NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(Unaudited)
1
. Business and Organization
Colony NorthStar, Inc. (the "Company") is a leading global real estate and investment management firm. The Company has significant property holdings in the healthcare, industrial and hospitality sectors, other equity and debt investments, as well as an embedded institutional and retail investment management business. The Company manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, traded and non-traded real estate investment trusts ("REITs") and registered investment companies.
The Company was organized in May 2016 as a Maryland corporation, and intends to elect to be taxed as a REIT under the Internal Revenue Code, for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2017.
The Company conducts all of its activities and holds substantially all of its assets and liabilities through its operating subsidiary, Colony Capital Operating Company, LLC (the "Operating Company" or the “OP”)
.
At
March 31, 2018
, the Company owned approximately
94.0%
of the OP
,
as its sole managing member. The remaining
6.0%
is owned primarily by certain employees of the Company as noncontrolling interests.
Merger
The Merger among Colony, NSAM and NRF was completed in an all-stock exchange on January 10, 2017.
The Merger was accounted for as a reverse acquisition, with NSAM as the legal acquirer for certain legal and regulatory matters, and Colony as the accounting acquirer for purposes of financial reporting. Consequently, the historical financial information included herein as of any date or for any periods on or prior to the Closing Date represents the pre-Merger financial information of Colony. Accordingly, comparisons of the period to period results of operations of Colony NorthStar as set forth herein may not be meaningful.
Details of the Merger are described more fully in Note
3
and the accounting treatment thereof in Note
2
.
Colony NorthStar Credit
On August 25, 2017, as amended and restated on November 20, 2017, certain subsidiaries of the Company entered into a combination agreement with NorthStar Real Estate Income Trust, Inc. (“NorthStar Income I”) and NorthStar Real Estate Income II, Inc. (“NorthStar Income II”), both publicly registered non-traded REITs sponsored and managed by a subsidiary of the Company, and certain other subsidiaries of the foregoing. Pursuant to the combination agreement, certain subsidiaries of the Company agreed to contribute the CLNS Contributed Portfolio (as defined in Note
4
), represented by the Company's ownership interests ranging from
38%
to
100%
in certain investment entities ("CLNS Investment Entities"), to Colony NorthStar Credit Real Estate, Inc. ("Colony NorthStar Credit") and its operating company, and NorthStar Income I and NorthStar Income II agreed to merge in all-stock mergers with and into Colony NorthStar Credit (collectively, the “Combination”).
On January 18, 2018, the Combination was approved by the stockholders of NorthStar Income I and NorthStar Income II. The Combination closed on January 31, 2018. See additional information in Note
4
.
Retail Distribution Business
On February 16, 2018, the Company entered into a definitive agreement with S2K Financial Holdings, LLC ("S2K") to combine
NorthStar Securities, LLC ("NorthStar Securities"), a captive broker-dealer platform acquired through the Merger that raises capital in the retail market, with S2K to create a leading retail distribution business, which will be renamed Colony S2K Holdings, LLC ("Colony S2K") (the "Proposed Transaction").
It is expected that Colony S2K will distribute both the current and future investment products sponsored by Colony NorthStar and S2K as well as third-party sponsored products. S2K is the holding company of S2K Financial, LLC, a registered broker-dealer wholesale distributor of investment vehicles, and S2K Servicing LLC, a provider of administrative services to institutional investment managers. The Proposed Transaction closed on April 30, 2018. See additional information in Note
26
.
2
. Summary of Significant Accounting Policies
The significant accounting policies of the Company are described below. The accounting policies of the Company's unconsolidated ventures are substantially similar to those of the Company.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
, or 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 year ended
December 31, 2017
.
Merger
The Merger was accounted for under the acquisition method for a business combination as a reverse acquisition. NSAM was the legal acquirer in the Merger for certain legal and regulatory matters, however, Colony was determined to be the accounting acquirer in the Merger for financial reporting purposes. While NSAM was the legal entity which initiated the transaction and issued its shares to consummate the Merger, the fact that the senior management of Colony NorthStar primarily consists of Colony senior executives, along with other qualitative considerations, resulted in Colony being designated the accounting acquirer.
