UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number: 001-38377
| COLONY CREDIT REAL ESTATE, INC. | ||||||||||||||
| (Exact Name of Registrant as Specified in Its Charter) | ||||||||||||||
| Maryland | 38-4046290 | |||||||||||||
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |||||||||||||
515 S. Flower Street, 44th Floor
Los Angeles, CA 90071
(Address of Principal Executive Offices, Including Zip Code)
(310) 282-8820
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Class A common stock, par value $0.01 per share | CLNC | New York Stock Exchange | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||||||||||
| Emerging growth company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
As of November 5, 2020, Colony Credit Real Estate, Inc. had 128,582,965 shares of Class A common stock, par value $0.01 per share, outstanding
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q of Colony Credit Real Estate, Inc., a Maryland corporation (the “Company”), includes the financial statements and other financial information of (i) the Company and (ii) the Company’s accounting predecessor, which are investment entities in which Colony Capital Operating Company, LLC (“CLNY OP”) or its subsidiaries owned interests ranging from approximately 38% to 100% and that were contributed to the Company on January 31, 2018 in connection with the closing of the Combination (as defined below) and certain intercompany balances between those entities and CLNY OP or its subsidiaries (the “CLNY Investment Entities”).
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”), by and among (i) the Company, (ii) Credit RE Operating Company, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (the “OP”), (iii) CLNY OP, a Delaware limited liability company and the operating company of Colony Capital, Inc., formerly Colony NorthStar, Inc. (“Colony Capital”), a Maryland corporation, (iv) NRF RED REIT Corp., a Maryland corporation and indirect subsidiary of CLNY OP (“RED REIT”), (v) NorthStar Real Estate Income Trust, Inc., a Maryland corporation (“NorthStar I”), (vi) NorthStar Real Estate Income Trust Operating Partnership, LP, a Delaware limited partnership and the operating partnership of NorthStar I (“NorthStar I OP”), (vii) NorthStar Real Estate Income II, Inc., a Maryland corporation (“NorthStar II”), and (viii) NorthStar Real Estate Income Operating Partnership II, LP, a Delaware limited partnership and the operating partnership of NorthStar II (“NorthStar II OP”).
Pursuant to the Combination Agreement, (i) CLNY OP contributed and conveyed to the Company a select portfolio of assets and liabilities (the “CLNY Contributed Portfolio”) of CLNY OP (the “CLNY OP Contribution”), (ii) RED REIT contributed and conveyed to the OP a select portfolio of assets and liabilities of RED REIT (the “RED REIT Contribution” and, together with the CLNY OP Contribution, the “CLNY Contributions”), (iii) NorthStar I merged with and into the Company, with the Company surviving the merger (the “NorthStar I Merger”), (iv) NorthStar II 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 CLNY Contributed Portfolio and the equity interests of each of NorthStar I OP and NorthStar II OP 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 CLNY Contributions, the “Combination”). To satisfy the condition to completion of the Combination that the Company’s Class A common stock, par value $0.01 per share (the “Class A common stock”), be approved for listing on a national securities exchange in connection with either an initial public offering or a listing, the Class A common stock was approved for listing by the New York Stock Exchange and began trading under the ticker “CLNC” on February 1, 2018.
The CLNY Contributions were accounted for as a reorganization of entities under common control, since both the Company and CLNY Investment Entities were under common control of Colony Capital at the time the contributions were made. Accordingly, the Company’s financial statements for prior periods were recast to reflect the consolidation of the CLNY Investment Entities as if the contribution had occurred on the date of the earliest period presented.
As used throughout this document, the terms the “Company,” “we,” “our” and “us” mean:
•Colony Credit Real Estate, Inc. and the consolidated CLNY Investment Entities for periods on or prior to the closing of the Combination on January 31, 2018; and
•The combined operations of Colony Credit Real Estate, Inc., NorthStar I and NorthStar II beginning February 1, 2018, following the closing of the Combination.
Accordingly, comparisons of the period to period financial information of the Company as set forth herein may not be meaningful because the CLNY Investment Entities represents only a portion of the assets and liabilities Colony Credit Real Estate, Inc. acquired in the Combination and does not reflect any potential benefits that may result from realization of future cost savings from operating efficiencies, or other incremental synergies expected to result from the Combination.
In addition to the financial statements contained herein, you should read and consider the audited financial statements and accompanying notes thereto of the Company for the year ended December 31, 2019 included in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2020.
i
COLONY CREDIT REAL ESTATE, INC.
FORM 10-Q
TABLE OF CONTENTS
| Index | Page | |||||||
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and contingencies, many of which are beyond our control, and may cause actual results to differ significantly from those expressed in any forward-looking statement.
Currently, one of the most significant factors that could cause actual outcomes to differ materially from our forward-looking statements is the adverse effect of the current pandemic of the novel coronavirus, or COVID-19, on the financial condition, results of operations, cash flows and performance of the Company, its borrowers and tenants, the real estate market and the global economy and financial markets. The extent to which the COVID-19 pandemic impacts us, our borrowers and our tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others. Moreover, investors are cautioned to interpret many of the risks identified under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as being heightened as a result of the ongoing and numerous adverse impacts of the COVID-19 pandemic.
Among others, the following uncertainties and other factors could cause actual results to differ from those set forth in the forward-looking statements.
•operating costs and business disruption may be greater than expected;
•uncertainties regarding the ongoing impact of COVID-19, the severity of the disease, the duration of the COVID-19 outbreak, actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact, the potential negative impacts of COVID-19 on the global economy and its adverse impact on the real estate market, the economy and our investments, financial condition and business operations;
•defaults by borrowers in paying debt service on outstanding indebtedness and borrowers’ abilities to manage and stabilize properties;
•deterioration in the performance of the properties securing our investments (including depletion of interest and other reserves or payment-in-kind concessions in lieu of current interest payment obligations) that may cause deterioration in the performance of our investments and, potentially, principal losses to us;
•the fair value of our investments may be subject to uncertainties;
•our use of leverage could hinder our ability to make distributions and may significantly impact our liquidity position;
•given our dependence on our external manager, an affiliate of Colony Capital, Inc., any adverse changes in the financial health or otherwise of our manager or Colony Capital, Inc. could hinder our operating performance and return on stockholder’s investment;
•the ability to realize substantial efficiencies as well as anticipated strategic and financial benefits, including, but not limited to expected returns on equity and/or yields on investments;
•adverse impacts on our corporate revolver, including covenant compliance and borrowing base capacity;
•adverse impacts on our liquidity, including margin calls on master repurchase facilities, debt service or lease payment defaults or deferrals, demands for protective advances and capital expenditures, or our ability to continue to generate liquidity from sales of legacy, non-strategic assets;
•our ability to liquidate our legacy, non-strategic assets within the projected timeframe or at the projected values;
•the timing of and ability to deploy available capital;
•our ability to pay, maintain or grow the dividend in the future;
•the timing of and ability to complete repurchases of our stock;
•our ability to refinance certain mortgage debt on similar terms to those currently existing or at all;
•whether Colony Capital will continue to serve as our external manager or whether we will pursue a strategic transaction related thereto;
•the impact of legislative, regulatory and competitive changes and the actions of governmental authorities, including the current U.S. presidential administration, and in particular those affecting the commercial real estate finance and mortgage industry or our business.
The foregoing list of factors is not exhaustive. We urge you to carefully review the disclosures we make concerning risks in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, the section entitled
2
“Risk Factors” in our Form 10-Q for the quarter ended March 31, 2020 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein.
We caution investors not to unduly rely on any forward-looking statements. The forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company is under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q, nor to conform prior statements to actual results or revised expectations, and the Company does not intend to do so.
3
PART I
Item 1. Financial Statements
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED BALANCE SHEETS
(in Thousands, Except Share and Per Share Data)
| September 30, 2020 (Unaudited) | December 31, 2019 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 461,990 | $ | 69,619 | |||||||
| Restricted cash | 73,059 | 126,065 | |||||||||
| Loans and preferred equity held for investment | 2,143,938 | 2,848,956 | |||||||||
| Allowance for loan losses | (40,524) | (272,624) | |||||||||
| Loans and preferred equity held for investment, net | 2,103,414 | 2,576,332 | |||||||||
| Real estate securities, available for sale, at fair value | 36,250 | 252,824 | |||||||||
| Real estate, net | 1,133,318 | 1,484,796 | |||||||||
| Investments in unconsolidated ventures ($7,093 and $10,283 at fair value, respectively) | 424,557 | 595,305 | |||||||||
| Receivables, net | 80,674 | 46,456 | |||||||||
| Deferred leasing costs and intangible assets, net | 85,881 | 112,762 | |||||||||
| Assets held for sale | 203,466 | 189,470 | |||||||||
| Other assets | 69,658 | 87,707 | |||||||||
| Mortgage loans held in securitization trusts, at fair value | 1,839,390 | 1,872,970 | |||||||||
| Total assets | $ | 6,511,657 | $ | 7,414,306 | |||||||
| Liabilities | |||||||||||
| Securitization bonds payable, net | $ | 834,621 | $ | 833,153 | |||||||
| Mortgage and other notes payable, net | 1,102,999 | 1,256,112 | |||||||||
| Credit facilities | 608,632 | 1,099,233 | |||||||||
| Due to related party (Note 10) | 9,192 | 11,016 | |||||||||
| Accrued and other liabilities | 111,525 | 140,424 | |||||||||
| Intangible liabilities, net | 8,443 | 22,149 | |||||||||
| Liabilities related to assets held for sale | 10,787 | 294 | |||||||||
| Escrow deposits payable | 37,642 | 74,497 | |||||||||
| Dividends payable | 0 | 13,164 | |||||||||
| Mortgage obligations issued by securitization trusts, at fair value | 1,770,924 | 1,762,914 | |||||||||
| Total liabilities | 4,494,765 | 5,212,956 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Equity | |||||||||||
| Stockholders’ equity | |||||||||||
| Preferred stock, $0.01 par value, 50,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 0 | 0 | |||||||||
| Common stock, $0.01 par value per share | |||||||||||
| Class A, 950,000,000 shares authorized, 128,582,965 and 128,538,703 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively | 1,286 | 1,285 | |||||||||
| Additional paid-in capital | 2,842,892 | 2,909,181 | |||||||||
| Accumulated deficit | (1,181,747) | (819,738) | |||||||||
| Accumulated other comprehensive income | 40,954 | 28,294 | |||||||||
| Total stockholders’ equity | 1,703,385 | 2,119,022 | |||||||||
| Noncontrolling interests in investment entities | 272,803 | 31,631 | |||||||||
| Noncontrolling interests in the Operating Partnership | 40,704 | 50,697 | |||||||||
| Total equity | 2,016,892 | 2,201,350 | |||||||||
| Total liabilities and equity | $ | 6,511,657 | $ | 7,414,306 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED BALANCE SHEETS
(in Thousands)
The following table presents assets and liabilities of securitization trusts and certain real estate properties that have noncontrolling 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 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in Thousands, Except Per Share Data)
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Net interest income | ||||||||||||||||||||||||||||||||
| Interest income | $ | 36,391 | $ | 46,991 | $ | 122,003 | $ | 127,473 | ||||||||||||||||||||||||
| Interest expense | (13,426) | (23,167) | (50,915) | (63,505) | ||||||||||||||||||||||||||||
| 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 | 25,223 | 26,111 | 78,017 | 71,996 | ||||||||||||||||||||||||||||
| Property and other income | ||||||||||||||||||||||||||||||||
| Property operating income | 41,678 | 63,492 | 137,913 | 191,393 | ||||||||||||||||||||||||||||
| Other income (loss) | 30 | 820 | 1,079 | 1,431 | ||||||||||||||||||||||||||||
| Total property and other income | 41,708 | 64,312 | 138,992 | 192,824 | ||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||
| Management fee expense | 7,083 | 11,355 | 22,235 | 34,070 | ||||||||||||||||||||||||||||
| Property operating expense | 15,277 | 29,756 | 54,119 | 86,076 | ||||||||||||||||||||||||||||
| Transaction, investment and servicing expense | 1,627 | 1,433 | 7,668 | 3,013 | ||||||||||||||||||||||||||||
| Interest expense on real estate | 12,205 | 14,281 | 37,101 | 41,786 | ||||||||||||||||||||||||||||
| Depreciation and amortization | 14,770 | 25,934 | 46,766 | 82,853 | ||||||||||||||||||||||||||||
| Provision for loan losses | 10,404 | 110,314 | 80,285 | 220,572 | ||||||||||||||||||||||||||||
| 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) | 5,780 | 7,732 | 19,569 | 22,395 | ||||||||||||||||||||||||||||
| Total expenses | 70,597 | 473,527 | 301,255 | 773,611 | ||||||||||||||||||||||||||||
| Other income (loss) | ||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||
| Other gain (loss), net | 9,680 | (2,688) | (130,115) | (13,829) | ||||||||||||||||||||||||||||
| 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 | (1,779) | (15,905) | (69,889) | 17,962 | ||||||||||||||||||||||||||||
| Income tax benefit (expense) | 15,357 | (1,046) | 11,544 | (544) | ||||||||||||||||||||||||||||
| Net income (loss) | 6,430 | (401,995) | (314,295) | (497,828) | ||||||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests: | ||||||||||||||||||||||||||||||||
| Investment entities | (1,222) | 37,445 | 6,362 | 38,623 | ||||||||||||||||||||||||||||
| Operating Partnership | (201) | 8,519 | 7,109 | 10,741 | ||||||||||||||||||||||||||||
| 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 18) | $ | 0.04 | $ | (2.77) | $ | (2.34) | $ | (3.51) | ||||||||||||||||||||||||
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.
6
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(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) | ||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
7
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(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 | |||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
8
COLONY 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.
9
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)
(Unaudited)
| Nine Months Ended September 30, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income (loss) | $ | (314,295) | $ | (497,828) | |||||||||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |||||||||||||||||
| Equity in (earnings) losses of unconsolidated ventures | 69,889 | (17,962) | |||||||||||||||
| Depreciation and amortization | 46,766 | 82,853 | |||||||||||||||
| Straight-line rental income | (3,100) | (5,049) | |||||||||||||||
| Amortization of above/below market lease values, net | (409) | (2,401) | |||||||||||||||
| Amortization of premium/accretion of discount and fees on investments and borrowings, net | (7,823) | (9,239) | |||||||||||||||
| Amortization of deferred financing costs | 9,522 | 6,803 | |||||||||||||||
| 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 | 3,856 | (5,634) | |||||||||||||||
| Distributions of cumulative earnings from unconsolidated ventures | 13,429 | 53,509 | |||||||||||||||
| 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 | 0 | (2,772) | |||||||||||||||
| Realized loss on securities from write-down to fair value | 32,606 | 0 | |||||||||||||||
| Realized loss on sale of real estate securities, available for sale | 51,889 | 0 | |||||||||||||||
| Realized gain on sale of real estate | (9,240) | 0 | |||||||||||||||
| Realized loss on sale of loans receivable | 1,457 | 0 | |||||||||||||||
| Provision for loan losses | 80,285 | 220,572 | |||||||||||||||
| Impairment of operating real estate | 33,512 | 282,846 | |||||||||||||||
| Amortization of equity-based compensation | 3,265 | 7,466 | |||||||||||||||
| Mortgage notes above/below market value amortization | (628) | 276 | |||||||||||||||
| Deferred income tax (benefit) expense | (397) | (3,298) | |||||||||||||||
| Other (gain) loss, net | 23,524 | 0 | |||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Receivables, net | (30,907) | (1,097) | |||||||||||||||
| Deferred costs and other assets | 7,169 | 718 | |||||||||||||||
| Due to related party | (1,824) | (792) | |||||||||||||||
| Other liabilities | (5,347) | 8,763 | |||||||||||||||
| Net cash provided by operating activities | 44,862 | 113,205 | |||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| 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 | 334,208 | 426,438 | |||||||||||||||
| Repayment on loans held for sale | 137,132 | 0 | |||||||||||||||
| Proceeds from sale of real estate | 300,469 | 0 | |||||||||||||||
| 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 | (19,749) | (16,773) | |||||||||||||||
| Investments in unconsolidated ventures | (47,541) | (28,344) | |||||||||||||||
| Proceeds from sale of investments in unconsolidated ventures | 99,985 | 115,298 | |||||||||||||||
| Distributions in excess of cumulative earnings from unconsolidated ventures | 25,011 | 202,732 | |||||||||||||||
| Repayment of real estate securities, available for sale, from sales | 118,586 | 0 | |||||||||||||||
| Repayment of real estate securities, available for sale, from cost recovery | 3,020 | 0 | |||||||||||||||
| Repayment of principal in mortgage loans held in securitization trusts | 19,816 | 0 | |||||||||||||||
| Proceeds from sale of mortgage loans held in securitization trusts | 0 | 39,848 | |||||||||||||||
| Net receipts on settlement of derivative instruments | 19,637 | 27,699 | |||||||||||||||
| Deposit on investments | 0 | (372) | |||||||||||||||
| Change in escrow deposits | (36,855) | 20,817 | |||||||||||||||
| Net cash provided (used in) by investing activities | 831,295 | (459,239) | |||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Distributions paid on common stock | (51,705) | (167,452) | |||||||||||||||
| Distributions paid on common stock to noncontrolling interests | (922) | (4,020) | |||||||||||||||
| Shares canceled for tax withholding on vested stock awards | (1,768) | (1,576) | |||||||||||||||
| Borrowings from mortgage notes | 15,026 | 85,660 | |||||||||||||||
| Repayment of mortgage notes | (156,066) | (4,448) | |||||||||||||||
| Borrowings from credit facilities | 255,128 | 1,830,412 | |||||||||||||||
| Repayment of credit facilities | (745,729) | (1,288,773) | |||||||||||||||
| Repayment of securitization bonds | 0 | (81,372) | |||||||||||||||
| Repayment of mortgage obligations issued by securitization trusts | (19,816) | 0 | |||||||||||||||
| Payment of deferred financing costs | (6,943) | (7,413) | |||||||||||||||
| Contributions from noncontrolling interests | 200,028 | 52 | |||||||||||||||
| Distributions to noncontrolling interests | (22,893) | (2,702) | |||||||||||||||
| Net cash provided by (used in) financing activities | (535,660) | 358,368 | |||||||||||||||
| Effect of exchange rates on cash, cash equivalents and restricted cash | (1,132) | 84 | |||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | 339,365 | 12,418 | |||||||||||||||
| Cash, cash equivalents and restricted cash - beginning of period | 195,684 | 187,463 | |||||||||||||||
| 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.
