equity partnership interest secured by residential development projects as a result of revised property sales expectations. | |
(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 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) | The Company owns varying levels of stated equity interests in certain ADC investments, as well as profit participation interests in real estate ventures without a stated ownership interest in other ADC investments. |
Within the Company’s Core Portfolio:
During 2019 the Company recorded a $17.6 million impairment loss related to an equity participation interest in a joint venture to reflect the estimated fair value of the collateral. During the three months ended June 30, 2020 the Company sold the related preferred equity investment at par and included one-third of the Company’s equity participation in the sale and recognized a loss of $10.1 million.
The impairment recorded on each of these investments is included in equity in earnings of unconsolidated ventures on the Company’s consolidated statements of operations.
Fair Value Measurement
At January 1, 2020, for loans and preferred equity investments included in the Company’s equity method investments, the fair value option was elected.Under the fair value option, loans and preferred equity investments are measured each reporting period based on their exit values in an orderly transaction. Fair value adjustments recorded on each of these investments is included in equity in earnings of unconsolidated ventures on the Company’s consolidated statements of operations.
Within the Company’s Core Portfolio:
•The Company’s mezzanine loan and preferred equity investment in a development project in Los Angeles County, which includes a hospitality and retail renovation and a new condominium tower construction (the “Mixed-use Project”), was converted into a mezzanine participation during the three months ended September 30, 2020. The Company’s investment was made through a joint venture with affiliates of our Manager (the “Colony Mezzanine Lender”) in the form of a $574.0 million commitment to the Mixed-use Project, of which the Company’s proportionate share of the commitment is $189.0 million. The Mixed-use Project’s total interest income recorded for the nine months ended September 30, 2020 and September 30, 2019 was $13.8 million and $31.1 million, respectively. The Company recognized its proportionate share of interest income for the nine months ended September 30, 2020 and September 30, 2019 of $2.4 million and $11.5 million, respectively. In connection with the refinancing, the Colony Mezzanine Lender is no longer subject to future funding requirements.
In April 2020, the senior mortgage lender notified the borrower developer that the Mixed-use Project loan funding was over budget, due to cost overruns from certain hard and soft costs and senior loan interest reserve shortfalls projected through completion. As a result, during the second quarter, the Company and its affiliates made two protective advances to the senior mortgage lender totaling $67.7 million, of which the Company’s proportionate share was $28.5 million. During the three months ended June 30, 2020, the Company placed the mezzanine loan and preferred equity investment on nonaccrual status.
In June 2020, the senior mortgage lender sought a third protective advance of $15.5 million of which the Company’s proportionate share would have been $7.0 million. While the Company and its affiliates did not fund its proportionate share, the senior mortgage lender funded the full amount of the required June advances. The senior mortgage lenders funding did not relieve the Company and its affiliates from its commitment to fund. As a result during the three months ended June 30, 2020, the Mixed-use Project’s recorded fair value losses totaling $250.0 million. The Company recognized its proportionate share of fair value losses equaling $89.3 million. The Mixed-use Project’s fair value was based on a weighted average probability analysis of potential resolutions based on a number of factors which included the maturity default of the loan, cost overruns, COVID-19 related delays, lack of funding by the borrower and recent negotiations with the senior lender, the borrower and potential sources of additional mezzanine financing.
In September 2020, in cooperation with the borrower and the EB-5 lender, the Colony Mezzanine Lender and senior mortgage lender secured $275 million of additional mezzanine financing from a third-party mezzanine lender (the “Senior Mezzanine Lender”).To consummate the new mezzanine financing, the Colony Mezzanine Lender simplified its investment interest by converting its existing preferred equity principal and accrued interest into the existing mezzanine loan, transferred the mezzanine loan to the Senior Mezzanine Lender, who subsequently increased the mezzanine loan amount by $275 million to a $821 million total mezzanine loan (the “Upsized Mezzanine Loan”). The Senior Mezzanine Lender holds a $275 million A-participation and the Colony Mezzanine Lender (including the Company’s interest) continues to hold a $546 million B-participation interest in the Upsized Mezzanine Loan at the Mixed-use Project.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the three months ended September 30, 2020, the Company continues to maintain the nonaccrual status and there was no change to the Company’s fair value loss adjustment on its proportionate share of the Colony Mezzanine Lender’s B-participation investment.