The financial statements of the Company represent a continuation of the financial information of Colony as the accounting acquirer, except that the equity structure of Colony NorthStar is adjusted to reflect the equity structure of the legal acquirer, including for comparative periods, by applying the Colony share exchange ratio of
1.4663
. The historical financial information as of any date or for any periods on or prior to the Closing Date represents the pre-Merger financial information of Colony. The assets and liabilities of Colony are reflected by Colony NorthStar at their pre-Merger carrying values while the assets and liabilities of NSAM and NRF are accounted for at their acquisition date fair value. The results of operations of NSAM and NRF were incorporated into Colony NorthStar effective from January 11, 2017.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. The portions of the equity, net income and other comprehensive income of consolidated subsidiaries that are not attributable to the parent are presented separately as amounts attributable to noncontrolling interests in the consolidated financial statements. A substantial portion of noncontrolling interests represents interests held by private investment funds or other investment vehicles managed by the Company and which invest alongside the Company and membership interests in OP primarily held by certain employees of the Company.
To the extent the Company consolidates a subsidiary that is subject to industry-specific guidance, the Company retains the industry-specific guidance applied by that subsidiary in its consolidated financial statements.
The Company consolidates entities in which it has a controlling financial interest by first considering if an entity meets the definition of a variable interest entity ("VIE") for which the Company is deemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of voting interest or through other arrangements.
Variable Interest Entities
—A VIE is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company also considers interests held by its related parties, including de facto agents. The Company assesses whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In performing this analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to the related party; the Company’s and the related party's ability to control or significantly influence key decisions of the VIE including consideration of involvement by de facto agents; the obligation or likelihood for the Company or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of the
Company and the related party. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE.
Voting Interest Entities
—Unlike VIEs, voting interest entities have sufficient equity to finance their activities and equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company consolidates such entities when it has the power to control these entities through ownership of a majority of the entities' voting interests or through other arrangements.
At each reporting period, the Company reassesses whether changes in facts and circumstances cause a change in the status of an entity as a VIE or voting interest entity, and/or a change in the Company's consolidation assessment. Changes in consolidation status are applied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the assets, liabilities and noncontrolling interest in the entity are recorded at fair value upon initial consolidation. Any existing equity interest held by the Company in the entity prior to the Company obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, the Company's existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. The Company may also deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any interests retained.
Noncontrolling Interests
Redeemable Noncontrolling Interests
—This represents noncontrolling interests in (i) a consolidated open-end fund sponsored by the Company beginning in August 2017, and (ii) an investment management subsidiary acquired through the Merger, Townsend Holdings, LLC ("Townsend"), beginning January 11, 2017 through December 29, 2017, the date the Company sold its interest in Townsend.
The limited partners in the consolidated open-end fund who represent noncontrolling interests generally have the ability to withdraw all or a portion of their interests in cash with 30 days' notice.
Redeemable noncontrolling interests is presented outside of permanent equity. Allocation of net income or loss to redeemable noncontrolling interests is based upon their ownership percentage during the period. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in additional paid-in capital.
Noncontrolling Interests in Investment Entities
—This represents interests in consolidated investment entities held by private investment funds or retail companies managed by the Company or held by third party joint venture partners. Allocation of net income or loss is generally based upon relative ownership interests held by equity owners in each investment entity, or based upon contractual arrangements that may provide for disproportionate allocation of economic returns among equity interests, including using a hypothetical liquidation at book value basis, where applicable and substantive.
Noncontrolling Interests in Operating Company
—This represents membership interests in OP held primarily by certain employees of the Company. Noncontrolling interests in OP are allocated a share of net income or loss in OP based on their weighted average ownership interest in OP during the period. Noncontrolling interests in OP have the right to require OP to redeem part or all of such member’s membership units in OP ("OP Units") for cash based on the market value of an equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a
one
-for-one basis. At the end of each reporting period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP, as applicable.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Investments in Unconsolidated Ventures
A noncontrolling, unconsolidated ownership interest in an entity may be accounted for using the equity method, fair value option or net asset value ("NAV") practical expedient, if elected, or 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.