10
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in Thousands)
| 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 | |||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
11
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business and Organization
Colony Credit Real Estate, Inc. (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 debt investments and net leased properties predominantly in the United States. CRE debt investments primarily 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 investments, which may include profit participations. The mezzanine loans and preferred investments equity may be in conjunction with the Company’s origination of 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 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 elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ended 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 September 30, 2020, the Company owned 97.7% of the OP, as its sole managing member. The remaining 2.3% is owned by an affiliate of the Company as noncontrolling interests.
The Company is externally managed and has 0 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 (“CLNY OP”), a Delaware limited liability company and the operating company of Colony Capital. Colony Capital 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) CLNY OP contributed and conveyed to the Company a select portfolio of assets and liabilities (the “CLNY OP Contributed Portfolio”) of CLNY OP (the “CLNY OP Contribution”), (ii) NRF RED REIT Corp., a Maryland corporation and indirect subsidiary of CLNY 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 CLNY OP Contributed Portfolio, the “CLNY Contributed Portfolio”) of RED REIT (the “RED REIT Contribution” and, together with the CLNY OP Contribution, the “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 Capital, merged with and into the Company, with the Company surviving the merger (the “NorthStar I Merger”), (iv) NorthStar Real Estate Income II, Inc. (“NorthStar II”), a publicly registered non-traded REIT sponsored and managed by a subsidiary of Colony 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 CLNY 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 CLNY 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 New York Stock Exchange (“NYSE”) on February 1, 2018 under the symbol “CLNC.”
12
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
Segment 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 Company’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, “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 Company remain unclear, the Company believes it has materially addressed overall recoverability in value 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
The significant accounting policies of the Company are described below. The accounting policies of the Company’s unconsolidated ventures are substantially similar to those of the Company.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“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, 2020, or for any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements 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, 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.
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(Unaudited)
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 components of OCI include unrealized gain (loss) on CRE debt securities available for sale for which the fair value option was not 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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(Unaudited)
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—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full term of the financial instrument.
Level 3—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.
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 the measurement 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 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.
Asset Acquisitions—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. 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 the acquisition of 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.
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 0t have any cash equivalents at September 30, 2020 or December 31, 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
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 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—Interest income is recognized based upon contractual interest rate and unpaid principal balance of the 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. When a loan or preferred equity investment is prepaid, prepayment fees and any excess of proceeds over the carrying amount of the loan or preferred equity investment is recognized as additional interest income.
The 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 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 collected is recognized on a 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 and preferred equity carrying value. Loans and preferred equity investments may be restored to accrual status when all principal and interest are current and full repayment of the remaining contractual principal and interest are reasonably assured.
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.
At September 30, 2020, the Company had 0 loans classified as held for sale.
Acquisition, Development and Construction (“ADC”) 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—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 forgone 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 is carried at cost less accumulated depreciation.
Costs Capitalized or 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—Real estate held for investment, other than land, is depreciated on a straight-line basis over the estimated useful lives of the assets, as follows:
| Real Estate Assets | Term | |||||||
| Building (fee interest) | 7 to 48 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 | 1 to 15 years | |||||||
| Tenant improvements | Lesser of the useful life or remaining term of the lease | |||||||
| Furniture, fixtures and equipment | 2 to 8 years | |||||||
Impairment—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 real estate for impairment generally on an individual property basis. If an impairment indicator exists, the Company 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 such assumptions change and the Company shortens its expected hold period, this may result in the recognition of impairment losses. During the three months ended September 30, 2020, the Company recorded impairment related to its operating real estate of $3.5 million to reflect the net proceeds expected to be received based on executed purchase and sale agreements. See Note 6, “Real Estate, net and Real Estate Held for Sale” and Note 14, “Fair Value” for further detail.
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Real Estate Held for Sale
Real estate is classified as held for sale in the period when (i) management approves a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, subject only to usual and customary terms, (iii) a program is initiated to locate a buyer and actively market the asset for sale at a reasonable price, and (iv) completion of the sale is probable within one year. Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal cost, with any write-down to fair value less disposal cost recorded as an impairment loss. For any increase in fair value less disposal cost subsequent to classification as held for sale, the impairment loss may be reversed, but only up to the amount of cumulative loss previously recognized. Depreciation is not recorded on assets classified as held for sale. 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 Held for Sale,” Note 17, “Segment Reporting” and 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 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. If the fair value of the property is lower than the carrying value of the loan, the difference is recognized as provision for loan loss and the cumulative loss allowance on the loan 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.
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 the assets and liabilities of its consolidated Investing VIEs, and as a result, any unrealized gains (losses) on the 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 September 30, 2020, the Company held subordinate tranches of 2 securitization trusts, which represent the Company’s retained interest in the securitization trusts, which the Company consolidates under U.S. GAAP. Refer to Note 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 impairment as any change in fair value is recorded in the consolidated statements of operations. Realized losses on such securities are reclassified to realized loss on mortgage 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 impairment quarterly. Impairment of a security is considered when 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 impaired due to (i) or (ii) or (iii), the security is written down to its fair value and an impairment is recognized in the consolidated statements of operations. In all other situations, the unrealized loss is bifurcated into: (a) the amount related to expected credit losses; and (b) the amount related to other factors in excess of expected credit losses. The portion of impairment related to expected credit losses is recognized as an allowance for credit losses. The remaining impairment related to other 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 impairment if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of impairment is then bifurcated as discussed above.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
During the three and nine months ended September 30, 2020, the Company recorded an 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 one 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 investments under the fair value option 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 it has the ability to exercise significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest. The equity method investment is initially recorded at cost and adjusted each period for capital contributions, distributions and the Company’s share of the entity’s net income or loss as well as other comprehensive income or loss. The Company’s share of net income or loss may differ from the stated ownership percentage interest in an entity if the governing documents prescribe a substantive non-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 are reported as investing activities in the statement of cash flows under the cumulative earnings approach.
At September 30, 2020 and December 31, 2019, the Company’s investments in unconsolidated joint 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
Evaluation of impairment applies to equity method investments and equity investments under the measurement alternative. If indicators of impairment exist, the Company will first estimate the fair value of its 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 other-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, or a significant and prolonged decline in traded price of the investee’s equity security. If management is unable to reasonably assert that an impairment is temporary or believes that the Company may not fully recover the carrying value of its investment, then the impairment is considered to be other-than-temporary.
Investments that are other-than-temporarily impaired are written down to their estimated fair value. Impairment loss is recorded in earnings from investments in unconsolidated 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. An 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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, 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 are 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 estimate 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 with 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 requires 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, (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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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—Rental income is recognized on a straight-line basis over the non-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—In net lease arrangements, the tenant is generally responsible for operating expenses related 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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—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. On a quarterly basis, the Company reviews, and if appropriate, adjusts its cash flow projections 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 reduction 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 effective 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 any cash interest received against the CRE securities amortized cost basis. Refer to Note 5, “Real Estate Securities, Available for Sale” for 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 the consolidated statements of operations.
Disclosures of non-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 presented.
Equity-Based Compensation
Equity-classified stock awards granted to executive officers and both independent and non-independent directors are based on the closing price of the Class A common stock on the grant date and recognized on a straight-line basis over the requisite service period of the 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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Earnings Per Share
The Company presents both basic and diluted earnings per share (“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
For U.S. federal income tax purposes, the Company elected to be taxed as a REIT beginning with its taxable year ended December 31, 2018. 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 not be subject to U.S. federal income tax to the extent of its distributions to 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 (“TRSs”) which may be subject to taxation by U.S. federal, state and local authorities. In general, a TRS of the Company may perform non-customary services for tenants, hold assets that the Company cannot hold directly and 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-specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic 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.
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was passed on March 27, 2020. Among other things, the CARES Act temporarily removed the 80% limitation on the amount of taxable income that can be offset with a net operating loss (“NOL”) for 2019 and 2020 and allowed for a carryback of net operating losses generated in years 2018 through 2020 to each of the preceding five years. During the three months ended September 30, 2020 the Company completed its analysis of the impact of the CARES Act on its NOLs and recorded a de minimis adjustment in the consolidated statement of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the three months ended September 30, 2020 and September 30, 2019, the Company recorded income tax benefit of $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 finalizing its 2019 federal tax return and determining it would be able to carryback certain tax capital losses to prior years resulting in a projected refund of $12.9 million.
Accounting Standards Adopted in 2020
Credit Losses - In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses, which amends the credit impairment model for financial instruments. The Company adopted ASU 2016-13 using the modified retrospective method on January 1, 2020.
The existing incurred loss model has 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 available-for-sale (“AFS”) debt securities, unrealized credit losses are 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 has 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 was amended to conform to the new impairment models for HTM and AFS debt securities.
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 exposures, 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 loan-specific characteristics such as loan-to-value (“LTV”) ratio, vintage year, loan term, property type, occupancy and geographic 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 collective (pool) basis when similar risk characteristics exist for multiple 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 appropriate to continue to keep the financial instrument in its existing pool or evaluate it individually.
In measuring the CECL reserve for financial instruments that share similar risk characteristics, the Company primarily applies a probability of default (“PD”)/loss given default (“LGD”) model for instruments that are collectively assessed, whereby the CECL reserve 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 loss parameters using a scenario-based statistical approach over a reasonable and supportable forecast period of twelve months, followed by a straight-line reversion period of twelve-months back to average historical losses.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For financial instruments assessed outside of the PD/LGD model on an individual basis, including when it is probable that the Company will be unable to collect the full payment of principal and interest on the instrument, the Company applies a discounted cash flow (“DCF”) methodology. For financial instruments where the borrower is experiencing financial difficulty based on the Company’s assessment at the reporting date and the repayment is expected to be provided substantially through the operation or sale of the collateral, the Company may elect to use as a practical expedient the fair value of the collateral at the reporting 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 loan 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 CECL 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 a 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 a manner that grants concession to the borrower who is experiencing financial difficulty. Concessions could include term extensions, payment deferrals, interest
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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 ASU requires new disclosures of changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements of instruments held at 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 fair value hierarchy, as well as amounts and reason for transfers between Levels 1 and 2. Additionally, the new guidance clarifies or modifies certain existing disclosures, including clarifying that information about measurement uncertainty of Level 3 fair values should be as of the reporting date and requiring disclosures of the timing 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 to be applied prospectively, while all other provisions are to be applied retrospectively. The Company adopted ASU No. 2018-13 on January 1, 2020.
Related Party Guidance for VIEs—In November 2018, the FASB issued ASU No. 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities. The ASU amends the VIE guidance to align, throughout the VIE model, the evaluation of a decision maker's or service provider's fee held by a related party whether or not they are under common control, in both the assessment of whether a fee qualifies as a variable interest and the determination of a primary beneficiary. Specifically, a decision maker or service provider considers interests in a VIE held by a related party under common control only if it has a direct interest in the related party under common control and considers such indirect interest in the VIE held by the related party under common control on a proportionate basis, rather than its entirety. Transition is generally on a modified retrospective basis, with the cumulative effect adjusted to retained earnings at the beginning of the earliest period presented. The Company adopted ASU No. 2018-17 on January 1, 2020, with no transitional impact upon adoption.
Reference Rate Reform-In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance in Topic 848 is optional, the election of which provides temporary relief for the accounting effects on contracts, hedging relationships and other transactions impacted by the transition from interbank offered rates (such as London Interbank Offered Rate, or LIBOR) that are expected to be discontinued by the end of 2021 to alternative reference rates (such as Secured Overnight Financing Rate, or SOFR). Modification of contractual terms to effect the reference rate reform transition on debt, leases, derivatives and other contracts is eligible for relief from modification accounting and accounted for as a continuation of the existing contract. Topic 848 is effective upon issuance through December 31, 2022, and may be applied retrospectively to January 1, 2020. The Company has elected to apply the hedge accounting expedients related to probability and assessment of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives, which preserves existing derivative treatment and presentation. The Company may elect other practical expedients or exceptions as applicable over time as reference rate reform activities occur.
Future Application of Accounting Standards
Income Tax Accounting—In December 2019, the FASB issued ASU No. 2019-12, Simplifying Accounting for Income Taxes. The ASU simplifies accounting for income taxes by eliminating certain exceptions to the general approach in ASC 740, Income Taxes, and clarifies certain aspects of the guidance for more consistent application. The simplifications relate to intraperiod tax allocations when there is a loss in continuing operations and a gain outside of continuing operations, accounting for tax law or tax rate changes and year-to-date losses in interim periods, recognition of deferred tax liability for outside basis difference when investment ownership changes, and accounting for franchise taxes that are partially based on income. The ASU also provides new guidance that clarifies the accounting for transactions resulting in a step-up in tax basis of goodwill, among other changes. Transition is generally prospective, other than the provision related to outside basis difference which is on a modified retrospective basis with the cumulative effect adjusted to retained earnings at the beginning of the period adopted, and franchise tax provision which is on either full or modified retrospective. ASU No. 2019-12 is effective January 1, 2021, with early adoption permitted in an interim period, to be applied to all provisions. The Company is currently evaluating the impact of this new guidance.
Accounting for Certain Equity Investments—In January 2020, the FASB issued ASU No. 2020-01, Clarifying the Interactions between Topic 321 Investments-Equity Securities, Topic 323-Investments Equity Method and Joint Ventures, and Topic 815-Derivatives and Hedging. The ASU clarifies that if as a result of an observable transaction, an equity investment under the
28
COLONY 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 is transitioned into measurement alternative, the investment is to be remeasured immediately before and after the transaction, respectively. The ASU also clarifies that certain forward contracts or purchased options to acquire equity securities that are not deemed to be derivatives or in-substance common stock will generally be measured using the fair value principles of ASC 321 before settlement or exercise, and that an entity should not be considering how it will account for the resulting investments upon eventual settlement or exercise. ASU No. 2020-01 is to be applied prospectively, effective January 1, 2021, with early adoption permitted in an interim period. The Company is currently evaluating the impact of this new guidance.
Accounting for Convertible Instruments and Contracts on Entity's Own Equity— In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU (1) simplifies an issuer’s accounting for convertible instruments as a single unit of account; (2) allows more contracts on an entity’s own equity to qualify for equity classification and more embedded derivatives meeting the derivative scope exception; and (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 new 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 qualifying 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 cash flows related to these instruments or contracts; 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 apply the 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.
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Loans and Preferred Equity 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):
| 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):
| 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 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.
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Nonaccrual and Past Due Loans and Preferred Equity
Loans 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 4 NY hospitality loans in its Legacy, Non-Strategic Portfolio failed to make all required interest payments and the loans were placed on nonaccrual status. These 4 loans are secured by the same collateral. During 2018, the Company recorded $53.8 million of provision for loan losses to reflect the estimated value to be recovered from the borrower following a sale. During 2019, the Company 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, 2020, 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 recognized 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 to be recovered from the borrower 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 was 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, secured by Midwest Hospitality.
•Additionally, the Company had a total $20.9 million allowance for loan losses recorded as of March 31, 2020, which included an $8.8 million allowance for loan losses resulting from CECL adoption and an additional $12.1 million provision for loan losses recognition during the three months ended March 31, 2020, on 1 loan secured by 6
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COLONY 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.
•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
Loans 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. Impaired loans include predominantly loans under nonaccrual, performing and nonperforming TDRs, as well as loans in maturity default. The following table presents impaired loans at December 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.
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The average carrying value and interest income recognized on 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 | |||||||||||||||||||||
Allowance for Loan Losses
As of December 31, 2019, the allowance for loan losses was $272.6 million related to $409.7 million in carrying value of loans.
Changes in allowance for loan losses on 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.
(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.
(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 its loans as held for sale. There were 0 assets held for sale that constituted discontinued operations as of September 30, 2020 and December 31, 2019.
Credit Quality Monitoring
Loan 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 loan and preferred equity investments at least quarterly and differentiates the relative credit quality principally based on: (i) 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 September 30, 2020, there were 0 loans and preferred equity investments past due and all loans were performing in accordance with the contractual terms of their governing documents and were categorized as performing loans. There were 5 loans held for investment with contractual payments past due as of December 31, 2019. For the nine months ended September 30, 2020, 0 debt investment contributed more than 10.0% of interest income.
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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 September 30, 2020, assuming the terms to qualify for future fundings, if any, had been met, total gross unfunded lending commitments were $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 lending 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 further details.