•Also, during the three months ended June 30, 2020, the Company recognized its proportionate share of fair value losses totaling $7.0 million on 1 mezzanine loan secured by a mixed-use development project (“West Mixed-use”). West Mixed-use’s decrease in fair value is a result of revised sale expectations. The Company previously placed West Mixed-use on nonaccrual status in January 2020.
•Additionally, the Company holds a $189.6 million co-lender interest (61%) in a senior mortgage loan in the amount of $310.9 million. The senior mortgage loan is also held by private investment vehicles managed by Colony Capital. The senior mortgage is Euro–denominated and is for a fully entitled land acquisition for a mixed-use development project in Dublin, Ireland. Project delays, permitting processes and uncertain market conditions as a result of COVID-19 (including adverse impacts on demand for office and residential space), may have a negative impact on the senior lender’s investment interest and may result in a future valuation impairment or investment loss. Given the delays and potential negative impact of COVID-19 on market conditions the loan was placed on nonaccrual status for the quarter ended September 30, 2020. The loan’s initial maturity date is December 31, 2020, and the borrower is unlikely to meet the conditions required for an automatic extension. The Company is working with the borrower and evaluating options.
Investments under Fair Value Option
Private Funds
The Company elected to account for its limited partnership interests, which range from 0.1% to 30.3%16.1%, in PE Investments under the fair value option. The Company records equity in earnings for these investments based on a change in fair value of its share of projected future cash flows.
Summarized Financial Information
The combined statements of operations forDuring the unconsolidated ventures, including PE Investments and excluding unconsolidated ventures accounted for under the cost method, for the threenine months ended MarchSeptember 30, 2020, the Company received the final $1.8 million in proceeds related to the sale of its PE Investments.
Investments in Unconsolidated Ventures Held for Sale
During the nine months ended September 30, 2020, the Company classified 1 investment in an unconsolidated venture it its Legacy, Non-Strategic Portfolio with a carrying value of $11.0 million as held for sale.
5. Real Estate Securities, Available for Sale
Investments in CRE Securities
CRE securities are composed of CMBS backed by a pool of CRE loans which are typically well-diversified by type and geography. The following table presents CMBS investments as of September 30, 2020 and December 31, 2018 and 2017, are as follows2019 (dollars in thousands):
|
| | | | | | | | |
| | Three Months Ended March 31,(1) |
| | 2018 | | 2017 |
Total revenues | | $ | 19,938 |
| | $ | 7,803 |
|
Net income (loss)(2) | | 10,107 |
| | 6,937 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Weighted Average |
| | | Principal Amount(1) | | Total Discount | | Amortized Cost | | Cumulative Unrealized on Investments | Fair Value | | Coupon(2) | | Unleveraged Current Yield(3) |
As of Date: | Count | | Gain | | (Loss) | | | |
September 30, 2020 | 11 | | $ | 67,334 | | | $ | (35,375) | | | $ | 31,959 | | | $ | 4,291 | | | $ | 0 | | | $ | 36,250 | | | 3.47 | % | | 0 | % |
December 31, 2019 | 43 | | 292,284 | | | (55,981) | | | 236,303 | | | 17,084 | | | (563) | | | 252,824 | | | 3.19 | % | | 7.12 | % |
| |
(1) | Includes summarized financial information for PE Investments on a one quarter lag, which is the most recent financial information available from the underlying funds. |
| |
(2) | Includes net investment income and unrealized and realized gains and losses for PE Investments. |
(1)CRE securities serve as collateral for financing transactions including carrying value of $18.4 million as of September 30, 2020 for the CMBS Credit Facilities (refer to Note 9, “Debt,” for further detail). The remainder is unleveraged.
(2)All CMBS are fixed rate.
(3)The Company placed all of its CRE securities on cost recovery status as of April 1, 2020.
COLONY NORTHSTAR CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three months ended September 30, 2020, the Company sold 5 CRE securities for a total gross sales price of $28.8 million and recognized a gain of $5.2 million. The gain is recorded in other gain (loss), net on the Company’s consolidated statements of operations. During the nine months ended September 30, 2020, the Company sold 32 CRE securities for a total gross sales price of $118.5 million and recognized a net loss of $51.8 million. The loss is recorded in other gain (loss), net on the Company’s consolidated statements of operations. In connection with these sales, the Company repaid $79.2 million of debt on its CMBS Credit Facility. See Note 19, “Subsequent Events,” for additional details regarding CRE securities sales.