The Company accounts for investments under the equity method of accounting if it has the ability to exercise significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest. The equity method investment is initially recorded at cost and adjusted each period for capital contributions, distributions and the Company's share of the entity’s net income or loss as well as other comprehensive income or loss. The Company's share of net income or loss may differ from the stated ownership percentage interest in an entity if the governing documents prescribe a substantive non-pro rata earnings allocation formula or a preferred return to certain investors. This includes carried interests earned by the Company, which are incentive fees that take the form of a disproportionate allocation of returns to the Company’s capital account within the equity structure of investment vehicles sponsored by the Company as general partner and investment manager; and of which a portion of the carried interest, generally at 40% consistent with market terms, is allocated to senior management, investment professionals and certain other employees through their participation in the Company-sponsored investment vehicles. The Company's share of both proportionate and disproportionate allocation of returns from its interests in investment vehicles, which are accounted for under the equity method, may reflect fair value changes in the underlying investments if the investment vehicles qualify for investment company accounting. For certain equity method investments, the Company records its proportionate share of income on a
one
to
three
month lag. Distributions of operating profits from equity method investments are reported as operating activities, while distributions in excess of operating profits or those related to capital transactions, such as a financing transactions or sales, are reported as investing activities in the statement of cash flows.
Fair value changes for equity method investments under the fair value option are recorded in earnings from investments in unconsolidated ventures. Fair value changes on other investments under the fair value option or NAV practical expedient, as well as adjustments for observable price changes under the measurement alternative, are recorded in other gain (loss).
Impairment
—Evaluation of impairment applies to equity method investments and equity investments under the measurement alternative. If indicators of impairment exist, the Company will estimate the fair value of its investment. For investments under the measurement alternative, if carrying value of the investment exceeds its fair value, an impairment is determined to have occurred. For equity method investments, impairment is assessed in a two-step process in which further consideration is made if a decrease in value of the investment is other-than-temporary to determine if impairment has occurred. Investments that are impaired are written down to their estimated fair value, recorded in earnings from investments in unconsolidated ventures for equity method investments and in impairment loss for investments under the measurement alternative.
Property Operating Income
Property operating income includes the following.
Rental Income
—Rental income is recognized on a straight-line basis over the noncancelable 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 from the tenants, is capitalized. For Company owned tenant improvements, the amount funded by or reimbursed from 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 relating to the property, including real estate taxes, property insurance, maintenance, repairs and improvements. Costs reimbursable from tenants and other recoverable costs are recognized as revenue in the period the recoverable costs are incurred. When the Company is the primary obligor with respect to purchasing goods and services for property operations and has discretion in selecting the supplier and retains credit risk, tenant reimbursement revenue and property operating expenses are presented on a gross basis in the statements of operations. For certain triple net leases where the lessee
self-manages the property, hires its own service providers and retains credit risk for routine maintenance contracts, no reimbursement revenue and expense are recognized.
Resident Fee Income
—The Company earns resident fee income from senior housing operating facilities that operate through management agreements with independent third-party operators. Resident fee income related to independent living and assisted living facilities are recorded when services are rendered based on the terms of their respective lease agreements.
Hotel Operating Income
—Hotel operating income includes room revenue, food and beverage sales and other ancillary services. Revenue is recognized upon occupancy of rooms, consummation of sales and provision of services.
Fee Income
Fee income consists of the following:
Base Management Fees
—The Company earns base management fees for the administration of its managed private funds, and for the management of its traded and non-traded REITs and investment companies, including management of their investments, which constitute a series of distinct services satisfied over time. Base management fees are recognized over the life of the investment vehicle as services are provided.
Asset Management Fees
—The Company receives a one-time asset management fee upon closing of each investment made by certain managed private funds. The underlying service of managing the investments of the private funds consist of a series of distinct services satisfied over time, in which asset management fees are recognized ratably over the life of each investment as the service is provided.
Acquisition and Disposition Fees
—The Company earns fees related to acquisition and disposition of investments by certain managed non-traded REITs, which are recognized upon closing of the respective acquisition or disposition of underlying investments.
Incentive Fees
—The Company may earn incentive fees from its managed private funds, traded and non-traded REITs and investment companies. Incentive fees are determined based on the performance of the investment vehicles subject to the achievement of minimum return hurdles in accordance with the terms set out in the respective governing agreements. Incentive fees that take the form of a contractual arrangement with the investment vehicle and does not represent an allocation of returns among equity holders of the investment vehicle (or “contractual incentive fees”) are recognized when fixed or determinable and related contingencies have been resolved, which is generally at the end of the incentive measurement period of the respective investment vehicles. Any contractual incentive fees received prior to that date are recorded as deferred income.