34
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):
| 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 Colony Capital 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 September 30, 2020 and December 31, 2019, respectively.
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.
35
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
•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.
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.
36
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 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.
During the nine months ended September 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, 2019 (dollars in thousands):
| 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)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.
37
COLONY 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%.
38
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 September 30, 2020, and December 31, 2019 (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.
39
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the Company’s portfolio of real estate included in its Legacy, Non-Strategic Portfolio, including foreclosed properties, as of September 30, 2020 and December 31, 2019 (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 | ||||||||||
_________________________________________
(1)See Note 14, “Fair Value,” for discussion of impairment of real estate.
For the nine months ended September 30, 2020, the Company had 0 single property with rental and other income equal to or greater than 10.0% of total revenue.
At September 30, 2020 and December 31, 2019, the Company held foreclosed properties which are included in real estate, net with a carrying value of $25.6 million and $50.7 million, respectively. At September 30, 2020 and December 31, 2019, the Company held foreclosed properties in assets held for sale of $42.4 million and $57.9 million, respectively.
Depreciation Expense
Depreciation expense on real estate was $10.6 million and $18.1 million for the three months ended September 30, 2020 and September 30, 2019, respectively. Depreciation expense on real estate was $32.0 million and $58.7 million for the nine months ended September 30, 2020 and 2019, respectively.
Property Operating Income
For the nine months ended September 30, 2020 and 2019, the components of property operating income were as follows (dollars in thousands):
| Three Months Ended September 30, 2020 | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
Lease revenues(1) | ||||||||||||||||||||||||||
| Minimum lease revenue | $ | 35,529 | $ | 45,555 | $ | 114,691 | $ | 135,198 | ||||||||||||||||||
| Variable lease revenue | 5,390 | 6,304 | 18,080 | 18,478 | ||||||||||||||||||||||
| $ | 40,919 | $ | 51,859 | $ | 132,771 | $ | 153,676 | |||||||||||||||||||
| Hotel operating income | 910 | 10,802 | 4,728 | 35,324 | ||||||||||||||||||||||
| $ | 41,829 | $ | 62,661 | $ | 137,499 | $ | 189,000 | |||||||||||||||||||
_________________________________________
(1)Excludes net amortization expense related to above and below-market leases of $0.2 million and income of $0.4 million for the three and nine months ended September 30, 2020, respectively.
40
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Minimum Future Rents
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 noncancellable 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):
| Remainder of 2020 | $ | 25,288 | ||||||
| 2021 | 98,543 | |||||||
| 2022 | 92,488 | |||||||
| 2023 | 78,687 | |||||||
| 2024 | 69,665 | |||||||
| 2025 and thereafter | 467,422 | |||||||
Total(1) | $ | 832,093 | ||||||
_________________________________________
(1)Excludes minimum future rents for real estate that is classified as held for sale totaling $40.4 million through 2050.
The following table presents approximate future minimum rental income under noncancellable operating leases to be received over the next five years and thereafter as of December 31, 2019 (dollars in thousands):
| 2020 | $ | 120,967 | ||||||
| 2021 | 113,170 | |||||||
| 2022 | 102,314 | |||||||
| 2023 | 85,367 | |||||||
| 2024 | 71,714 | |||||||
| 2025 and thereafter | 448,812 | |||||||
| Total | $ | 942,344 | ||||||
The rental properties owned at September 30, 2020 are leased under noncancellable operating leases with current expirations ranging from 2020 to 2038, with certain tenant renewal rights. For certain properties, the tenants pay the Company, in addition to the contractual base rent, their pro rata share of real estate taxes and operating expenses. Certain lease agreements provide for periodic rental increases and others provide for increases based on the consumer price index.
Lease Concessions Related to COVID-19
As a result of the COVID-19 crisis, some tenants sought more flexible payment terms and the Company is currently engaged with affected tenants on a case-by-case basis to evaluate and respond to the current environment. For lease concessions resulting directly from the impact of COVID-19 that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee, for example, where total payments required by the modified contract will be substantially the same as or less than the original contract, the Company made a policy election to account for the concessions as though the enforceable rights and obligations for those concessions existed in the lease contracts, under a relief provided by the FASB. Under the relief, the concessions will not be treated as lease modifications that are accounted for over the remaining term of the respective leases, as the Company believes this would not accurately reflect the temporary economic effect of the concessions. Instead, (i) rent deferrals that meet the criteria will be treated as if no changes were made to the lease contract, with continued recognition of lease income and receivable under the original terms of the contract; and (ii) rent forgiveness that meets the criteria will be accounted for as variable lease payments in the affected periods.
Commitments and Contractual Obligations
Ground Lease Obligation
In connection with real estate acquisitions, the Company assumed certain noncancellable operating ground leases as lessee or sublessee with expiration dates through 2055. Rents on certain ground leases are paid directly by the tenants. Ground rent expense for the three and nine months ended September 30, 2020 was $0.8 million and $2.4 million, respectively. Ground rent expense for the three and nine months ended September 30, 2019 was $0.8 million and $2.3 million, respectively.
Refer to Note 16, “Commitments and Contingencies” for the details of future minimum rental payments on noncancellable ground lease on real estate as of September 30, 2020.
41
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Real Estate Asset Acquisitions
The following table summarizes the Company’s real estate asset acquisitions for the year ended December 31, 2019 (dollars in thousands):
| Purchase Price Allocation | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Acquisition Date | Property Type and Location | Number of Buildings | Purchase Price(1) | Land and Improvements(2) | Building and Improvements(2) | Furniture, Fixtures and Equipment | Lease Intangible Assets(2) | Other Assets | Other Liabilities | |||||||||||||||||||||||||||||||||||||||||
| Year Ended December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| June | Retail - Massachusetts(3) | 3 | $ | 21,919 | $ | 9,294 | $ | 6,598 | $ | 0 | $ | 5,256 | $ | 1,538 | $ | (767) | ||||||||||||||||||||||||||||||||||
| January | Various - in U.S.(3) | 28 | 105,437 | 38,145 | 66,413 | 0 | 879 | 3,223 | (3,223) | |||||||||||||||||||||||||||||||||||||||||
| $ | 127,356 | $ | 47,439 | $ | 73,011 | $ | 0 | $ | 6,135 | $ | 4,761 | $ | (3,990) | |||||||||||||||||||||||||||||||||||||
_________________________________________
(1)Dollar amounts of purchase price and allocation to assets acquired and liabilities assumed are translated using foreign exchange rate as of the respective dates of acquisitions, where applicable.
(2)Useful life of real estate acquired is 4 to 33 years for buildings, 1 to 20 years for site improvements, 1 to 27 years for tenant improvements, 5 to 7 years for furniture, fixtures and equipment, and 1 to 27 years for lease intangibles.
(3)Represents assets acquired by the Company through foreclosure.
The Company did 0t have any real estate acquisitions in 2020.
Real Estate Held for Sale
The following table summarizes the Company’s assets and related liabilities held for sale related to real estate (dollars in thousands):
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Assets | ||||||||||||||
| Real estate, net | $ | 182,356 | $ | 178,564 | ||||||||||
| Deferred leasing costs and intangible assets, net | 10,109 | 5,890 | ||||||||||||
| Total assets held for sale | $ | 192,465 | $ | 184,454 | ||||||||||
| Liabilities | ||||||||||||||
| Intangible liabilities, net | $ | 10,787 | $ | 294 | ||||||||||
| Total liabilities related to assets held for sale | $ | 10,787 | $ | 294 | ||||||||||
During the three months ended September 30, 2020, the Company classified several properties in its Net Leased Real Estate and Legacy, Non-Strategic Portfolio as held for sale.
There were 0 assets held for sale that constituted discontinued operations as of September 30, 2020 and December 31, 2019.
Real Estate Sales
During the nine months ended September 30, 2020, the Company completed the sale of 11 properties. Sales included 5 offices, 1 hotel, 2 multifamily, 1 retail and 1 manufactured housing property included in the Company’s Legacy, Non-Strategic Portfolio for a total gross sales price of $185.7 million and a total loss on sale of $2.1 million. In addition, there was 1 sale of an industrial property in the Company’s Core Portfolio for a total gross sales price of $131.4 million and a total gain on sale of $9.0 million.
The real estate sold during the nine months ended September 30, 2020 did not constitute discontinued operations.
Refer to Note 19, “Subsequent Events” for further detail on additional real estate sales.
42
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Deferred Leasing Costs and Other Intangibles
The Company’s deferred leasing costs, other intangible assets and intangible liabilities, excluding those related to assets held for sale, at September 30, 2020 and December 31, 2019 are as follows (dollars in thousands):
| September 30, 2020 | ||||||||||||||||||||
| Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| Deferred Leasing Costs and Intangible Assets | ||||||||||||||||||||
| In-place lease values | $ | 94,440 | $ | (35,816) | $ | 58,624 | ||||||||||||||
| Deferred leasing costs | 37,642 | (15,035) | 22,607 | |||||||||||||||||
| Above-market lease values | 11,733 | (7,083) | 4,650 | |||||||||||||||||
| $ | 143,815 | $ | (57,934) | $ | 85,881 | |||||||||||||||
| Intangible Liabilities | ||||||||||||||||||||
| Below-market lease values | $ | 17,591 | $ | (9,148) | $ | 8,443 | ||||||||||||||
| December 31, 2019 | ||||||||||||||||||||
| Carrying Amount | Accumulated Amortization | Net Carrying Amount | ||||||||||||||||||
| Deferred Leasing Costs and Intangible Assets | ||||||||||||||||||||
| In-place lease values | $ | 115,139 | $ | (39,093) | $ | 76,046 | ||||||||||||||
| Deferred leasing costs | 42,345 | (13,637) | 28,708 | |||||||||||||||||
| Above-market lease values | 14,318 | (6,310) | 8,008 | |||||||||||||||||
| $ | 171,802 | $ | (59,040) | $ | 112,762 | |||||||||||||||
| Intangible Liabilities | ||||||||||||||||||||
| Below-market lease values | $ | 32,652 | $ | (10,503) | $ | 22,149 | ||||||||||||||
The following table summarizes the amortization of deferred leasing costs, intangible assets and intangible liabilities for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Above-market lease values | $ | (451) | $ | (1,300) | $ | (1,944) | $ | (3,189) | ||||||||||||||||||||||||
| Below-market lease values | 294 | 2,130 | 2,353 | 5,612 | ||||||||||||||||||||||||||||
| Net increase (decrease) to property operating income | $ | (157) | $ | 830 | $ | 409 | $ | 2,423 | ||||||||||||||||||||||||
| In-place lease values | $ | 2,588 | $ | 5,468 | $ | 9,685 | $ | 16,922 | ||||||||||||||||||||||||
| Deferred leasing costs | 1,428 | 2,281 | 4,669 | 6,828 | ||||||||||||||||||||||||||||
| Other intangibles | 118 | 120 | 381 | 359 | ||||||||||||||||||||||||||||
| Amortization expense | $ | 4,134 | $ | 7,869 | $ | 14,735 | $ | 24,109 | ||||||||||||||||||||||||
43
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the amortization of deferred leasing costs, intangible assets and intangible liabilities, excluding those related to assets and liabilities held for sale, for each of the next five years and thereafter as of September 30, 2020 (dollars in thousands):
| Remainder of 2020 | 2021 | 2022 | 2023 | 2024 | 2025 and thereafter | Total | ||||||||||||||||||||||||||||||||||||||
| Above-market lease values | $ | 437 | $ | 1,533 | $ | 1,248 | $ | 640 | $ | 471 | $ | 321 | $ | 4,650 | ||||||||||||||||||||||||||||||
| Below-market lease values | (432) | (1,599) | (1,531) | (1,415) | (1,382) | (2,084) | (8,443) | |||||||||||||||||||||||||||||||||||||
| Net increase (decrease) to property operating income | $ | 5 | $ | (66) | $ | (283) | $ | (775) | $ | (911) | $ | (1,763) | $ | (3,793) | ||||||||||||||||||||||||||||||
| In-place lease values | $ | 2,025 | $ | 8,374 | $ | 7,321 | $ | 5,762 | $ | 4,933 | $ | 30,209 | $ | 58,624 | ||||||||||||||||||||||||||||||
| Deferred leasing costs | 1,272 | 4,619 | 3,846 | 2,963 | 2,345 | 7,562 | 22,607 | |||||||||||||||||||||||||||||||||||||
| Amortization expense | $ | 3,297 | $ | 12,993 | $ | 11,167 | $ | 8,725 | $ | 7,278 | $ | 37,771 | $ | 81,231 | ||||||||||||||||||||||||||||||
8. Restricted Cash, Other Assets and Accrued and Other Liabilities
The following table presents a summary of restricted cash as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Restricted cash: | ||||||||||||||
| Borrower escrow deposits | $ | 37,642 | $ | 74,496 | ||||||||||
| Real estate escrow reserves | 18,469 | 18,020 | ||||||||||||
| Working capital and other reserves | 6,850 | 4,198 | ||||||||||||
| Capital expenditure reserves | 6,653 | 8,882 | ||||||||||||
| Margin pledged as collateral | 2,633 | 19,536 | ||||||||||||
| Tenant lockboxes | 812 | 933 | ||||||||||||
| Total | $ | 73,059 | $ | 126,065 | ||||||||||
The following table presents a summary of other assets as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Other assets: | ||||||||||||||
| Prepaid taxes, tax receivable and deferred tax assets | $ | 27,995 | $ | 21,989 | ||||||||||
| Right-of-use lease asset | 23,228 | 25,480 | ||||||||||||
| Deferred financing costs, net - credit facilities | 7,833 | 8,382 | ||||||||||||
| Prepaid expenses | 7,139 | 5,311 | ||||||||||||
| Derivative asset | 1,981 | 4,122 | ||||||||||||
| Investment deposits and pending deal costs | 781 | 20,779 | ||||||||||||
| Other assets | 701 | 1,644 | ||||||||||||
| Total | $ | 69,658 | $ | 87,707 | ||||||||||
44
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents a summary of accrued and other liabilities as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Accrued and other liabilities: | ||||||||||||||
| Current and deferred tax liability | $ | 29,240 | $ | 31,510 | ||||||||||
| Accounts payable, accrued expenses and other liabilities | 25,781 | 28,278 | ||||||||||||
| Operating lease liability | 23,318 | 25,495 | ||||||||||||
| Interest payable | 15,938 | 16,259 | ||||||||||||
| Prepaid rent and unearned revenue | 14,382 | 16,744 | ||||||||||||
| Tenant security deposits | 1,627 | 3,005 | ||||||||||||
| Unfunded CECL loan allowance | 1,202 | 0 | ||||||||||||
| Derivative liability | 37 | 19,133 | ||||||||||||
| Total | $ | 111,525 | $ | 140,424 | ||||||||||
45
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Debt
The following table presents debt as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Capacity ($) | Recourse vs. Non-Recourse(1) | Final Maturity | Contractual Interest Rate | Principal Amount(2) | Carrying Value(2) | Principal Amount(2) | Carrying Value(2) | ||||||||||||||||||||||||||||||||||||||||
| Securitization bonds payable, net | |||||||||||||||||||||||||||||||||||||||||||||||
CLNC 2019-FL1(3) | Non-recourse | Aug-35 | LIBOR + 1.59% | $ | 840,423 | $ | 834,621 | $ | 840,423 | $ | 833,153 | ||||||||||||||||||||||||||||||||||||
| Subtotal securitization bonds payable, net | 840,423 | 834,621 | 840,423 | 833,153 | |||||||||||||||||||||||||||||||||||||||||||
| Mortgage and other notes payable, net | |||||||||||||||||||||||||||||||||||||||||||||||
Net lease 6(4) | Non-recourse | Oct-27 | 4.45% | 23,780 | 23,780 | 24,117 | 24,117 | ||||||||||||||||||||||||||||||||||||||||
Net lease 5(5) | Non-recourse | Nov-26 | 4.45% | 3,373 | 3,290 | 3,422 | 3,329 | ||||||||||||||||||||||||||||||||||||||||
Net lease 4(5) | Non-recourse | Nov-26 | 4.45% | 7,272 | 7,094 | 7,384 | 7,184 | ||||||||||||||||||||||||||||||||||||||||
Net lease 3(5) | Non-recourse | Jun-21 | 4.00% | 12,308 | 12,268 | 12,450 | 12,368 | ||||||||||||||||||||||||||||||||||||||||
Net lease 6(5) | Non-recourse | Jul-23 | LIBOR + 2.15% | 1,439 | 1,405 | 1,658 | 1,615 | ||||||||||||||||||||||||||||||||||||||||
Net lease 5(4) | Non-recourse | Aug-26 | 4.08% | 31,439 | 31,189 | 31,821 | 31,539 | ||||||||||||||||||||||||||||||||||||||||
Net lease 1(5)(6) | Non-recourse | Nov-26 | 4.45% | 18,315 | 17,866 | 18,579 | 18,076 | ||||||||||||||||||||||||||||||||||||||||
Net lease 1(7) | Non-recourse | Mar-28 | 4.38% | 12,077 | 11,639 | 12,221 | 11,758 | ||||||||||||||||||||||||||||||||||||||||
Net lease 4(4)(8) | Non-recourse | Apr-21 | LIBOR + 2.50% | 0 | 0 | 74,916 | 74,845 | ||||||||||||||||||||||||||||||||||||||||
Net lease 1(4) | Non-recourse | Jul-25 | 4.31% | 250,000 | 247,270 | 250,000 | 246,961 | ||||||||||||||||||||||||||||||||||||||||
Net lease 2(4)(9) | Non-recourse | Jun-25 | 3.91% | 170,112 | 172,524 | 181,952 | 184,532 | ||||||||||||||||||||||||||||||||||||||||
Net lease 3(4) | Non-recourse | Sep-33 | 4.77% | 200,000 | 198,583 | 200,000 | 198,521 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 4(5) | Non-recourse | Dec-23 | 4.84% | 42,383 | 42,853 | 42,925 | 43,407 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 2(5)(10) | Non-recourse | Dec-23 | 4.94% | 0 | 0 | 42,443 | 42,851 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 8(5) | Non-recourse | Jun-30 | 3.53% | 22,880 | 22,648 | 15,819 | 16,324 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 10(5)(11) | Non-recourse | Jun-30 | 3.53% | 12,480 | 12,306 | 11,744 | 11,939 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 9(5) | Non-recourse | Nov-26 | 3.98% | 23,543 | 22,791 | 23,885 | 23,133 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 1(5) | Non-recourse | Oct-24 | 4.47% | 107,317 | 107,915 | 108,719 | 109,475 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 3(5) | Non-recourse | Jan-25 | 4.30% | 74,134 | 73,548 | 75,256 | 74,554 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 5(5)(10) | Non-recourse | Apr-23 | LIBOR + 4.00% | 0 | 0 | 33,498 | 32,801 | ||||||||||||||||||||||||||||||||||||||||