Consistent with the overall market, the Company’s CRE securities, which it marks to fair value, lost significant value since the onset of the COVID-19 pandemic. Although the market at September 30, 2020 experienced a slight rebound in some securities from the marks taken at June 30, 2020, the Company believes bond prices will remain volatile over the next six to twelve months reflecting changes in the macro environment as well as individual credit events within individual bonds. While the Company will evaluate selling its investment grade and non-investment grade rated CRE securities over the next twelve months, it is more likely than not that the Company will sell before recovery. This impairment loss was a result of writing down the Company’s amortized cost basis to equal fair value. The loss is recorded in other gain (loss), net on the Company’s consolidated statements of operations. Additionally, the Company has placed its investment grade and non-investment grade rated CRE securities on cost recovery and as a result, has ceased accretion of any discounts to expected maturity and applied any cash interest received against the CRE securities’ carrying value. This decision was made given the inability to project future cash flows from the Company’s CRE securities. To the extent that the carrying value of any CRE security is reduced to zero, any cash subsequently received would be recorded as interest income.
The Company recorded an unrealized gain in OCI of $4.3 million and an unrealized loss of $12.2 million for the three and nine months ended September 30, 2020 and an unrealized gain in OCI of $5.1 million and $22.7 million for the three and nine months ended September 30, 2019. For securities in which the fair value dropped below the amortized cost basis during the three and nine months ended September 30, 2020, the Company wrote down through earnings the amortized cost basis of the securities to fair value as of September 30, 2020, realizing a loss for the three and nine months ended September 30, 2020 of $3.4 million and $32.6 million, respectively. As of September 30, 2020, the Company did 0t hold any securities in an unrealized loss position.
As of September 30, 2020, the weighted average contractual maturity of CRE securities was 28.6 years with an expected maturity of 5.5 years.
The Company had $0.7 million of interest receivable related to its real estate securities, available for sale as of December 31, 2019. This is included in receivables, net on the Company’s consolidated balance sheets.
Investments in Investing VIEs
The Company is the directing certificate holder of 2 securitization trusts and has the ability to appoint and replace the special servicer on all mortgage loans. As such, U.S. GAAP requires the Company to consolidate the assets, liabilities, income and expenses of the securitization trusts as Investing VIEs. Refer to Note 2, “Summary of Significant Accounting Policies” for further discussion on Investing VIEs.
In July 2019, the Company sold its retained investments in the subordinate tranches of 1 securitization trust for $33.4 million in total proceeds. As a result of the sale, the Company deconsolidated 1 of the securitization trusts with gross assets and liabilities of approximately $1.2 billion and $1.2 billion, respectively.
Other than the securities represented by the Company’s subordinate tranches of the securitization trusts, the Company does not have any claim to the assets or exposure to the liabilities of the securitization trusts. The original issuers, who are unrelated third parties, guarantee the interest and principal payments related to the investment grade securitization bonds in the securitization trusts, therefore these obligations do not have any recourse to the general credit of the Company as the consolidator of the securitization trusts. The Company’s maximum exposure to loss would not exceed the carrying value of its retained investments in the securitization trusts, or the subordinate tranches of the securitization trusts.
As of September 30, 2020, the mortgage loans and the related mortgage obligations held in the securitization trusts had an unpaid principal balance of $1.8 billion and $1.6 billion, respectively. As of December 31, 2019, the mortgage loans and the related mortgage obligations held in the securitization trusts had an unpaid principal balance of $1.8 billion and $1.6 billion, respectively. As of September 30, 2020, across the 2 consolidated securitization trusts, the underlying collateral consisted of 115 underlying commercial mortgage loans, with a weighted average coupon of 4.5% and a weighted average loan to value ratio of 56.8%.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the assets and liabilities recorded on the consolidated balance sheets attributable to the securitization trust as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Assets | | | | |
Mortgage loans held in a securitization trust, at fair value | | $ | 1,839,390 | | | $ | 1,872,970 | |
Receivables, net | | 7,272 | | | 7,020 | |
Total assets | | $ | 1,846,662 | | | $ | 1,879,990 | |
Liabilities | | | | |
Mortgage obligations issued by a securitization trust, at fair value | | $ | 1,770,924 | | | $ | 1,762,914 | |
Accrued and other liabilities | | 6,307 | | | 6,267 | |
Total liabilities | | $ | 1,777,231 | | | $ | 1,769,181 | |
The Company elected the fair value option to measure the assets and liabilities of the securitization trusts, which requires that changes in valuations of the securitization trusts be reflected in the Company’s consolidated statements of operations.