Incentive fees that take the form of a disproportionate allocation of returns to the Company’s capital account within the equity structure of the investment vehicle (or “carried interests”) are accounted for as earnings from the Company’s ownership interests in the investment vehicles under the equity method, and addressed in the Company's accounting policy for investments in unconsolidated ventures.
A portion of the incentive fees earned by the Company, generally at
40%
consistent with market terms, is allocated to senior management, investment professionals and certain other employees of the Company through their participation in the Company-sponsored investment vehicles.
Selling Commission and Dealer Manager Fees
—These fees are earned by the Company for selling equity in the non-traded REITs and investment companies, and are recognized on trade date.
Accounting Standards Adopted in 2018
Revenue Recognition
—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09,
Revenue from Contracts with Customers,
which amends existing revenue recognition standards by establishing principles for a single comprehensive model for revenue measurement and recognition, along with enhanced disclosure requirements. Key provisions include, but are not limited to, determining which goods or services are capable of being distinct in a contract to be accounted for separately as a performance obligation and recognizing variable consideration only to the extent that it is probable a significant revenue reversal would not occur. The FASB has subsequently issued several amendments to the standard, including clarifying the guidance on assessing principal versus agent based on the notion of control, which affects recognition of revenue on a gross or net basis. The Company adopted the standard on January 1, 2018 using the modified retrospective approach, applied to contracts not yet completed as of January 1, 2018, with cumulative effect recognized in retained earnings.
The Company evaluated the principal versus agent considerations under the guidance and determined that certain cost reimbursement arrangements with investment vehicles managed by the Company that were previously reported net
on the statement of operations would be reported on a gross basis as reimbursement income and expenses on the statement of operations. Such reimbursements include travel and entertainment costs, third party due diligence costs, asset management costs, and other shared costs for which the Company is deemed to the primary obligor, whether or not the payment is made directly by the investment vehicles or initially by the Company on behalf of the investment vehicles. The gross presentation has no impact on the Company's net income to the extent the expense incurred and corresponding cost reimbursement income are recognized in the same period (see Note
22
).
The standard excludes from its scope accounting for financial instruments and leases, but is applicable to certain property operating income and fee income streams of the Company, as discussed below.
Resident Fee Income
—The Company earns resident fee income from senior housing operating facilities and in 2017, from skilled nursing facilities that operate through management agreements with independent third-party operators. The Company has determined that independent living and assisted living agreements are leases subject to the leasing standard, while certain agreements within skilled nursing facilities, which entitle residents to reside in the community rather than an explicitly or implicitly identified unit, are not leases. Revenue for services provided within skilled nursing facilities, whether they are routine services such as room and bed maintenance, nursing, dietary services, and resident activities or programs, or separately covered services such as those ordered by physicians, are satisfied over the duration of care. These services are a series of distinct services satisfied over time, and revenue is recognized over time as services are provided. The Company determined that there is no change to revenue recognition for such services provided within the skilled nursing facilities in 2017. In 2018, all of the Company's skilled nursing facilities are structured under net leases to healthcare operators and the Company no longer earns resident fee income from skilled nursing facilities, only rental income.
Hotel Operating Income
—Revenue is recognized upon occupancy of rooms, consummation of sales and provision of services. The Company determined that there is no change to revenue recognized under the new guidance as revenue is recognized over time based on the transaction price.
Base Management Fees
—The Company earns base management fees for the day-to-day operations and administration of its managed private funds, traded and non-traded REITs and investment companies. The Company determined that there is no change to revenue recognition for base management fees as the underlying services consist of a series of distinct services satisfied over time, for which revenue is recognized over the life of the fund as services are provided.
Asset Management Fees
—The Company receives a one-time asset management fee upon closing of each investment made by certain managed private funds. Prior to the adoption of the revenue standard, a portion of asset management fees was recognized upon closing of an investment, with remaining fees deferred and recognized over the estimated life of each investment. Under the new guidance, the Company determined that the underlying service of managing the investments of the funds consists of a series of distinct services satisfied over time, for which revenue should be recognized ratably over the estimated life of each investment. As a result of the change in revenue recognition under the new standard, the Company recorded a cumulative impact of approximately
$1.6 million
as a decrease to retained earnings and an increase to deferred income liability on January 1, 2018. The impact of the change in revenue recognition for the
three months ended March 31, 2018
was an increase to asset management fees of
$0.2 million
.