Other real estate 6(5)(12) | Non-recourse | Apr-24 | LIBOR + 2.95% | 22,788 | 22,282 | 21,500 | 20,825 | ||||||||||||||||||||||||||||||||||||||||
Loan 9(13) | Non-recourse | Jun-24 | LIBOR + 3.00% | 71,748 | 71,748 | 65,958 | 65,958 | ||||||||||||||||||||||||||||||||||||||||
| Subtotal mortgage and other notes payable, net | 1,107,388 | 1,102,999 | 1,260,267 | 1,256,112 | |||||||||||||||||||||||||||||||||||||||||||
| Bank credit facility | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank credit facility | $ | 450,000 | Recourse | Feb-23 (14) | LIBOR + 2.25% | 0 | 0 | 113,500 | 113,500 | ||||||||||||||||||||||||||||||||||||||
| Subtotal bank credit facility | 0 | 0 | 113,500 | 113,500 | |||||||||||||||||||||||||||||||||||||||||||
| Master repurchase facilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank 1 facility 3 | $ | 400,000 | Limited Recourse(15) | Apr-23(16) | LIBOR + 1.91% | (17) | 103,622 | 103,622 | 106,309 | 106,309 | |||||||||||||||||||||||||||||||||||||
Bank 2 facility 3(18) | 200,000 | Limited Recourse(15) | Oct-22 | LIBOR + 2.50% | (17) | 21,353 | 21,353 | 22,750 | 22,750 | ||||||||||||||||||||||||||||||||||||||
| Bank 3 facility 3 | 600,000 | Limited Recourse(15) | Apr-22 | LIBOR + 2.14% | (17) | 202,952 | 202,952 | 265,633 | 265,633 | ||||||||||||||||||||||||||||||||||||||
| Bank 7 facility 1 | 500,000 | Limited Recourse(15) | Apr-22(19) | LIBOR + 2.01% | (17) | 124,704 | 124,704 | 221,421 | 221,421 | ||||||||||||||||||||||||||||||||||||||
| Bank 8 facility 1 | 250,000 | Limited Recourse(15) | Jun-21(20) | LIBOR + 1.98% | (17) | 130,769 | 130,769 | 164,098 | 164,098 | ||||||||||||||||||||||||||||||||||||||
| Bank 9 facility 1 | 300,000 | (21) | Nov-23(22) | (23) | (17) | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||||
| Subtotal master repurchase facilities | $ | 2,250,000 | 583,400 | 583,400 | 780,211 | 780,211 | |||||||||||||||||||||||||||||||||||||||||
46
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
| Capacity ($) | Recourse vs. Non-Recourse(1) | Final Maturity | Contractual Interest Rate | Principal Amount(2) | Carrying Value(2) | Principal Amount(2) | Carrying Value(2) | ||||||||||||||||||||||||||||||||||||||||
| CMBS credit facilities | |||||||||||||||||||||||||||||||||||||||||||||||
| Bank 1 facility 1 | Recourse | (24) | NA | (25) | 0 | 0 | 20,375 | 20,375 | |||||||||||||||||||||||||||||||||||||||
| Bank 1 facility 2 | Recourse | (24) | NA | (25) | 0 | 0 | 18,834 | 18,834 | |||||||||||||||||||||||||||||||||||||||
| Bank 3 facility | Recourse | (24) | NA | (25) | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||
| Bank 4 facility | Recourse | (24) | NA | (25) | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||
| Bank 5 facility 1 | Recourse | (24) | NA | (25) | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||
| Bank 5 facility 2 | Recourse | (24) | NA | (25) | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||||
| Bank 6 facility 1 | Recourse | (24) | 4.25% | 13,165 | 13,165 | 83,584 | 83,584 | ||||||||||||||||||||||||||||||||||||||||
| Bank 6 facility 2 | Recourse | (24) | 4.25% | 12,067 | 12,067 | 82,729 | 82,729 | ||||||||||||||||||||||||||||||||||||||||
| Subtotal CMBS credit facilities | 25,232 | 25,232 | 205,522 | 205,522 | |||||||||||||||||||||||||||||||||||||||||||
| Subtotal credit facilities | 608,632 | 608,632 | 1,099,233 | 1,099,233 | |||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,556,443 | $ | 2,546,252 | $ | 3,199,923 | $ | 3,188,498 | |||||||||||||||||||||||||||||||||||||||
_________________________________________
(1)Subject to customary non-recourse carveouts.
(2)Difference between principal amount and carrying value of securitization bonds payable, net and mortgage and other notes payable, net is attributable to deferred financing costs, net and premium/discount on mortgage notes payable.
(3)The Company, through indirect Cayman subsidiaries, securitized commercial mortgage loans originated by the Company. Senior notes issued by the securitization trusts were generally sold to third parties and subordinated notes retained by the Company. These securitizations are accounted for as secured financing with the underlying mortgage loans pledged as collateral. Principal payments from underlying collateral loans must be applied to repay the notes until fully paid off, irrespective of the contractual maturities on the notes. Underlying collateral loans have initial terms of two to three years.
(4)Represents a mortgage note collateralized by an investment in the Company’s Core Portfolio.
(5)Represents a mortgage note collateralized by an investment in the Company’s Legacy, Non-Strategic Portfolio.
(6)Payment terms are periodic payment of principal and interest for debt on 2 properties and periodic payment of interest only with principal at maturity (except for principal repayments to release collateral properties disposed) for debt on 1 property.
(7)Represents a mortgage note collateralized by 3 properties in the Company’s Legacy, Non-Strategic Portfolio.
(8)Represents a mortgage note that was repaid during the third quarter of 2020 in connection with the sale of the collateralized property.
(9)As of September 30, 2020, the outstanding principal of the mortgage payable was NOK 1.6 billion, which translated to $170.1 million.
(10)Represents a mortgage note that was repaid during the first quarter of 2020 in connection with the sale of the collateralized properties.
(11)Represents 2 separate senior mortgage notes with a weighted average maturity of December 2020 and weighted average interest rate of 3.53%.
(12)The current maturity of the mortgage payable is April 2022, with 2 one-year extensions available at the Company’s option, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.
(13)The current maturity of the note payable is June 2021, with 3 one-year extensions available at the Company’s option, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents. The loan is included in the Company’s Core Portfolio.
(14)The ability to borrow additional amounts terminates on February 1, 2022 at which time the Company may, at its election, extend the termination date for 2 additional six-month terms.
(15)Recourse solely with respect to 25.0% of the financed amount.
(16)The next maturity date is April 2021, with 2 one-year extensions available at the option of the Company, which may be exercised upon the satisfaction of certain customary conditions set forth in the governing documents.
(17)Represents the weighted average spread as of September 30, 2020. The contractual interest rate depends upon asset type and characteristics and ranges from one-month London Interbank Offered Rates (“LIBOR”) plus 1.50% to 2.60%.
(18)The next maturity date is October 2020, with 2 one-year extension options available, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents. Subsequent to September 30, 2020, the Company exercised a one-year extension option to October 2021 and reduced the capacity of Bank 2 Facility 3 to $21.4 million.
(19)The next maturity date is April 2021, with a one-year extension available, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.
(20)The next maturity date is June 2021, with a one-year extension available, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.
(21)Recourse is either 25.0% or 50.0% depending on loan metrics.
(22)The next maturity date is November 2021, with 2 one-year extension options available, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.
(23)The interest rate will be determined by the lender in its sole discretion.
(24)The maturity dates on the CMBS Credit Facilities are dependent upon asset type and will typically range from one to six months.
(25)CMBS Credit Facilities are undrawn and fully available.
47
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Future Minimum Principal Payments
The following table summarizes future scheduled minimum principal payments at September 30, 2020 based on initial maturity dates or extended maturity dates to the extent criteria are met and the extension option is at the borrower’s discretion (dollars in thousands):
| Total | Securitization Bonds Payable, Net | Mortgage Notes Payable, Net(1) | Credit Facilities(1) | ||||||||||||||||||||
| Remainder of 2020 | $ | 25,904 | $ | 0 | $ | 672 | $ | 25,232 | |||||||||||||||
| 2021 | 145,401 | 0 | 14,632 | 130,769 | |||||||||||||||||||
| 2022 | 351,529 | 0 | 2,520 | 349,009 | |||||||||||||||||||
| 2023 | 148,532 | 0 | 44,910 | 103,622 | |||||||||||||||||||
| 2024 | 204,072 | 0 | 204,072 | 0 | |||||||||||||||||||
| 2025 and thereafter | 1,681,005 | 840,423 | 840,582 | 0 | |||||||||||||||||||
| Total | $ | 2,556,443 | $ | 840,423 | $ | 1,107,388 | $ | 608,632 | |||||||||||||||
_________________________________________
(1)Includes $101.3 million of future minimum principal payments related to assets held for sale.
Bank Credit Facility
On February 1, 2018, the Company, through subsidiaries, including the OP, entered into a credit agreement with several lenders to provide a revolving credit facility in the aggregate principal amount of up to $400.0 million (the “Bank Credit Facility”). On December 17, 2018, the aggregate amount of revolving commitments was increased to $525.0 million and on February 4, 2019, the aggregate amount of revolving commitments was increased to $560.0 million. On May 6, 2020 these commitments were reduced to $450.0 million. The Bank Credit Facility will mature on February 1, 2022, unless the OP elects to extend the maturity date for up to 2 additional six-month terms.
The maximum amount available for borrowing at any time under the Bank Credit Facility is limited to a borrowing base valuation of certain investment assets, with the valuation of such investment assets generally determined according to a percentage of adjusted net book value. At September 30, 2020, the borrowing base valuation was sufficient to support the borrowing of up to $195.0 million.
Advances under the Bank Credit Facility accrue interest at a per annum rate equal to, at the applicable borrower’s election, either a LIBOR rate plus a margin of 2.25%, or a base rate determined according to a prime rate or federal funds rate plus a margin of 1.25%. The Company pays a commitment fee of 0.25% or 0.35% per annum of the unused amount (0.35%) at September 30, 2020, depending upon the amount of facility utilization.
Substantially all material wholly owned subsidiaries of the Company guarantee the obligations of the Company and any other borrowers under the Bank Credit Facility. As security for the advances under the Bank Credit Facility, the Company pledged substantially all equity interests it owns and granted a security interest in deposit accounts in which the proceeds of investment asset distributions are maintained.
The Bank Credit Facility contains various affirmative and negative covenants including financial covenants that require the Company to maintain minimum tangible net worth, liquidity levels and financial ratios, as specified in the Bank Credit Facility. On May 6, 2020, the Company amended the Bank Credit Facility to, among other things, (i) reduce the minimum tangible net worth covenant to $1.5 billion, providing portfolio management flexibilities as a result of any disruptions in investments caused by COVID-19 or other factors; (ii) reduce the facility size to $450.0 million, (iii) limit dividends in line with taxable income and restrict stock repurchases, each for liquidity preservation purposes, and (iv) focus new investments on senior mortgages. At September 30, 2020, the Company was in compliance with all of the financial covenants.
Securitization Financing Transactions
Securitization bonds payable, net represent debt issued by securitization vehicles consolidated by the Company. Senior notes issued by these securitization trusts were generally sold to third parties and subordinated notes retained by the Company. Payments from underlying collateral loans must be applied to repay the notes until fully paid off, irrespective of the contractual maturities of the loans.
48
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In October 2019, the Company executed a securitization transaction, through wholly-owned subsidiaries, CLNC 2019-FL1, Ltd. and CLNC 2019-FL1, LLC (collectively, “CLNC 2019-FL1”), which resulted in the sale of $840.4 million of investment grade notes. The securitization reflects an advance rate of 83.5% at a weighted average cost of funds of LIBOR plus 1.59%, and is collateralized by a pool of 21 senior loans originated by the Company.
CLNC 2019-FL1 includes a two-year reinvestment feature that allows us to contribute existing or newly originated loan investments in exchange for proceeds from repayments or repurchases of loans held in CLNC 2019-FL1, subject to the satisfaction of certain conditions set forth in the indenture. In addition to existing eligible loans available for reinvestment, the continued origination of securitization eligible loans is required to ensure that we reinvest the available proceeds within CLNC 2019-FL1.
Additionally, CLNC 2019-FL1 contains note protection tests that can be triggered as a result of contributed loan defaults, losses, and certain other events outlined in the indenture, beyond established thresholds. A note protection test failure that is not remedied can result in the redirection of interest proceeds from the below investment grade tranches to amortize the most senior outstanding tranche. While we continue to closely monitor all loan investments contributed to CLNC 2019-FL1, a deterioration in the performance of an underlying loan could negatively impact our liquidity position.
As of September 30, 2020, the Company had $1.0 billion carrying value of CRE debt investments financed with $840.4 million of securitization bonds payable, net.
Master Repurchase Facilities
As of September 30, 2020, the Company, through subsidiaries, had entered into repurchase agreements with multiple global financial institutions to provide an aggregate principal amount of up to $2.3 billion to finance the origination of first mortgage loans and senior loan participations secured by CRE debt investments (“Master Repurchase Facilities”). The Company agreed to guarantee certain obligations under the Master Repurchase Facilities, which contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. The Master Repurchase Facilities act as revolving loan facilities that can be paid down as assets are repaid or sold and re-drawn upon for new investments. As of September 30, 2020, the Company was in compliance with all of its financial covenants under the Master Repurchase Facilities.
As of September 30, 2020, the Company had $869.0 million carrying value of CRE debt investments financed with $583.4 million under the master repurchase facilities.
On May 7, 2020, the Company amended all 6 of its Master Repurchase Facilities to reduce the minimum tangible net worth covenant consistent with the Bank Credit Facility. During the first quarter of 2020, the Company received and timely paid a margin call on a hospitality loan and made voluntarily paydowns on 2 other hospitality and 1 retail loan. The lender granted the Company a holiday from future margin calls for four months, and it obtained broader discretion to enter into permitted modifications with the borrowers on these 3 specific loans, if necessary.
In May, the Company entered into agreements to modify 2 of its Master Repurchase Facilities pursuant to which the Company reduced facility advances corresponding to 10 senior mortgage loans financed under such facilities. The Company and its lender counterparties agreed to temporary modifications providing for margin holidays from future margin calls or buffers before further margin calls are possible, as well as providing additional protections before certain repurchase obligations may be triggered. The Company was also provided broader discretion to negotiate with its borrowers to implement certain modifications to the underlying loans during such period. These holiday periods are scheduled to expire in the fourth quarter of 2020. Additionally, during the third quarter and fourth quarter of 2020, the Company made voluntarily paydowns on a hospitality loan and a self-storage loan, respectively. In exchange for the paydown on the self-storage loan, the lender granted the Company a holiday from future margin calls for four months, and the Company obtained broader approval to enter into a permitted modification with the borrower.
Subsequent to September 30, 2020, the Company exercised a one-year extension option on Bank 2 Facility 3, extending the maturity to October 2021. The Company additionally reduced the capacity from $200.0 million to $21.4 million.
CMBS Credit Facilities
As of September 30, 2020, the Company had entered into 8 master repurchase agreements (collectively the “CMBS Credit Facilities”) to finance CMBS investments. The CMBS Credit Facilities are on a recourse basis and contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. As of September 30, 2020, the Company had $36.3 million carrying value of CRE securities financed with $18.4
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
million under its CMBS Credit Facilities. As of September 30, 2020, the Company had $21.6 million carrying value of underlying investments in the subordinate tranches of the securitization trusts financed with $6.8 million under its CMBS Credit Facilities.
During the first quarter, the Company received and paid margin calls on its CMBS Credit Facilities of $48.9 million. During the second quarter, the Company consolidated its CMBS Credit Facilities borrowings with one existing counterparty bank. In connection with the consolidation, the Company paid down the CMBS Credit Facilities borrowing advance rate to a blended borrowing advance rate of 62% and extended the repurchase date on all such borrowings first to June 30, 2020 and then to December 31, 2020. This $73.9 million paydown allowed for a 15% additional loss on a bond specific basis before further margin calls. As of November 5, 2020, the Company had $18.6 million outstanding under its CMBS Credit Facilities. The consolidated facility bears a fixed interest rate of 4.25%. Refer to Note 19 “Subsequent Events” for further details on CMBS sales and repayment of the CMBS Credit Facility.