The difference between the carrying values of the mortgage loans held in securitization trusts and the carrying value of the mortgage obligations issued by securitization trusts was $68.5 million and $110.1 million as of September 30, 2020 and December 31, 2019, respectively, and approximates the fair value of the Company’s retained investments in the subordinate tranches of the securitization trusts, which are eliminated in consolidation. Refer to Note 14, “Fair Value” for a description of the valuation techniques used to measure fair value of assets and liabilities of the Investing VIEs.
The below table presents net income attributable to the Company’s common stockholders for the nine months ended September 30, 2020 and 2019 generated from the Company’s investments in the subordinate tranches of the securitization trusts (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Statement of Operations | | | | | | | | |
Interest expense | | $ | (75) | | | $ | (220) | | | $ | (420) | | | $ | (761) | |
Interest income on mortgage loans held in securitization trusts | | 20,462 | | | 22,586 | | | 61,556 | | | 99,718 | |
Interest expense on mortgage obligations issued by securitization trusts | | (18,204) | | | (20,299) | | | (54,627) | | | (91,690) | |
Net interest income | | 2,183 | | | 2,067 | | | 6,509 | | | 7,267 | |
Administrative expense | | (274) | | | (225) | | | (969) | | | (915) | |
Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net | | (13,162) | | | (1,976) | | | (41,589) | | | 4,602 | |
Realized gain on mortgage loans and obligations held in securitization trusts, net | | 0 | | | 2,724 | | | 0 | | | 2,772 | |
Net income (loss) attributable to Colony Credit Real Estate, Inc. common stockholders | | $ | (11,253) | | | $ | 2,590 | | | $ | (36,049) | | | $ | 13,726 | |
6. Real Estate, net and Real Estate Held for Sale
The following table presents the Company’s net lease portfolio, net, as of March 31, 2018September 30, 2020, and December 31, 20172019 (dollars in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Land and improvements | | $ | 181,409 | | | $ | 209,693 | |
Buildings, building leaseholds, and improvements | | 762,433 | | | 899,889 | |
Tenant improvements | | 20,491 | | | 25,077 | |
Construction-in-progress | | 3,144 | | | 415 | |
Subtotal | | $ | 967,477 | | | $ | 1,135,074 | |
Less: Accumulated depreciation | | (74,055) | | | (63,995) | |
Less: Impairment(1) | | 0 | | | (23,911) | |
Net lease portfolio, net | | $ | 893,422 | | | $ | 1,047,168 | |
(1)See Note 14, “Fair Value,” for discussion of impairment of real estate.
|
| | | | | | | | |
| | March 31, 2018 (Unaudited) | | December 31, 2017 |
Land and improvements | | $ | 102,764 |
| | $ | 25,262 |
|
Buildings, building leaseholds, and improvements | | 575,589 |
| | 178,109 |
|
Tenant improvements | | 8,901 |
| | 2,316 |
|
Construction-in-progress | | 23 |
| | 21 |
|
Subtotal | | $ | 687,277 |
| | $ | 205,708 |
|
Less: Accumulated depreciation | | (10,294 | ) | | (5,516 | ) |
Net lease portfolio, net | | $ | 676,983 |
| | $ | 200,192 |
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the Company’s other portfolio net,of real estate included in its Legacy, Non-Strategic Portfolio, including foreclosed properties, as of March 31, 2018September 30, 2020 and December 31, 20172019 (dollars in thousands):
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
Land and improvements | | $ | 59,523 | | | $ | 91,997 | |
Buildings, building leaseholds, and improvements | | 341,197 | | | 536,046 | |
Tenant improvements | | 25,128 | | | 38,230 | |
Furniture, fixtures and equipment | | 3,791 | | | 3,183 | |
Construction-in-progress | | 1,806 | | | 6,325 | |
Subtotal | | $ | 431,445 | | | $ | 675,781 | |
Less: Accumulated depreciation | | (35,677) | | | (46,079) | |
Less: Impairment(1) | | (155,872) | | | (192,074) | |
Other portfolio, net | | $ | 239,896 | | | $ | 437,628 | |
Minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The following table presents approximate future minimum rental income under non-cancellablenoncancellable operating leases, excluding variable lease revenue of tenant reimbursements, to be received over the next five years and thereafter as of September 30, 2020 (dollars in thousands):