Acquisition and Disposition Fees
—The Company receives fees related to acquisition and disposition of investments by certain managed non-traded REITs. The Company determined that there is no change to revenue recognition as acquisition and disposition fees are earned at a point in time upon closing of the respective acquisition or disposition of underlying investments.
Incentive Fees
—The Company may earn incentive fees from its managed private funds, traded and non-traded REITs. Incentive fees are determined based on the performance of the investment vehicles subject to the achievement of certain return hurdles.
Incentive fees that take the form of a contractual arrangement with the investment vehicle and do not represent an allocation of returns among equity holders of the investment vehicle (or “contractual incentive fees”) are within the scope of the new revenue standard. The Company currently recognizes contractual incentive fees when it is fixed or determinable and related contingencies have been resolved, which is generally at the end of the incentive measurement period of the respective investment vehicles. Under the new revenue guidance, contractual incentive fees are a form of variable consideration and will be recognized when it is probable that a significant reversal of the cumulative revenue recognized will not occur, which may result in earlier recognition of revenue relative to the Company’s existing policy. There was no cumulative impact as of January 1, 2018.
Incentive fees that take the form of a disproportionate allocation of returns to the Company’s capital account within the equity structure of the investment vehicle (or “carried interests”) are outside the scope of the new revenue standard.
Carried interests are financial instruments and accounted for as earnings from the Company’s ownership interests in the investment vehicles under the equity method. As carried interest represents income from equity method investments, it is presented, along with other proportionate allocation of returns based on the Company’s ownership interests in the investment vehicles, in earnings from unconsolidated investment ventures on the statement of operations. Adoption of the new standard did not have an impact to the Company's recognition of carried interests.
Derecognition and Partial Sales of Nonfinancial Assets
—In February 2017, the FASB issued ASU No. 2017-05,
Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets
, which clarifies the scope and application of Accounting Standards Codification ("ASC") 610-20,
Other Income
—
Gains and Losses from Derecognition of Nonfinancial Assets
, and defines in substance nonfinancial assets. ASC 610-20 applies to derecognition of all nonfinancial assets which are not contracts with customers or revenue transactions under ASC 606,
Revenue from Contracts with Customers
. Derecognition of a business is governed by ASC 810,
Consolidation
, while derecognition of financial assets, including equity method investments, even if the investee holds predominantly nonfinancial assets, is governed by ASC 860,
Transfers and Servicing
. The ASU also aligns the accounting for partial sales of nonfinancial assets to be more consistent with accounting for sale of a business. Specifically, in a partial sale to a noncustomer, when a noncontrolling interest is received or retained, the latter is considered a noncash consideration and measured at fair value in accordance with ASC 606, which would result in full gain or loss recognized upon sale. This ASU removes guidance on partial exchanges of nonfinancial assets in ASC 845,
Nonmonetary Transactions
, and eliminates the real estate sales guidance in ASC 360-20,
Property, Plant and Equipment
—
Real Estate Sales
.
The Company adopted this standard on January 1, 2018, concurrent with the adoption of the new revenue standard, using the modified retrospective approach. Under the new standard, if the Company sells a partial interest in its real estate assets to noncustomers or contributes real estate assets to unconsolidated ventures, and the Company retains a noncontrolling interest in the asset, such transactions could result in a larger gain on sale. The adoption of this standard did not have an impact on the Company's financial statements. There were no sales of partial interests in real estate assets in the
three months ended March 31, 2018
or for the year ended December 31, 2017.
Financial Instruments
—In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which affects accounting for investments in equity securities, financial liabilities under the fair value option, as well as presentation and disclosures, but does not affect accounting for investments in debt securities and loans
.