10. Related Party Arrangements
Management Agreement
On January 31, 2018, the Company and the OP entered into a management agreement (the “Management Agreement”) with the Manager, pursuant to which the Manager manages the Company’s assets and its day-to-day operations. The Manager is responsible for, among other matters, (1) the selection, origination, acquisition, management and sale of the Company’s portfolio investments, (2) the Company’s financing activities and (3) providing the Company with investment advisory services. The Manager is also responsible for the Company’s day-to-day operations and will perform (or will cause to be performed) such services and activities relating to the Company’s investments and business and affairs as may be appropriate. The Management Agreement requires the Manager to manage the Company’s business affairs in conformity with the investment guidelines and other policies that are approved and monitored by the Board of Directors. Each of the Company’s executive officers is also an employee of the Manager or its affiliates. The Manager’s role as Manager will be under the supervision and direction of the Company’s Board of Directors.
The initial term of the Management Agreement expires on the third anniversary of the Closing Date and will be automatically renewed for a one-year term each anniversary date thereafter unless earlier terminated as described below. The Company’s independent directors review the Manager’s performance and the fees that may be payable to the Manager annually and, following the initial term, the Management Agreement may be terminated if there has been an affirmative vote of at least two-thirds of the Company’s independent directors determining that (1) there has been unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) the compensation payable to the Manager, in the form of base management fees and incentive fees taken as a whole, or the amount thereof, is not fair to the Company, subject to the Manager’s right to prevent such termination due to unfair fees by accepting reduced compensation as agreed to by at least two-thirds of the Company’s independent directors. The Company must provide the Manager 180 days’ prior written notice of any such termination.
The Company may also terminate the Management Agreement for cause (as defined in the Management Agreement) at any time, including during the initial term, without the payment of any termination fee, with at least 30 days’ prior written notice from the Company’s Board of Directors. Unless terminated for cause, the Manager will be paid a termination fee as described below. The Manager may terminate the Management Agreement if the Company becomes required to register as an investment company under the Investment Company Act with such termination deemed to occur immediately before such event, in which case the Company would not be required to pay a termination fee. The Manager may decline to renew the Management Agreement by providing the Company with 180 days’ prior written notice, in which case the Company would not be required to pay a termination fee. The Manager may also terminate the Management Agreement with at least 60 days’ prior written notice if the Company breaches the Management Agreement in any material respect or otherwise is unable to perform its obligations thereunder and the breach continues for a period of 30 days after written notice to the Company, in which case the Manager will be paid a termination fee as described below.
In November 2019 the Manager, the Company and the OP amended and restated the Management Agreement to modify the “Core Earnings” definition, providing that “unrealized provisions for loan losses and real estate impairments” shall only be applied as exclusions from the definition of Core Earnings if approved by a majority of the independent directors of the Company. Such change became effective during the fourth quarter of 2019 and results in a reduction to Core Earnings which thereby reduces the annual management fee and any incentive fee paid by the Company due to accumulated unrealized provisions for loan losses and real estate impairments to date.
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fees to Manager
Base Management Fee
The base management fee payable to the Manager is equal to 1.5% of the Company’s stockholders’ equity (as defined in the Management Agreement), per annum (0.375% per quarter), payable quarterly in arrears in cash. For purposes of calculating the base management fee, the Company’s stockholders’ equity means: (a) the sum of (1) the net proceeds received by the Company (or, without duplication, the Company’s direct subsidiaries, such as the OP) from all issuances of the Company’s or such subsidiaries’ common and preferred equity securities since inception (allocated on a pro rata basis for such issuances during the calendar quarter of any such issuance), plus (2) the Company’s cumulative Core Earnings (as defined in the Management Agreement) from and after the Closing Date to the end of the most recently completed calendar quarter, less (b)(1) any distributions to the Company’s common stockholders (or owners of common equity of the Company’s direct subsidiaries, such as the OP, other than the Company or any of such subsidiaries), (2) any amount that the Company or any of the Company’s direct subsidiaries, such as the OP, have paid to (x) repurchase for cash the Company’s common stock or common equity securities of such subsidiaries or (y) repurchase or redeem for cash the Company’s preferred equity securities or preferred equity securities of such subsidiaries, in each case since the Closing Date and (3) any incentive fee (as described below) paid to the Manager since the Closing Date.
For the three and nine months ended September 30, 2020, the total management fee expense incurred was $7.1 million and $22.2 million, respectively. For the three and nine months ended September 30, 2019, the total management fee expense incurred was $11.4 million and $34.1 million, respectively. As of September 30, 2020 and December 31, 2019, $7.2 million and $8.4 million, respectively, of unpaid management fee were included in due to related party in the Company’s consolidated balance sheets.
Incentive Fee
The incentive fee payable to the Manager is equal to the difference between (i) the product of (a) 20% and (b) the difference between (1) Core Earnings (as defined in the Management Agreement) for the most recent 12-month period (or the Closing Date if it has been less than 12 months since the Closing Date), including the current quarter, and (2) the product of (A) common equity (as defined in the Management Agreement) in the most recent 12-month period (or the Closing Date if it has been less than 12 months since the Closing Date), and (B) 7% per annum and (ii) the sum of any incentive fee paid to the Manager with respect to the first three calendar quarters of the most recent 12-month period (or the Closing Date if it has been less than 12 months since the Closing Date), provided, however, that no incentive fee is payable with respect to any calendar quarter unless Core Earnings (as defined in the Management Agreement) is greater than zero for the most recently completed 12 calendar quarters (or the Closing Date if it has been less than 12 calendar quarters since the Closing Date).
The Company did 0t incur any incentive fees during the three and nine months ended September 30, 2020 and 2019.
Reimbursements of Expenses
Reimbursement of expenses related to the Company incurred by the Manager, including legal, accounting, financial, due diligence and other services are paid on the Company’s behalf by the OP or its designee(s). The Company reimburses the Manager for the Company’s allocable share of the salaries and other compensation of the Company’s chief financial officer and certain of its affiliates’ non-investment personnel who spend all or a portion of their time managing the Company’s affairs, and the Company’s share of such costs are based upon the percentage of such time devoted by personnel of the Manager (or its affiliates) to the Company’s affairs. The Company may be required to pay the Company’s pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Manager and its affiliates required for the Company’s operations.
For the three and nine months ended September 30, 2020, the total reimbursements of expenses incurred by the Manager on behalf of the Company and reimbursable in accordance with the Management Agreement was $2.0 million and $7.1 million, respectively, and are included in administrative expense on the consolidated statements of operations. For the three and nine months ended September 30, 2019, the total reimbursements of expenses incurred by the Manager on behalf of the Company and reimbursable in accordance with the Management Agreement was $2.5 million and $8.1 million, respectively. As of September 30, 2020 and December 31, 2019, there were $2.0 million and $2.7 million, respectively, of unpaid expenses included in due to related party in the Company’s consolidated balance sheets.
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Equity Plan Grants
In April 2020, the Company granted 143,000 shares to its chief executive officer, an employee of the Manager, under the 2018 Equity Incentive Plan (the "2018 Plan"). In March 2019, the Company granted 800,000 shares to the Manager and/or employees thereof under the 2018 Plan. In March 2018, the Company granted 978,946 shares to its non-independent directors, officers and the Manager and/or employees thereof under the 2018 Plan. 927,414 shares remain granted and unvested as of September 30, 2020. See Note 11, “Equity-Based Compensation” for further discussion on the 2018 Plan including shares issued to independent directors of the Company. In connection with these grants, the Company recognized share-based compensation expense of $1.3 million and $3.0 million to its Manager within administrative expense in the consolidated statement of operations for the three and nine months ended September 30, 2020, respectively. The Company recognized share-based compensation expense of $2.8 million and $7.1 million to its Manager within administrative expense in the consolidated statement of operations for the three and nine months ended September 30, 2019, respectively.
Colony Capital, Inc. Internalization Discussions with the Company
As previously disclosed, the Company’s Board of Directors formed a special committee consisting exclusively of independent and disinterested directors (the “Special Committee”) to explore an internalization proposal made by Colony Capital as well as other strategic alternatives. Subsequently, due to ongoing uncertainty surrounding the duration and magnitude of the COVID-19 pandemic and its impact on the global economy, on April 1, 2020, Colony Capital reported in Amendment No. 3 to Schedule 13D (filed with the U.S. Securities and Exchange Commission) that it has postponed any decision regarding a disposition of its management agreement with the Company until market conditions improve. The Special Committee has continued to explore alternatives but has been unable to negotiate mutually acceptable terms with Colony Capital. The Special Committee will continue to consider value-enhancing alternatives for the Company as opportunities arise.
Investment Activity
All investment acquisitions are approved in accordance with the Company’s investment and related party guidelines, which may include approval by either the audit committee or disinterested members of the Company’s Board of Directors. No investment by the Company will require approval under the related party transaction policy solely because such investment constitutes a co-investment made by and between the Company and any of its subsidiaries, on the one hand, and one or more investment vehicles formed, sponsored, or managed by an affiliate of the Manager on the other hand.
In July 2017, NorthStar II entered into a joint venture with an affiliate of the Manager to make a $60.0 million investment in a $180.0 million mezzanine loan which was originated by such affiliate of the Manager. The transaction was approved by NorthStar II’s board of directors, including all of its independent directors. The investment was purchased by the Company in connection with the Combination. In June 2018, the Company increased its commitment to $101.8 million in connection with the joint venture bifurcating the mezzanine loan into a mezzanine loan and a preferred equity investment. The Company’s interest in both the underlying mezzanine loan and preferred equity investment is 31.8%, and the affiliate entities own the remaining 68.2%. Both the underlying mezzanine loan and preferred equity investment carry a fixed 13.0% interest rate. This investment is recorded in investments in unconsolidated ventures in the Company’s consolidated balance sheets. In July 2019, the Company increased its commitment in the mezzanine loan from $101.8 million to $189.0 million. The Company’s interest in the upsized mezzanine loan is 45.2% and it carries a fixed 13.0% interest rate. During the three months ended June 30, 2020, the Company made its pro-rata share of two protective advances to the senior mortgage lender totaling $28.5 million. The Company placed this investment on nonaccrual status as of April 1, 2020. In September 2020 the Company’s mezzanine loan and preferred equity investment was converted into a mezzanine participation. See Note 4, “Investments in Unconsolidated Ventures,” for further information.
In May 2018, the Company acquired an $89.1 million (at par) preferred equity investment in an investment vehicle that owns a seven-property office portfolio located in the New York metropolitan area from an affiliate of the Company’s Manager. The affiliate has a 27.2% ownership interest in the borrower. The preferred equity investment carries a fixed 12.0% interest rate. This investment is recorded in loans and preferred equity held for investment, net in the Company’s consolidated balance sheets. In July 2020, the Company accepted a discounted payoff and recognized an impairment loss of $20.6 million. See Note 3, “Loans and Preferred Equity Held for Investment, net” for further information.
In July 2018, the Company acquired a $326.8 million Class A office campus located in Norway from an affiliate of the Company’s Manager. In connection with the purchase, the Company assumed senior mortgage financing from a private bond issuance of $197.7 million. The bonds have a five-year term remaining, and carry a fixed interest rate of 3.91%.
In July 2018, the Company entered into a joint venture to invest in a development project for land and a Grade A office building in Ireland. The Company agreed to invest up to $69.9 million of the $139.7 million total commitment. The Company co-
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
invested along with two affiliates of the Manager, with the Company owning 50.0% of the joint venture and the affiliate entities owning the remaining 50.0%. The joint venture invested in a senior mortgage loan of $66.7 million with a fixed interest rate of 12.5% and a maturity date of 3.5 years from origination and common equity.
In October 2018, the Company entered into a joint venture to invest in a mixed-use development project in Ireland. The Company agreed to invest up to $162.4 million of the $266.5 million total commitment. The Company co-invested along with two affiliates of the Manager, with the Company owning 61.0% of the joint venture and the affiliate entities owning the remaining 39.0%. The joint venture invested in a senior mortgage loan with a fixed interest rate of 15.0% and a maturity date of two years from origination. The Company placed this investment on nonaccrual status as of July 1, 2020. See Note 4, “Investments in Unconsolidated Ventures,” for further information.
In October 2018, the Company acquired a $20.0 million mezzanine loan from an affiliate of the Company’s Manager, secured by a pledge of an ownership interest in a luxury condominium development project located in New York, NY. The loan bears interest at 9.5% plus LIBOR. The borrower repaid the loan in February 2020.
11. Equity-Based Compensation
On January 29, 2018 the Company’s Board of Directors adopted the 2018 Plan. The 2018 Plan permits the grant of awards with respect to 4.0 million shares of the Class A common stock, subject to adjustment pursuant to the terms of the 2018 Plan. Awards may be granted under the 2018 Plan to (x) the Manager or any employee, officer, director, consultant or advisor (who is a natural person) providing services to the Company, the Manager or their affiliates and (y) any other individual whose participation in the 2018 Plan is determined to be in the best interests of the Company. The following types of awards may be made under the 2018 Plan, subject to the limitations set forth in the plan: (i) stock options (which may be either incentive stock options or non-qualified stock options); (ii) stock appreciation rights; (iii) restricted stock awards; (iv) stock units; (v) unrestricted stock awards; (vi) dividend equivalent rights; (vii) performance awards; (viii) annual cash incentive awards; (ix) long-term incentive units; and (x) other equity-based awards.
Shares subject to an award granted under the 2018 Plan will be counted against the maximum number of shares of Class A common stock available for issuance thereunder as one share of Class A common stock for every one share of Class A common stock subject to such an award. Shares subject to an award granted under the 2018 Plan will again become available for issuance under the 2018 Plan if the award terminates by expiration, forfeiture, cancellation, or otherwise without the issuance of such shares (except as set forth in the following sentence). The number of shares of Class A common stock available for issuance under the 2018 Plan will not be increased by (i) any shares tendered or withheld in connection with the purchase of shares upon exercise of a stock option, (ii) any shares deducted or delivered in connection with the Company’s tax withholding obligations, or (iii) any shares purchased by the Company with proceeds from stock option exercises. The shares granted in May 2020 to the independent directors of the Company under the 2018 Plan vest in May 2021. Shares granted to non-independent directors, officers and the Manager under the 2018 Plan vest ratably in three annual installments.
The table below summarizes our awards granted, forfeited or vested under the 2018 Plan during the nine months ended September 30, 2020:
| Number of Shares | |||||||||||||||||
| Restricted Stock | Total | Weighted Average Grant Date Fair Value | |||||||||||||||
| Unvested Shares at December 31, 2019 | 1,335,590 | 1,335,590 | $ | 17.79 | |||||||||||||
| Granted | 237,340 | 237,340 | 3.70 | ||||||||||||||
| Vested | (452,438) | (452,438) | 17.34 | ||||||||||||||
| Forfeited | (193,078) | (193,078) | 17.21 | ||||||||||||||
| Unvested shares at September 30, 2020 | 927,414 | 927,414 | $ | 16.14 | |||||||||||||
Fair value of equity awards that vested during the nine months ended September 30, 2020 and September 30, 2019, determined based on their respective fair values at vesting date, was $2.7 million and $4.7 million, respectively. Fair value of granted awards is determined based on the closing price of the Class A common stock on the date of grant of the awards. Equity-based compensation is classified within administrative expense in the consolidated statement of operations.
At September 30, 2020, aggregate unrecognized compensation cost for all unvested equity awards was $6.0 million, which is expected to be recognized over a weighted-average period of 1.3 years.
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. Stockholders’ Equity
Authorized Capital
As of September 30, 2020, the Company had the authority to issue up to 1.0 billion shares of stock, at $0.01 par value per share, consisting of 950.0 million shares of Class A common stock and 50.0 million shares of preferred stock. On February 1, 2019, the Class B-3 common stock automatically converted to Class A common stock and each unissued share of Class B-3 common stock was automatically reclassified as one share of Class A common stock.
The Company had 0 shares of preferred stock issued and outstanding as of September 30, 2020.
Dividends
During the nine months ended September 30, 2020, the Company declared the following dividends on its common stock:
| Declaration Date | Record Date | Payment Date | Per Share | |||||||||||||||||
| January 15, 2020 | January 31, 2020 | February 10, 2020 | $0.10 | |||||||||||||||||
| February 14, 2020 | February 29, 2020 | March 10, 2020 | $0.10 | |||||||||||||||||
| March 16, 2020 | March 31, 2020 | April 10, 2020 | $0.10 | |||||||||||||||||
The Company and its Board of Directors suspended the Company’s monthly stock dividend beginning with the monthly period ended April 30, 2020.
Stock Repurchase Program
The Company’s Board of Directors authorized a stock repurchase program (the “Stock Repurchase Program”), under which the Company could repurchase up to $300.0 million of its outstanding Class A common stock until March 31, 2020. On February 18, 2020, the Company’s Board of Directors voted to extend the Stock Repurchase Program through March 31, 2021. Under the Stock Repurchase Program, the Company may repurchase shares in open market purchases, through tender offers or otherwise in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.
As of September 30, 2020, the Company had 0t repurchased any shares under the Stock Repurchase Program.
Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in each component of Accumulated Other Comprehensive Income (Loss) (“AOCI”) attributable to stockholders and noncontrolling interests in the OP, net of immaterial tax effect.