Investments in equity securities, other than equity method investments, will be measured at fair value through earnings, except for equity securities without readily determinable fair values which may be measured at cost less impairment and adjusted for observable price changes, unless these equity securities qualify for the NAV practical expedient. This provision eliminates cost method accounting and recognition of unrealized holding gains or losses on equity investments in other comprehensive income. For financial liabilities under the fair value option, changes in fair value resulting from the Company's own instrument-specific credit risk will be recorded separately in other comprehensive income. Fair value disclosures of financial instruments measured at amortized cost will be based on exit price and corresponding disclosures of valuation methodology and significant inputs will no longer be required. In February 2018, the FASB issued ASU No. 2018-03,
Technical Corrections and Improvements to Financial Instruments, Recognition and Measurement of Financial Assets and Financial Liabilities,
which provided several clarifications and amendments to the standard. These include specifying that for equity instruments without readily determinable fair values for which the measurement alternative is applied: (i) adjustments made when an observable transaction occurs for a similar security are intended to reflect the fair value as of the observable transaction date, not as of current reporting date; (ii) the measurement alternative may be discontinued upon an irrevocable election to change to a fair value measurement approach under fair value guidance, which would apply to all identical and similar investments of the same issuer; and (iii) the prospective transition approach for equity securities without readily determinable fair values is applicable only when the measurement alternative is applied. ASU No. 2016-01 and ASU No. 2018-03 are to be applied retrospectively with cumulative effect as of the beginning of the first reporting period adopted recognized in retained earnings, except for provisions related to equity investments without readily determinable fair values and exit price fair value disclosures for financial instruments measured at amortized cost, which are to be applied prospectively.
The Company adopted ASU No. 2016-01 and ASU No. 2018-03 on January 1, 2018, and recorded a cumulative adjustment to increase retained earnings by approximately
$0.6 million
. This includes
$0.2 million
of unrealized gains on available for sale equity securities held by an equity method investee that was reclassified from accumulated other comprehensive income. In connection with the adoption, the Company elected the NAV practical expedient to measure its previous cost method investments in non-traded REITs and limited partnership interest in a third party private fund based on their respective NAV per share. The new standard does not affect equity securities held by the Company's consolidated fund for which the Company has retained investment company accounting applied by the fund, and limited partnership interests in third party private funds for which the Company has elected the fair value option, as in both instances, unrealized fair value gains and losses are currently recorded in earnings. The Company's remaining cost
method investments do not have readily determinable fair values. To the extent the Company becomes aware of observable price changes in the future, the Company will adjust the carrying value of these investments through earnings.
Cash Flow Classifications
—In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, which is intended to reduce diversity in practice in certain classifications on the statement of cash flows. This guidance addresses eight types of cash flows, which includes clarifying how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows, as well as requiring an accounting policy election for classification of distributions received from equity method investees using either the cumulative earnings or nature of distributions approach, among others. The Company adopted this guidance on January 1, 2018 on a retrospective basis and made an accounting policy election for classification of distributions from its equity method investees using the cumulative earnings approach, which is largely consistent with its previous accounting policy. The adoption of this standard did not have a material effect on the presentation of the Company's statement of cash flows.
Restricted Cash
—In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash
, which requires that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents with restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the ASU requires a reconciliation between the totals in the statement of cash flows and the related captions on the balance sheet. The new guidance also requires disclosure of the nature of restricted cash and restricted cash equivalents, similar to existing requirements under Regulation S-X; however, it does not define restricted cash and restricted cash equivalents. The Company adopted ASU 2016-18 on January 1, 2018. The required retrospective application of this new standard resulted in changes to the previously reported statement of cash flows as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
(In thousands)
|
|
As Previously Reported
|
|
After Adoption of ASU 2016-18
|
Net cash provided by operating activities
|
|
22,920
|
|
|
24,120
|
|
Net cash provided by investing activities
|
|
493,865
|
|
|
693,786
|
|
Net cash used in financing activities
|
|
(246,683
|
)
|
|
(253,511
|
)
|
The increase in net cash provided by investing activities is primarily due to restricted cash assumed in the Merger and the CPI restructuring which was previously reported as noncash investing activities.
Future Application of Accounting Standards
Leases
—In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which amends existing lease accounting standards, primarily requiring lessees to recognize most leases on balance sheet, as well as making targeted changes to lessor accounting. ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The new leases standard requires adoption using a modified retrospective approach for all leases existing at, or entered into after, the date of initial application. Full retrospective application is prohibited. In March 2018, the FASB approved an amendment to the standard, providing (i) optional transitional relief to apply the effective date of the new lease standard as the date of initial application in transition instead of the earliest comparative period presented; as well as (ii) certain practical expedients which include not segregating non-lease components from the related lease components but to account for those components as a single lease component by class of underlying assets.
The Company will adopt the new lease standard on its effective date of January 1, 2019 and will adopt the package of practical expedients under the guidance, which exempts the Company from having to reassess whether any expired or expiring contracts contain leases, revisit lease classification for any expired or expiring leases and reassess initial direct costs for any existing leases.
When the amendment approved by the FASB in March 2018 is issued, the Company expects to adopt the transition option, in which case, the cumulative effect adjustment to the opening balance of retained earnings will be recognized as of the effective date (i.e., on January 1, 2019) rather than as of the earliest period presented, and similarly, new disclosures under the standard will be made for periods beginning January 1, 2019, and not required for prior comparative periods. In addition, the Company expects to make an accounting policy election to treat lease and related non-lease components in a contract as a single performance obligation to the extent that the timing and pattern of transfer are the same for the lease and non-lease components and the combined single lease component is classified as an operating lease.
As the new lease standard requires congruous accounting treatment between lessor and lessee in a sale leaseback transaction, if the seller/lessee does not achieve sale accounting, it would be considered a financing transaction to the Company, as the buyer/lessor. As lessee, the Company will recognize a right of use asset and corresponding liability for future obligations under its leasing arrangements, such as ground leases and office leases. As of December 31, 2017, the Company had future contractual lease payment obligations of
$74.2 million
on office leases and
$172.2 million
on ground leases, excluding leases related to net lease properties contributed to Colony NorthStar Credit on January 31, 2018. Additionally, under the new lease standard, only incremental initial direct costs incurred in the execution of a lease can be capitalized by the lessor and lessee. The Company continues to evaluate the impact of this guidance on its financial statements.
Credit Losses
—In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments
—
Credit Losses
, which amends the credit impairment model for financial instruments. The existing incurred loss model will be replaced with a lifetime current expected credit loss ("CECL") model for financial instruments carried at amortized cost and off-balance sheet credit exposures, such as loans, loan commitments, held-to-maturity ("HTM") debt securities, financial guarantees, net investment in leases, reinsurance and trade receivables, which will generally result in earlier recognition of allowance for losses. For AFS debt securities, unrealized credit losses will be recognized as allowances rather than reductions in amortized cost basis and elimination of the other than temporary impairment ("OTTI") concept will result in more frequent estimation of credit losses. The accounting model for purchased credit-impaired loans and debt securities will be simplified, including elimination of some of the asymmetrical treatment between credit losses and credit recoveries, to be consistent with the CECL model for originated and purchased non-credit-impaired assets. The existing model for beneficial interests that are not of high credit quality will be amended to conform to the new impairment models for HTM and AFS debt securities. Expanded disclosures on credit risk include credit quality indicators by vintage for financing receivables and net investment in leases. Transition will generally be on a modified retrospective basis, with prospective application for other than temporarily impaired debt securities and purchased credit-impaired assets. ASU No. 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company expects that recognition of credit losses will generally be accelerated under the CECL model. Evaluation of the impact of this new guidance is ongoing.
Hedge Accounting
—In August 2017, the FASB issued ASU No. 2017-12,
Targeted Improvements to Accounting for Hedging Activities
, which simplifies and expands the application of hedge accounting. This standard amends hedge accounting recognition and presentation, including eliminating the requirement to separately measure and present hedge ineffectiveness as well as presenting the entire fair value change of a hedging instrument in the same income statement line as the hedged item. The new guidance also provides alternatives for applying hedge accounting to additional hedging strategies, and easing requirements for effectiveness testing and hedging documentation, although the "highly effective" threshold for a qualifying hedging relationship has not changed. Revised disclosures include tabular disclosures that focus on the effect of hedge accounting by income statement line item. Transition will generally be on a modified retrospective basis applied to existing hedging relationships as of date of adoption, with prospective application for income statement presentation and disclosure, and specific transition elections are available to modify existing hedge documentation. ASU 2017-12 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted, with adjustments to be reflected as of the beginning of the fiscal year of adoption if early adopted in an interim period.