Changes in Components of AOCI - Stockholders
| (in thousands) | Unrealized gain (loss) on real estate securities, available for sale | Unrealized gain on net investment hedges | Foreign currency translation gain (loss) | Total | |||||||||||||||||||
| AOCI at December 31, 2019 | $ | 15,909 | $ | 25,872 | $ | (13,487) | $ | 28,294 | |||||||||||||||
| Other comprehensive income (loss) | (73,273) | 21,255 | (18,981) | (70,999) | |||||||||||||||||||
| AOCI at March 31, 2020 | $ | (57,364) | $ | 47,127 | $ | (32,468) | $ | (42,705) | |||||||||||||||
| Other comprehensive loss before reclassification | (26,905) | 0 | 10,581 | (16,324) | |||||||||||||||||||
| Amounts reclassified from AOCI | 84,269 | 0 | 0 | 84,269 | |||||||||||||||||||
| Net current period OCI | 57,364 | 0 | 10,581 | 67,945 | |||||||||||||||||||
| AOCI at June 30, 2020 | $ | 0 | $ | 47,127 | $ | (21,887) | $ | 25,240 | |||||||||||||||
| Other comprehensive income (loss) before reclassification | 6,018 | 0 | 11,443 | 17,461 | |||||||||||||||||||
| Amounts reclassified from AOCI | (1,748) | 0 | 0 | (1,748) | |||||||||||||||||||
| Net current period OCI | 4,270 | 0 | 11,443 | 15,713 | |||||||||||||||||||
| AOCI at September 30, 2020 | $ | 4,270 | $ | 47,127 | $ | (10,444) | $ | 40,953 | |||||||||||||||
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| (in thousands) | Unrealized gain (loss) on real estate securities, available for sale | Unrealized gain on net investment hedges | Foreign currency translation gain (loss) | Total | |||||||||||||||||||
| AOCI at December 31, 2018 | $ | (1,295) | $ | 11,037 | $ | (10,141) | $ | (399) | |||||||||||||||
| Other comprehensive income (loss) | 9,530 | 7,222 | (3,233) | 13,519 | |||||||||||||||||||
| AOCI at March 31, 2019 | $ | 8,235 | $ | 18,259 | $ | (13,374) | $ | 13,120 | |||||||||||||||
| Other comprehensive income | 7,679 | 916 | 3,832 | 12,427 | |||||||||||||||||||
| AOCI at June 30, 2019 | $ | 15,914 | $ | 19,175 | $ | (9,542) | $ | 25,547 | |||||||||||||||
| Other comprehensive income (loss) | 4,983 | 12,492 | (14,107) | 3,368 | |||||||||||||||||||
| AOCI at September 30, 2019 | $ | 20,897 | $ | 31,667 | $ | (23,649) | $ | 28,915 | |||||||||||||||
Changes in Components of AOCI - Noncontrolling Interests in the OP
| (in thousands) | Unrealized gain (loss) on real estate securities, available for sale | Unrealized gain (loss) on net investment hedges | Foreign currency translation gain (loss) | Total | |||||||||||||||||||
| AOCI at December 31, 2019 | $ | 612 | $ | 893 | $ | (801) | $ | 704 | |||||||||||||||
| Other comprehensive income (loss) | (1,756) | 509 | (455) | (1,702) | |||||||||||||||||||
| AOCI at March 31, 2020 | $ | (1,144) | $ | 1,402 | $ | (1,256) | $ | (998) | |||||||||||||||
| Other comprehensive income before reclassification | (872) | 0 | 259 | (613) | |||||||||||||||||||
| Amounts reclassified from AOCI | 2,016 | 0 | 0 | 2,016 | |||||||||||||||||||
| Net current period OCI | 1,144 | 0 | 259 | 1,403 | |||||||||||||||||||
| AOCI at June 30, 2020 | $ | 0 | $ | 1,402 | $ | (997) | $ | 405 | |||||||||||||||
| Other comprehensive income (loss) before reclassification | 63 | 0 | 298 | 361 | |||||||||||||||||||
| Amounts reclassified from AOCI | (42) | 0 | 0 | (42) | |||||||||||||||||||
| Net current period OCI | 21 | 0 | 298 | 319 | |||||||||||||||||||
| AOCI at September 30, 2020 | $ | 21 | $ | 1,402 | $ | (699) | $ | 724 | |||||||||||||||
| (in thousands) | Unrealized gain (loss) on real estate securities, available for sale | Unrealized gain on net investment hedges | Foreign currency translation gain (loss) | Total | |||||||||||||||||||
| AOCI at December 31, 2018 | $ | (32) | $ | 268 | $ | (246) | $ | (10) | |||||||||||||||
| Other comprehensive income (loss) | 228 | 173 | (77) | 324 | |||||||||||||||||||
| AOCI at March 31, 2019 | $ | 196 | $ | 441 | $ | (323) | $ | 314 | |||||||||||||||
| Other comprehensive income | 184 | 22 | 91 | 297 | |||||||||||||||||||
| AOCI at June 30, 2019 | $ | 380 | $ | 463 | $ | (232) | $ | 611 | |||||||||||||||
| Other comprehensive income (loss) | 119 | 299 | (338) | 80 | |||||||||||||||||||
| AOCI at September 30, 2019 | $ | 499 | $ | 762 | $ | (570) | $ | 691 | |||||||||||||||
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COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Changes in Components of AOCI - Noncontrolling Interests in investment entities
| (in thousands) | Unrealized gain (loss) on real estate securities, available for sale | Unrealized gain (loss) on net investment hedges | Foreign currency translation gain (loss) | Total | |||||||||||||||||||
| AOCI at December 31, 2019 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
| Other comprehensive income | 0 | 0 | 0 | 0 | |||||||||||||||||||
| AOCI at March 31, 2020 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
| Other comprehensive income | 0 | 0 | 257 | 257 | |||||||||||||||||||
| AOCI at June 30, 2020 | $ | 0 | $ | 0 | $ | 257 | $ | 257 | |||||||||||||||
| Other comprehensive income | 0 | 0 | 915 | 915 | |||||||||||||||||||
| AOCI at September 30, 2020 | $ | 0 | $ | 0 | $ | 1,172 | $ | 1,172 | |||||||||||||||
The following table presents the details of the reclassifications from AOCI for the nine months ended September 30, 2020:
| (in thousands) | ||||||||||||||
| Component of AOCI reclassified into earnings | Nine Months Ended September 30, 2020 | Affected Line Item in the Consolidated Statements of Operations | ||||||||||||
| Realized loss on sale of real estate securities | $ | (50,677) | Other gain (loss), net | |||||||||||
| Impairment of real estate securities | (31,844) | Other gain (loss), net | ||||||||||||
The Company had no reclassifications from AOCI for the nine months ended September 30, 2019.
13. Noncontrolling Interests
Operating Partnership
Noncontrolling interests include the aggregate limited partnership interests in the OP held by RED REIT. Net income (loss) attributable to the noncontrolling interests is based on the limited partners’ ownership percentage of the OP. Net income attributable to the noncontrolling interests of the OP was $0.2 million for the three months ended September 30, 2020 and net loss attributable to the noncontrolling interests of the OP was $7.1 million for the nine months ended September 30, 2020, respectively. Net loss attributable to the noncontrolling interests of the OP for the three and nine months ended September 30, 2019 was $8.5 million and $10.7 million.
Investment Entities
Noncontrolling interests in investment entities represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net income attributable to noncontrolling interests in the investment entities for three months ended September 30, 2020 was $1.2 million and net loss attributable to noncontrolling interests in the investments entities was $6.4 million for the nine months ended September 30, 2020.
Net loss attributable to noncontrolling interests in the investment entities for the three and nine months ended September 30, 2019 was $37.4 million and $38.6 million, respectively.
5-Investment Preferred Financing
On June 5, 2020, subsidiaries of the Company entered into a preferred financing arrangement (on a portfolio of five underlying Company investment interests) (the “5-Investment Preferred Financing”) from investment vehicles managed by Goldman Sachs (“GS”). The financing provided $200 million of proceeds at closing. The preferred financing is limited to (i) the Company’s interests in 4 co-investments, 3 of which are in the Company’s Core Portfolio and 1 which is in the Legacy, Non-Strategic Portfolio, alongside investment funds managed by affiliates of the Company’s manager, each of which are financings on underlying development projects (including residential, office and/or mixed-use components), and (ii) a wholly-owned triple-net industrial distribution center investment leased to a national grocery chain, which is included in the Company’s Core Portfolio. The preferred financing provides GS a 10% preferred return and certain other minimum returns, as well as a minority interest in future cash flows.
56
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company and its affiliates control the continuing investment and portfolio management of such investments and thus continues to consolidate these investments on the Consolidated Balance Sheet at September 30, 2020. The preferred financing provides for a disproportionate allocation of profits and losses, and thus each party’s share of earnings or loss is determined using a balance sheet approach known as the HLBV method. Under the HLBV method, earnings and losses are recognized based on the change in each party’s capital account from the beginning of the period in question to the end of the period, adjusting for the effects of distributions and new investments. The entity measures each party’s capital account assuming that the subsidiary was liquidated or sold at book value. The preferred financing resulted in a reallocation of a portion of stockholders equity to noncontrolling interest, resulting in a $69 million day one reduction in stockholders equity. The noncontrolling interest in investment entities on the Company’s consolidated balance sheet includes $269.9 million representing GS’s investment at September 30, 2020 under the HLBV method.
The transaction resulted in the Company receiving net liquidity of approximately $170 million, net of approximately $30 million in paydowns under the Company’s corporate credit facility, and the ability to draw down up to $29 million additional commitments from GS for future fundings to the portfolio, if any, at our same advance rate. As of September 30, 2020, we have neither drawn-down additional funds from, nor completed any cash distributions to, GS.
14. Fair Value
Determination of Fair Value
The following is a description of the valuation techniques used to measure fair value of assets accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
PE Investments
The Company accounts for PE Investments at fair value which is determined based on either a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the funds and discount rate, or pending sales prices, if applicable. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 of the fair value hierarchy, unless the PE Investments are valued based on pending sales prices, which are classified as Level 2 of the fair value hierarchy. The Company considers cash flow and NAV information provided by general partners of the underlying funds (“GP NAV”) and the implied yields of those funds in valuing its PE Investments. The Company also considers the values derived from the valuation model as a percentage of GP NAV, and compares the resulting percentage of GP NAV to precedent transactions, independent research, industry reports as well as pricing from executed purchase and sale agreements related to the disposition of its PE Investments. The Company may, as a result of that comparison, apply a mark-to-market adjustment. The Company has not elected the practical expedient to measure the fair value of its PE Investments using the NAV of the underlying funds.
Real Estate Securities
CRE securities are generally valued using a third-party pricing service or broker quotations. These quotations are not adjusted and are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Certain CRE securities may be valued based on a single broker quote, dealer bid or an internal price. Situations where management applies adjustments based on or using unobservable inputs and would be classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as its knowledge of and experience in the market.
Investing VIEs
As discussed in Note 5, “Real Estate Securities, Available for Sale,” the Company has elected the fair value option for the financial assets and liabilities of the consolidated Investing VIEs. The Investing VIEs are “static,” that is no reinvestment is permitted and there is very limited active management of the underlying assets. The Company is required to determine whether the fair value of the financial assets or the fair value of the financial liabilities of the Investing VIEs are more observable, but in either case, the methodology results in the fair value of the assets of the securitization trusts being equal to the fair value of their liabilities. The Company has determined that the fair value of the liabilities of the securitization trusts are more observable, since market prices for the liabilities are available from a third-party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. The financial assets of the securitization trusts are not readily marketable and their fair value measurement requires information that may be limited in availability.
In determining the fair value of the trusts’ financial liabilities, the dealers will consider contractual cash payments and yields expected by market participants. Dealers also incorporate common market pricing methods, including a spread measurement to
57
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. The Company’s collateralized mortgage obligations are classified as Level 2 of the fair value hierarchy, where a third-party pricing service or broker quotations are available and are based on observable valuation inputs, and as Level 3 of the fair value hierarchy, where internal price is utilized based on or using unobservable inputs. In accordance with ASC 810, Consolidation, the assets of the securitization trusts are an aggregate value derived from the fair value of the trust’s liabilities, and the Company has determined that the valuation of the trust’s assets in their entirety including its retained interests from the securitizations (eliminated in consolidation in accordance with U.S. GAAP) should be classified as Level 3 of the fair value hierarchy.
Derivatives
Derivative instruments consist of interest rate contracts and foreign exchange contracts that are generally traded over-the-counter, and are valued using a third-party service provider. Quotations on over-the counter derivatives are not adjusted and are generally valued using observable inputs such as contractual cash flows, yield curve, foreign currency rates and credit spreads, and are classified as Level 2 of the fair value hierarchy. Although credit valuation adjustments, such as the risk of default, rely on Level 3 inputs, these inputs are not significant to the overall valuation of its derivatives. As a result, derivative valuations in their entirety are classified as Level 2 of the fair value hierarchy.
Fair Value Hierarchy
Financial assets recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table presents financial assets that were accounted for at fair value on a recurring basis as of September 30, 2020 and December 31, 2019 by level within the fair value hierarchy (dollars in thousands):
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Investments in unconsolidated ventures - PE Investments | $ | 0 | $ | 124 | $ | 6,969 | $ | 7,093 | $ | 0 | $ | 1,425 | $ | 8,858 | $ | 10,283 | ||||||||||||||||||||||||||||||||||
| Real estate securities, available for sale | 0 | 36,250 | 0 | 36,250 | 0 | 252,824 | 0 | 252,824 | ||||||||||||||||||||||||||||||||||||||||||
| Mortgage loans held in securitization trusts, at fair value | 0 | 0 | 1,839,390 | 1,839,390 | 0 | 0 | 1,872,970 | 1,872,970 | ||||||||||||||||||||||||||||||||||||||||||
| Other assets - derivative assets | 0 | 1,981 | 1,981 | 0 | 4,122 | 0 | 4,122 | |||||||||||||||||||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Mortgage obligations issued by securitization trusts, at fair value | $ | 0 | $ | 1,770,924 | $ | 0 | $ | 1,770,924 | $ | 0 | $ | 1,762,914 | $ | 0 | $ | 1,762,914 | ||||||||||||||||||||||||||||||||||
| Other liabilities - derivative liabilities | 0 | 37 | 0 | 37 | 0 | 19,133 | 0 | 19,133 | ||||||||||||||||||||||||||||||||||||||||||
58
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the changes in fair value of financial assets which are measured at fair value on a recurring basis using Level 3 inputs to determine fair value for the nine months ended September 30, 2020 and year ended December 31, 2019 (dollars in thousands):
| Nine Months Ended September 30, 2020 | Year Ended December 31, 2019 | |||||||||||||||||||||||||
| Investments in unconsolidated ventures - PE Investments | Mortgage loans held in securitization trusts(1) | Investments in unconsolidated ventures - PE Investments | Mortgage loans held in securitization trusts(1) | |||||||||||||||||||||||
| Beginning balance | $ | 8,858 | $ | 1,872,970 | $ | 160,851 | $ | 3,116,978 | ||||||||||||||||||
Contributions(2)/purchases | 0 | 0 | 151 | 0 | ||||||||||||||||||||||
| Distributions/paydowns | (2,558) | (19,817) | (18,407) | (55,288) | ||||||||||||||||||||||
Deconsolidation of securitization trust(3) | 0 | 0 | 0 | (1,239,627) | ||||||||||||||||||||||
| Equity in earnings | 669 | 0 | 0 | 0 | ||||||||||||||||||||||
| Sale of investments | 0 | 0 | (48,930) | (39,848) | ||||||||||||||||||||||
| Transfers out of Level 3 | 0 | (84,807) | 0 | |||||||||||||||||||||||
| Unrealized gain (loss) in earnings | 0 | (13,763) | 0 | 87,983 | ||||||||||||||||||||||
| Realized gain in earnings | 0 | 0 | 2,772 | |||||||||||||||||||||||
| Ending balance | $ | 6,969 | $ | 1,839,390 | $ | 8,858 | $ | 1,872,970 | ||||||||||||||||||
_________________________________________
(1)For the nine months ended September 30, 2020, the Company recorded an unrealized loss of $13.8 million related to mortgage loans held in securitization trusts, at fair value and an unrealized loss of $27.8 million related to mortgage obligations issued by securitization trusts, at fair value.
(2)Includes initial investments, before distribution and contribution closing statement adjustments, and subsequent contributions, including deferred purchase price fundings.
(3)In July 2019, the Company sold its retained investments in the subordinate tranches of 1 securitization trust. As a result of the sale, the Company deconsolidated 1 of the securitization trusts. See Note 5, “Real Estate Securities, Available for Sale” for further information.
Transfers of assets into or out of Level 3 are presented at their fair values as measured at the end of the reporting period. Assets transferred out of Level 3 represent PE Investments that were valued based on their contracted sales price in March 2019.
As of September 30, 2020 and December 31, 2019, the Company utilized a discounted cash flow model, comparable precedent transactions and other market information to quantify Level 3 fair value measurements on a recurring basis. As of September 30, 2020 and December 31, 2019, the key unobservable inputs used in the analysis of PE Investments included discount rates with a range of 11.0% to 12.0% and timing and amount of expected future cash flows. As of September 30, 2020 and December 31, 2019, the key unobservable inputs used in the valuation of mortgage obligations issued by securitization trusts included yields ranging from 20.3% to 54.3% and 15.0% to 16.1%, respectively, and a weighted average life of 5.1 years and 5.4 years, respectively. Significant increases or decreases in any one of the inputs described above in isolation may result in significantly different fair value of the financial assets and liabilities using such Level 3 inputs.
For the three and nine months ended September 30, 2020, the Company recorded a net unrealized loss of $13.2 million and $41.6 million, respectively, related to mortgage loans held in and mortgage obligations issued by securitization trusts, at fair value. For the three and nine months ended September 30, 2019, the Company recorded a net unrealized loss of $2.0 million and a net unrealized gain of $4.6 million, respectively, related to mortgage loans held in and mortgage obligations issued by securitization trusts, at fair value. These amounts, when incurred, are recorded as unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net in the consolidated statements of operations.
For the three and nine months ended September 30, 2020, the company did 0t record a realized gain on mortgage loans held in securitization trusts, at fair value. For the three and nine months ended September 30, 2019, the Company recorded $2.7 million and $2.8 million realized gain respectively, on mortgage loans held in securitization trusts, at fair value, which represents the gain upon the sale of the Company’s retained interests in the subordinate tranches of one securitization trust. This amount is recorded as realized gain on mortgage loans and obligations held in securitization trusts, net in the consolidated statements of operations.
Fair Value Option
The Company may elect to apply the fair value option of accounting for certain of its financial assets or liabilities due to the nature of the instrument at the time of the initial recognition of the investment. The Company elected the fair value option for PE Investments and eligible financial assets and liabilities of its consolidated Investing VIEs because management believes it is
59
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
a more useful presentation for such investments. The Company determined recording the PE Investments based on the change in fair value of projected future cash flow from one period to another better represents the underlying economics of the respective investment. As of September 30, 2020 and December 31, 2019, the Company has elected not to apply the fair value option for any other eligible financial assets or liabilities.
Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||
| Principal Amount | Carrying Value | Fair Value | Principal Amount | Carrying Value | Fair Value | |||||||||||||||||||||||||||||||||
Financial assets:(1) | ||||||||||||||||||||||||||||||||||||||
| Loans and preferred equity held for investment, net | $ | 2,149,018 | $ | 2,103,414 | (2) | $ | 2,109,093 | $ | 2,858,423 | (2) | $ | 2,576,332 | $ | 2,470,561 | ||||||||||||||||||||||||
Financial liabilities:(1) | ||||||||||||||||||||||||||||||||||||||
| Securitization bonds payable, net | $ | 840,423 | $ | 834,621 | $ | 840,423 | $ | 840,423 | $ | 833,153 | $ | 840,423 | ||||||||||||||||||||||||||
| Mortgage and other notes payable, net | 1,107,388 | 1,102,999 | 1,107,388 | 1,260,267 | 1,256,112 | 1,260,675 | ||||||||||||||||||||||||||||||||
| Master repurchase facilities | 608,632 | 608,632 | 608,632 | 1,099,233 | 1,099,233 | 1,099,233 | ||||||||||||||||||||||||||||||||
_________________________________________
(1)The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
(2)Excludes future funding commitments of $173.2 million and $276.6 million as of September 30, 2020 and December 31, 2019, respectively.
Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2020. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Loans and Preferred Equity Held for Investment, Net
For loans and preferred equity held for investment, net, fair values were determined: (i) by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment; or (ii) based on discounted cash flow projections of principal and interest expected to be collected, which includes consideration of the financial standing of the borrower or sponsor as well as operating results of the underlying collateral. These fair value measurements of CRE debt are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy. Carrying values of loans and preferred equity held for investment are presented net of allowance for loan losses, where applicable.
Securitization Bonds Payable, Net
The Company’s securitization bonds payable, net bear floating rates of interest. As of September 30, 2020, the Company believes the carrying value approximates fair value. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Mortgage and Other Notes Payable, Net
For mortgage and other notes payable, net, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using comparable U.S. Treasury rates as of the end of the reporting period. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
60
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Master Repurchase Facilities
The Company has amounts outstanding under Master Repurchase Facilities. The Master Repurchase Facilities bear floating rates of interest. As of September 30, 2020, the Company believes the carrying value approximates fair value. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Other
The carrying values of cash and cash equivalents, receivables, and accrued and other liabilities approximate fair value due to their short term nature and credit risk, if any, are negligible.
Nonrecurring Fair Values
The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Adjustments to fair value generally result from the application of lower of amortized cost or fair value accounting for assets held for sale or write-down of asset values due to impairment.
The following table summarizes assets carried at fair value on a nonrecurring basis as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| September 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||||||||||||
| Loans and preferred equity held for investment, net | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 104,797 | $ | 104,797 | ||||||||||||||||||||||||||||||||||
| Loans held for sale | 0 | 0 | 0 | 0 | 0 | 0 | 5,016 | 5,016 | ||||||||||||||||||||||||||||||||||||||||||
| Real estate, net | 0 | 0 | 0 | 0 | 0 | 0 | 423,540 | 423,540 | ||||||||||||||||||||||||||||||||||||||||||
| Real estate assets held for sale | 0 | 0 | 142,559 | 142,559 | 0 | 0 | 117,880 | 117,880 | ||||||||||||||||||||||||||||||||||||||||||
| Investments in unconsolidated ventures | 0 | 0 | 0 | 0 | 0 | 0 | 124,860 | 124,860 | ||||||||||||||||||||||||||||||||||||||||||
| Deferred leasing costs and intangible assets, net | 0 | 0 | 0 | 0 | 0 | 0 | 41,862 | 41,862 | ||||||||||||||||||||||||||||||||||||||||||
The following table summarizes the fair value write-downs to assets carried at nonrecurring fair values during the periods presented (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Loans: | ||||||||||||||||||||||||||
Loans and preferred equity held for investment, net (1) | $ | 0 | $ | 99,729 | $ | 2,346 | $ | 209,987 | ||||||||||||||||||
Loans held for sale (1) | 0 | 10,584 | 31,581 | 10,584 | ||||||||||||||||||||||
| Total | $ | 0 | $ | 110,313 | $ | 33,927 | $ | 220,571 | ||||||||||||||||||
| Real Estate: | ||||||||||||||||||||||||||
| Real estate, net | $ | 0 | $ | 216,437 | $ | 0 | $ | 226,561 | ||||||||||||||||||
| Real estate held for sale | 4,565 | 56,285 | 30,500 | 56,285 | ||||||||||||||||||||||
| Total | $ | 4,565 | $ | 272,722 | $ | 30,500 | $ | 282,846 | ||||||||||||||||||
| Investments in Unconsolidated Ventures: | ||||||||||||||||||||||||||
| Investments in unconsolidated ventures | $ | 0 | $ | 17,600 | $ | 0 | $ | 17,600 | ||||||||||||||||||
| Total | $ | 0 | $ | 17,600 | $ | 0 | $ | 17,600 | ||||||||||||||||||
_________________________________________
(1)See Note 3 “Loans and Preferred Equity Held for Investment, net and Loans Held for Sale’ for further details.
61
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Real estate held for sale consisted of certain properties in the Company’s portfolio of real estate in its Legacy, Non-Strategic Portfolio segment. The amount of the impairment recognized was determined based on feedback received during the sales process. The fair value of the impaired properties was determined based on broker price opinions, executed purchase and sale agreements and third party bids received which utilized terminal capitalization rates ranging from 6% to 16%.
15. Derivatives
The Company uses derivative instruments to manage the risk of changes in interest rates and foreign exchange rates, arising from both its business operations and economic conditions. Specifically, the Company enters into derivative instruments to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and cash payments, the values of which are driven by interest rates, principally relating to the Company’s investments. Additionally, the Company’s foreign operations expose the Company to fluctuations in foreign exchange rates. The Company enters into derivative instruments to protect the value or fix certain of these foreign denominated amounts in terms of its functional currency, the U.S. dollar. Derivative instruments used in the Company’s risk management activities may be designated as qualifying hedge accounting relationships designated hedges or non-designated hedges.
As of September 30, 2020 and December 31, 2019, fair value of derivative assets and derivative liabilities were as follows (dollars in thousands):
| September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||||||
| Non-Designated Hedges | Total | Designated Hedges | Non-Designated Hedges | Total | |||||||||||||||||||||||||||||||
| Derivative Assets | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | 1,974 | $ | 1,974 | $ | 0 | $ | 4,122 | $ | 4,122 | |||||||||||||||||||||||||
| Interest rate contracts | 7 | 7 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
| Included in other assets | $ | 1,981 | $ | 1,981 | $ | 0 | $ | 4,122 | $ | 4,122 | |||||||||||||||||||||||||
| Derivative Liabilities | |||||||||||||||||||||||||||||||||||
| Foreign exchange contracts | $ | 0 | $ | 0 | $ | (2,128) | $ | (29) | $ | (2,157) | |||||||||||||||||||||||||
| Interest rate contracts | (37) | (37) | 0 | (16,976) | (16,976) | ||||||||||||||||||||||||||||||
| Included in accrued and other liabilities | $ | (37) | $ | (37) | $ | (2,128) | $ | (17,005) | $ | (19,133) | |||||||||||||||||||||||||
As of September 30, 2020, the Company’s counterparties held $0.1 million in cash collateral.
The following table summarizes the Company’s interest rate contracts as of September 30, 2020:
| Type of Derivatives | Notional Currency | Notional Amount (in thousands) | Range of Maturity Dates | |||||||||||||||||||||||
| Designated | Non-Designated | |||||||||||||||||||||||||
| Put Option | NOK | 0 | 928,000 | July 2021 | ||||||||||||||||||||||
| Interest Rate Swap | USD | $ | 0 | $ | 109,526 | April 2021 - July 2023 | ||||||||||||||||||||
62
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The table below represents the effect of the derivative financial instruments on the consolidated statements of operations and of comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Other gain (loss), net | ||||||||||||||||||||||||||
| Non-designated foreign exchange contracts | $ | 99 | $ | 2,016 | $ | 4,573 | $ | 2,394 | ||||||||||||||||||
| Non-designated interest rate contracts | 7 | (4,688) | (17,084) | (14,949) | ||||||||||||||||||||||
| $ | 106 | $ | (2,672) | $ | (12,511) | $ | (12,555) | |||||||||||||||||||
| Other income | ||||||||||||||||||||||||||
| Non-designated foreign exchange contracts | $ | 0 | $ | 0 | $ | 178 | $ | 0 | ||||||||||||||||||
| Non-designated interest rate contracts | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
| $ | 0 | $ | 0 | $ | 178 | $ | 0 | |||||||||||||||||||
| Accumulated other comprehensive income (loss) | ||||||||||||||||||||||||||
| Designated foreign exchange contracts | $ | 0 | $ | 12,791 | $ | 21,764 | $ | 21,124 | ||||||||||||||||||
| $ | 0 | $ | 12,791 | $ | 21,764 | $ | 21,124 | |||||||||||||||||||
During the nine months ended September 30, 2020, the Company received $28.2 million from the unwind of its NOK and EUR FX forwards and realized a gain of $8.7 million which is included in other loss, net on its consolidated statements of operations.
During the nine months ended September 30, 2020, the Company unwound its remaining interest rate swaps and realized a loss of $34.0 million, which is included in other loss, net on its consolidated statement of operations. This was previously recorded as an unrealized loss as of March 31, 2020.
At the end of each quarter, the Company reassesses the effectiveness of its net investment hedges and as appropriate, dedesignates the portion of the derivative notional that is in excess of the beginning balance of its net investments as non-designated hedges. Any unrealized gain or loss on the dedesignated portion of net investment hedges is transferred into earnings, recorded in other gain (loss), net. During the three and nine months ended September 30, 2020 and 2019, 0 gain (loss) was transferred from accumulated other comprehensive income (loss).
Offsetting Assets and Liabilities
The Company enters into agreements subject to enforceable netting arrangements with its derivative counterparties that allow the Company to offset the settlement of derivative assets and liabilities in the same currency by derivative instrument type or, in the event of default by the counterparty, to offset all derivative assets and liabilities with the same counterparty. The Company has elected not to net derivative asset and liability positions, notwithstanding the conditions for right of offset may have been met. The Company presents derivative assets and liabilities with the same counterparty on a gross basis on the consolidated balance sheets.
63
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth derivative positions where the Company has a right of offset under netting arrangements with the same counterparty as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| Gross Amounts of Assets (Liabilities) Included on Consolidated Balance Sheets | Gross Amounts Not Offset on Consolidated Balance Sheets | Net Amounts of Assets (Liabilities) | ||||||||||||||||||||||||
| (Assets) Liabilities | Cash Collateral Pledged | |||||||||||||||||||||||||
| September 30, 2020 | ||||||||||||||||||||||||||
| Derivative Assets | ||||||||||||||||||||||||||
| Foreign exchange contracts | $ | 1,974 | $ | 0 | $ | 0 | $ | 1,974 | ||||||||||||||||||
| Interest rate contracts | 7 | (7) | 0 | 0 | ||||||||||||||||||||||
| $ | 1,981 | $ | (7) | $ | 0 | $ | 1,974 | |||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||||||||
| Interest rate contracts | $ | (37) | $ | 7 | $ | 30 | $ | 0 | ||||||||||||||||||
| $ | (37) | $ | 7 | $ | 30 | $ | 0 | |||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Derivative Assets | ||||||||||||||||||||||||||
| Foreign exchange contracts | $ | 4,122 | $ | (2,157) | $ | 0 | $ | 1,965 | ||||||||||||||||||
| $ | 4,122 | $ | (2,157) | $ | 0 | $ | 1,965 | |||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||||||||
| Foreign exchange contracts | $ | (2,157) | $ | 2,157 | $ | 0 | $ | 0 | ||||||||||||||||||
| Interest rate contracts | (16,976) | 0 | 16,976 | 0 | ||||||||||||||||||||||
| $ | (19,133) | $ | 2,157 | $ | 16,976 | $ | 0 | |||||||||||||||||||
16. Commitments and Contingencies
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 September 30, 2020, assuming the terms to qualify for future fundings, if any, had been met, total unfunded lending commitments for loans and preferred equity held for investment was $146.3 million for senior loans, $12.1 million for securitized loans, $0.1 million for corporate term loans and $14.7 million for mezzanine loans. Total unfunded commitments for equity method investments was $24.6 million.
Ground Lease Obligation
The Company’s operating leases are ground leases acquired with real estate.
At September 30, 2020, the weighted average remaining lease terms were 14.4 years for ground leases.
The following table presents lease expense, included in property operating expense, for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Operating lease expense: | ||||||||||||||||||||||||||
| Minimum lease expense | $ | 805 | $ | 791 | $ | 2,407 | $ | 2,335 | ||||||||||||||||||
| Variable lease expense | 0 | 0 | 0 | 0 | ||||||||||||||||||||||
| $ | 805 | $ | 791 | $ | 2,407 | $ | 2,335 | |||||||||||||||||||
64
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The operating lease liability was determined using a weighted average discount rate of 5.2%. The following table presents future minimum rental payments, excluding contingent rents, on noncancellable ground leases on real estate as of September 30, 2020 (dollars in thousands):
| Remainder of 2020 | $ | 796 | ||||||
| 2021 | 3,171 | |||||||
| 2022 | 3,199 | |||||||
| 2023 | 3,229 | |||||||
| 2024 | 2,338 | |||||||
| 2025 and thereafter | 21,725 | |||||||
| Total lease payments | 34,458 | |||||||
| Less: Present value discount | 11,140 | |||||||
| Operating lease liability (Note 8) | $ | 23,318 | ||||||
The following table presents future minimum rental payments, excluding contingent rents, on noncancellable ground leases on real estate as of December 31, 2019 (dollars in thousands):
| 2020 | $ | 3,232 | ||||||
| 2021 | 3,216 | |||||||
| 2022 | 3,244 | |||||||
| 2023 | 3,274 | |||||||
| 2024 | 2,383 | |||||||
| 2025 and thereafter | 23,079 | |||||||
| Total lease payments | 38,428 | |||||||
| Less: Present value discount | 12,933 | |||||||
| Operating lease liability (Note 8) | $ | 25,495 | ||||||
Litigation and Claims
The Company may be involved in litigation and claims in the ordinary course of the business. As of September 30, 2020, the Company was not involved in any legal proceedings that are expected to have a material adverse effect on the Company’s results of operations, financial position or liquidity.
17. Segment Reporting
Following the Combination, the Company conducted its business through the following 5 operating segments: the loan portfolio, CRE debt securities, net leased real estate, other, and corporate. The Company continually monitors and reviews its segment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would impact our reportable segments.
During the third quarter of 2019, the Company realigned the business and reportable segment information to reflect how the CODM regularly review and manage the business. As a result, the Company presents its business segments as follows:
•Core Portfolio, which consists of the following 4 segments and remain unchanged from the prior segments:
◦Senior and Mezzanine Loans and Preferred Equity—CRE debt investments including senior mortgage loans, mezzanine loans, and preferred equity interests as well as participations in such loans. The segment also includes ADC loan arrangements accounted for as equity method investments.
◦CRE Debt Securities—investments currently consisting of BBB and some BB rated CMBS (including Non-Investment Grade “B-pieces” of a CMBS securitization pool), or CRE CLOs (including the junior tranches thereof, collateralized by pools of CRE debt investments).
◦Net Leased Real Estate—direct investments in CRE 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.
65
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
◦Corporate—includes corporate-level asset management and other fees, related party and general and administrative expenses to the Core Portfolio only.
•Legacy, Non-Strategic Portfolio—segment consists of direct investments in operating real estate such as multi-tenant office and multifamily residential assets such as real estate acquired in settlement of loans (“REO”) which the Company plans to exit. It also includes two portfolios of PE Investments and certain retail and other legacy loans originated prior to the Combination. This segment includes corporate-level asset management and other fees, related party and general and administrative expenses related to the Legacy, Non-Strategic Portfolio only.
There were no changes in the structure of the Company’s internal organization that prompted the change in reportable segments. Prior period amounts have been revised to conform to the current year presentation shown below.
The Company primarily generates revenue from net interest income on the loan, preferred equity and securities portfolios, rental and other income from its net leased, hotel, multi-tenant office, and multifamily real estate assets, as well as equity in earnings of unconsolidated ventures. CRE debt securities include the Company’s investment in the subordinate tranches of the securitization trusts which are eliminated in consolidation. The Company’s income is primarily derived through the difference between revenue and the cost at which the Company is able to finance its investments. The Company may also acquire investments which generate attractive returns without any leverage.
The following tables present segment reporting for the three and nine months ended September 30, 2020 and 2019 (dollars in thousands):
| Core | ||||||||||||||||||||||||||||||||||||||||||||
| Senior and Mezzanine Loans and Preferred Equity | CRE Debt Securities | Net Leased Real Estate | Corporate(1) | Total Core Portfolio | Legacy, Non-Strategic Portfolio | Total | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (expense) | $ | 24,677 | $ | 2,338 | $ | 6 | $ | (1,460) | $ | 25,561 | $ | (338) | $ | 25,223 | ||||||||||||||||||||||||||||||
| Property and other income | (14) | 0 | 21,121 | 76 | 21,183 | 20,525 | 41,708 | |||||||||||||||||||||||||||||||||||||
| Management fee expense | 0 | 0 | 0 | (6,445) | (6,445) | (638) | (7,083) | |||||||||||||||||||||||||||||||||||||
| Property operating expense | 0 | 0 | (2,480) | 0 | (2,480) | (12,797) | (15,277) | |||||||||||||||||||||||||||||||||||||
| Transaction, investment and servicing expense | (210) | (2) | (364) | (827) | (1,403) | (224) | (1,627) | |||||||||||||||||||||||||||||||||||||
| Interest expense on real estate | 0 | 0 | (8,067) | 0 | (8,067) | (4,138) | (12,205) | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 0 | 0 | (10,946) | 0 | (10,946) | (3,824) | (14,770) | |||||||||||||||||||||||||||||||||||||
| Provision for loan losses | (11,229) | 0 | 0 | 0 | (11,229) | 825 | (10,404) | |||||||||||||||||||||||||||||||||||||
| Impairment of operating real estate | 0 | 0 | 0 | 0 | 0 | (3,451) | (3,451) | |||||||||||||||||||||||||||||||||||||
| Administrative expense | (66) | (281) | (28) | (4,163) | (4,538) | (1,242) | (5,780) | |||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net | 0 | (13,750) | 0 | 588 | (13,162) | 0 | (13,162) | |||||||||||||||||||||||||||||||||||||
| Other gain (loss), net | (1,457) | 1,790 | 9,563 | 0 | 9,896 | (216) | 9,680 | |||||||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of unconsolidated ventures and income taxes | 11,701 | (9,905) | 8,805 | (12,231) | (1,630) | (5,518) | (7,148) | |||||||||||||||||||||||||||||||||||||
| Equity in earnings (loss) of unconsolidated ventures | (1,652) | 0 | 0 | 0 | (1,652) | (127) | (1,779) | |||||||||||||||||||||||||||||||||||||
| Income tax benefit | 1,915 | 0 | 34 | 0 | 1,949 | 13,408 | 15,357 | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 11,964 | $ | (9,905) | $ | 8,839 | $ | (12,231) | $ | (1,333) | $ | 7,763 | $ | 6,430 | ||||||||||||||||||||||||||||||
66
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Core | ||||||||||||||||||||||||||||||||||||||||||||
| Senior and Mezzanine Loans and Preferred Equity | CRE Debt Securities | Net Leased Real Estate | Corporate(1) | Total Core Portfolio | Legacy, Non-Strategic Portfolio | Total | ||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (expense) | $ | 21,295 | $ | 5,102 | $ | 0 | $ | (2,363) | $ | 24,034 | $ | 2,077 | $ | 26,111 | ||||||||||||||||||||||||||||||
| Property and other income | 209 | 200 | 28,316 | 369 | 29,094 | 35,218 | 64,312 | |||||||||||||||||||||||||||||||||||||
| Management fee expense | 0 | 0 | 0 | (9,084) | (9,084) | (2,271) | (11,355) | |||||||||||||||||||||||||||||||||||||
| Property operating expense | 0 | 0 | (8,340) | 0 | (8,340) | (21,416) | (29,756) | |||||||||||||||||||||||||||||||||||||
| Transaction, investment and servicing expense | (512) | (3) | (103) | (245) | (863) | (570) | (1,433) | |||||||||||||||||||||||||||||||||||||
| Interest expense on real estate | 0 | 0 | (8,695) | 0 | (8,695) | (5,586) | (14,281) | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 0 | 0 | (11,673) | 0 | (11,673) | (14,261) | (25,934) | |||||||||||||||||||||||||||||||||||||
| Provision for loan losses | 0 | 0 | 0 | 0 | 0 | (110,314) | (110,314) | |||||||||||||||||||||||||||||||||||||
| Impairment of operating real estate | 0 | 0 | (23,911) | 0 | (23,911) | (248,811) | (272,722) | |||||||||||||||||||||||||||||||||||||
| Administrative expense | (312) | (244) | (78) | (3,537) | (4,171) | (3,561) | (7,732) | |||||||||||||||||||||||||||||||||||||
| Unrealized gain on mortgage loans and obligations held in securitization trusts, net | 0 | 215 | 0 | (2,191) | (1,976) | 0 | (1,976) | |||||||||||||||||||||||||||||||||||||
| Realized gain on mortgage loans and obligations held in securitization trusts, net | 0 | 0 | 0 | 2,724 | 2,724 | 0 | 2,724 | |||||||||||||||||||||||||||||||||||||
| Other gain (loss), net | (15) | (4,683) | 2,019 | (3) | (2,682) | (6) | (2,688) | |||||||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of unconsolidated ventures and income taxes | 20,665 | 587 | (22,465) | (14,330) | (15,543) | (369,501) | (385,044) | |||||||||||||||||||||||||||||||||||||
| Equity in earnings (loss) of unconsolidated ventures | 2,736 | 0 | 0 | 0 | 2,736 | (18,641) | (15,905) | |||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | 0 | 0 | (201) | 0 | (201) | (845) | (1,046) | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 23,401 | $ | 587 | $ | (22,666) | $ | (14,330) | $ | (13,008) | $ | (388,987) | $ | (401,995) | ||||||||||||||||||||||||||||||
_________________________________________
(1)Includes income earned from the CRE securities purchased at a discount, recognized using the effective interest method had the transaction been recorded as an available for sale security, at amortized cost. During the three months ended September 30, 2020 and September 30, 2019, $0.6 million and $2.2 million, respectively, was attributable to discount accretion income and was eliminated in consolidation in the corporate segment. The corresponding interest expense is recorded in net interest income in the Corporate column.
67
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Core | ||||||||||||||||||||||||||||||||||||||||||||
| Senior and Mezzanine Loans and Preferred Equity | CRE Debt Securities | Net Leased Real Estate | Corporate(1) | Total Core Portfolio | Legacy, Non-Strategic Portfolio | Total | ||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (expense) | $ | 75,309 | $ | 8,929 | $ | 15 | $ | (6,086) | $ | 78,167 | $ | (150) | $ | 78,017 | ||||||||||||||||||||||||||||||
| Property and other income | 91 | 73 | 66,290 | 198 | 66,652 | 72,340 | 138,992 | |||||||||||||||||||||||||||||||||||||
| Management fee expense | 0 | 0 | 0 | (19,446) | (19,446) | (2,789) | (22,235) | |||||||||||||||||||||||||||||||||||||
| Property operating expense | (1) | 0 | (9,437) | 0 | (9,438) | (44,681) | (54,119) | |||||||||||||||||||||||||||||||||||||
| Transaction, investment and servicing expense | (1,737) | (39) | (511) | (2,770) | (5,057) | (2,611) | (7,668) | |||||||||||||||||||||||||||||||||||||
| Interest expense on real estate | 0 | 0 | (24,613) | 0 | (24,613) | (12,488) | (37,101) | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 0 | 0 | (31,396) | 0 | (31,396) | (15,370) | (46,766) | |||||||||||||||||||||||||||||||||||||
| Provision for loan losses | (42,642) | 0 | 0 | 0 | (42,642) | (37,643) | (80,285) | |||||||||||||||||||||||||||||||||||||
| Impairment of operating real estate | 0 | 0 | 0 | 0 | 0 | (33,512) | (33,512) | |||||||||||||||||||||||||||||||||||||
| Administrative expense | (802) | (1,017) | (231) | (11,033) | (13,083) | (6,486) | (19,569) | |||||||||||||||||||||||||||||||||||||
| Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net | 0 | (43,154) | 0 | 1,565 | (41,589) | 0 | (41,589) | |||||||||||||||||||||||||||||||||||||
| Other gain (loss), net | (49,567) | (101,552) | 14,035 | (94) | (137,178) | 7,063 | (130,115) | |||||||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of unconsolidated ventures and income taxes | (19,349) | (136,760) | 14,152 | (37,666) | (179,623) | (76,327) | (255,950) | |||||||||||||||||||||||||||||||||||||
| Equity in earnings (loss) of unconsolidated ventures | (72,906) | 0 | 0 | 0 | (72,906) | 3,017 | (69,889) | |||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | (646) | 0 | 330 | 0 | (316) | 11,860 | 11,544 | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (92,901) | $ | (136,760) | $ | 14,482 | $ | (37,666) | $ | (252,845) | $ | (61,450) | $ | (314,295) | ||||||||||||||||||||||||||||||
| Core | ||||||||||||||||||||||||||||||||||||||||||||
| Senior and Mezzanine Loans and Preferred Equity | CRE Debt Securities | Net Leased Real Estate | Corporate(1) | Total Core Portfolio | Legacy, Non-Strategic Portfolio | Total | ||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (expense) | $ | 55,077 | $ | 15,856 | $ | 2 | $ | (7,674) | $ | 63,261 | $ | 8,735 | $ | 71,996 | ||||||||||||||||||||||||||||||
| Property and other income | 450 | 341 | 88,067 | 371 | 89,229 | 103,595 | 192,824 | |||||||||||||||||||||||||||||||||||||
| Management fee expense | 0 | 0 | 0 | (27,256) | (27,256) | (6,814) | (34,070) | |||||||||||||||||||||||||||||||||||||
| Property operating expense | 0 | 0 | (25,187) | 0 | (25,187) | (60,889) | (86,076) | |||||||||||||||||||||||||||||||||||||
| Transaction, investment and servicing expense | (1,325) | (4) | (208) | 301 | (1,236) | (1,777) | (3,013) | |||||||||||||||||||||||||||||||||||||
| Interest expense on real estate | 0 | 0 | (26,078) | 0 | (26,078) | (15,708) | (41,786) | |||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 0 | 0 | (37,645) | 0 | (37,645) | (45,208) | (82,853) | |||||||||||||||||||||||||||||||||||||
| Provision for loan losses | 0 | 0 | 0 | 0 | 0 | (220,572) | (220,572) | |||||||||||||||||||||||||||||||||||||
| Impairment of operating real estate | 0 | 0 | (23,911) | 0 | (23,911) | (258,935) | (282,846) | |||||||||||||||||||||||||||||||||||||
| Administrative expense | (614) | (979) | (178) | (10,206) | (11,977) | (10,418) | (22,395) | |||||||||||||||||||||||||||||||||||||
| Unrealized gain on mortgage loans and obligations held in securitization trusts, net | 0 | 6,035 | 0 | (1,433) | 4,602 | 0 | 4,602 | |||||||||||||||||||||||||||||||||||||
| Realized gain on mortgage loans and obligations held in securitization trusts, net | 0 | 48 | 0 | 2,724 | 2,772 | 0 | 2,772 | |||||||||||||||||||||||||||||||||||||
| Other gain (loss), net | (15) | (14,909) | 2,399 | 1 | (12,524) | (1,305) | (13,829) | |||||||||||||||||||||||||||||||||||||
| Income (loss) before equity in earnings of unconsolidated ventures and income taxes | 53,573 | 6,388 | (22,739) | (43,172) | (5,950) | (509,296) | (515,246) | |||||||||||||||||||||||||||||||||||||
| Equity in earnings (losses) of unconsolidated ventures | 39,020 | 0 | 0 | 0 | 39,020 | (21,058) | 17,962 | |||||||||||||||||||||||||||||||||||||
| Income tax benefit (expense) | (12) | 0 | 1,822 | (382) | 1,428 | (1,972) | (544) | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 92,581 | $ | 6,388 | $ | (20,917) | $ | (43,554) | $ | 34,498 | $ | (532,326) | $ | (497,828) | ||||||||||||||||||||||||||||||
_________________________________________
68
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1)Includes income earned from the CRE securities purchased at a discount, recognized using the effective interest method had the transaction been recorded as an available for sale security, at amortized cost. During the nine months ended September 30, 2020 and September 30, 2019, $1.6 million and $1.4 million, respectively, was attributable to discount accretion income and was eliminated in consolidation in the corporate segment. The corresponding interest expense is recorded in net interest income in the Corporate column.
The following table presents total assets by segment as of September 30, 2020 and December 31, 2019 (dollars in thousands):
| Core | ||||||||||||||||||||||||||||||||||||||||||||
| Total Assets | Senior and Mezzanine Loans and Preferred Equity(1) | CRE Debt Securities | Net Leased Real Estate | Corporate(2) | Total Core Portfolio | Legacy, Non-Strategic Portfolio(3) | Total | |||||||||||||||||||||||||||||||||||||
| September 30, 2020 | $ | 1,831,043 | $ | 1,805,418 | $ | 1,022,527 | $ | 1,200,207 | $ | 5,859,195 | $ | 652,462 | $ | 6,511,657 | ||||||||||||||||||||||||||||||
| December 31, 2019 | 2,464,963 | 2,226,448 | 1,181,609 | 496,714 | 6,369,734 | 1,044,572 | 7,414,306 | |||||||||||||||||||||||||||||||||||||
_________________________________________
(1)Includes investments in unconsolidated ventures totaling $417.5 million and $585.0 million as of September 30, 2020 and December 31, 2019, respectively.
(2)Includes cash, unallocated receivables, deferred costs and other assets, net and the elimination of the subordinate tranches of the securitization trusts in consolidation.
(3)Includes PE Investments totaling $7.1 million and $10.3 million as of September 30, 2020 and December 31, 2019, respectively.
Geography
Geography is generally defined as the location in which the income producing assets reside or the location in which income generating services are performed. Geography information on total income includes equity in earnings of unconsolidated ventures. Geography information on total income and long lived assets are presented as follows (dollars in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||
| Total income by geography: | ||||||||||||||||||||||||||||||||
| United States | $ | 90,814 | $ | 105,826 | $ | 222,547 | $ | 400,864 | ||||||||||||||||||||||||
| Europe | 5,968 | 12,161 | 30,115 | 37,080 | ||||||||||||||||||||||||||||
| Other | 0 | (3) | 0 | 32 | ||||||||||||||||||||||||||||
Total(1) | $ | 96,782 | $ | 117,984 | $ | 252,662 | $ | 437,976 | ||||||||||||||||||||||||
| September 30, 2020 | December 31, 2019 | |||||||||||||
| Long-lived assets by geography: | ||||||||||||||
| United States | $ | 931,300 | $ | 1,282,189 | ||||||||||
| Europe | 287,899 | 315,369 | ||||||||||||
Total(2) | $ | 1,219,199 | $ | 1,597,558 | ||||||||||
_________________________________________
(1)Includes interest income, interest income on mortgage loans held in securitization trusts, property and other income and equity in earnings of unconsolidated ventures.
(2)Long-lived assets are comprised of real estate and real estate related intangible assets, and excludes financial instruments and assets held for sale.
69
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
18. Earnings Per Share
The Company’s net income (loss) and weighted average shares outstanding for the three and nine months ended September 30, 2020 and 2019 consist of the following (dollars in thousands, except per share data):
| 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) | ||||||||||||||||||||||||
| Net (income) loss attributable to noncontrolling interests: | ||||||||||||||||||||||||||||||||
| Investment Entities | (1,222) | 37,445 | 6,362 | 38,623 | ||||||||||||||||||||||||||||
| Operating Partnership | (201) | 8,519 | 7,109 | 10,741 | ||||||||||||||||||||||||||||
| Net income (loss) attributable to Colony Credit Real Estate, Inc. common stockholders | $ | 5,007 | $ | (356,031) | $ | (300,824) | $ | (448,464) | ||||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||||||||
| Net income allocated to participating securities (non-vested shares) | $ | 0 | $ | (616) | $ | (322) | $ | (1,709) | ||||||||||||||||||||||||
| Net income (loss) attributable to common stockholders | $ | 5,007 | $ | (356,647) | $ | (301,146) | $ | (450,173) | ||||||||||||||||||||||||