The Company plans to adopt the standard on its effective date. Upon adoption, as it relates to the Company’s cash flow and net investment hedges, the Company will record the entire change in fair value of the hedging instrument (other than amounts excluded from assessment of hedge effectiveness for net investment hedges) in other comprehensive income and there will be no hedge ineffectiveness recorded in earnings. Additionally, subsequent to initial quantitative hedge assessment, the Company may elect to perform effectiveness testing qualitatively so long as the Company can reasonably support an expectation that the hedge is highly effective now and in subsequent periods. As the standard allows more flexibility in hedging interest rate risk in cash flow hedges beyond a specified benchmark rate, the Company may be able to designate in the future other contractually specified variable interest rate as the hedged risk, which if effective, could decrease fluctuations in earnings. The Company continues to evaluate the impact of this new guidance but at this time, does not expect the adoption of this standard to have a material effect on its financial condition or results of operations.
3
. Business Combinations
Merger with NSAM and NRF
On the Closing Date, the Merger of NSAM, Colony and NRF was completed in an all-stock exchange to create Colony NorthStar.
The Merger was accomplished through a series of transactions. On the Closing Date, NSAM merged with and into Colony NorthStar in order to redomesticate NSAM as a Maryland corporation, followed by a series of internal reorganization transactions with subsidiaries of NRF resulting in NRF becoming a subsidiary of Colony NorthStar, and the merger of Colony into Colony NorthStar, with Colony NorthStar surviving as the combined company.
Upon the closing of the Merger, NSAM outstanding common stock was converted into Colony NorthStar common stock, and the outstanding common stock and preferred stock of NRF and Colony were converted into the right to receive shares of common stock and preferred stock of Colony NorthStar at pre-determined exchange ratios.
The specific exchanges of common stock and preferred stock as a result of the Merger were as follows:
|
|
•
|
Each share of NSAM common stock and performance common stock issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into
one
share of Colony NorthStar class A common stock and performance common stock, respectively;
|
|
|
•
|
Each share of class A and class B common stock of Colony issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into the right to receive
1.4663
shares of Colony NorthStar class A and class B common stock for each share of Colony's class A and class B common stock;
|
|
|
•
|
Each share of common stock of NRF issued and outstanding prior to the effective time of the Merger was canceled and converted into the right to receive
1.0996
shares of Colony NorthStar class A common stock for each share of NRF common stock;
|
|
|
•
|
Each share of each series of the preferred stock of Colony and of NRF issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into the right to receive
one
share of a corresponding series of Colony NorthStar preferred stock with substantially identical preferences, conversion and other rights, voting powers, restrictions, limitations as to dividend, qualification and terms and conditions of redemption; and
|
|
|
•
|
Concurrently, the OP issued OP Units to equal the number of OP membership units outstanding on the day prior to the closing of the Merger multiplied by the exchange ratio of
1.4663
.
|
Upon consummation of the Merger, the former stockholders of Colony, NSAM and NRF owned, or had the right to own, approximately
33.25%
,
32.85%
and
33.90%
, respectively, of Colony NorthStar, on a fully diluted basis, excluding the effect of certain equity-based awards issued in 2017 in connection with the Merger.
The Merger was accounted for as a reverse acquisition, with NSAM as the legal acquirer for certain legal and regulatory matters and Colony as the accounting acquirer for purposes of the financial information set forth herein. See Note 2 for further discussion on the accounting treatment of the Merger.
Merger Consideration
As the Merger was accounted for as a reverse acquisition, the fair value of the consideration transferred in common stock was measured based upon the number of shares of common stock that Colony, as the accounting acquirer, would theoretically have issued to the shareholders of NSAM and NRF to achieve the same ratio of ownership in Colony NorthStar upon completion of the Merger, multiplied by the closing price of Colony class A common stock of
$21.52
on the Closing Date. As a result, the implied shares of Colony common stock issued in consideration was computed as the number of outstanding shares of NSAM and NRF common stock prior to the Closing Date divided by the exchange ratios of
1.4663
and
1.3335
, respectively.
Substantially all NSAM and NRF equity awards outstanding on the Closing Date vested upon consummation of the Merger. As Colony NorthStar issued its common stock upon consummation of the Merger and settlement of these equity awards relate to pre-Merger services, these equity awards were included in the outstanding shares of NSAM and NRF common stock used to determine the merger consideration.
NSAM and NRF equity awards outstanding on the Closing Date that did not vest upon consummation of the Merger were assumed by Colony NorthStar through the conversion of such equity awards into comparable Colony NorthStar equity awards with substantially the same vesting terms pre-Merger. The portion of the replacement awards attributable to
pre-Merger services was deemed part of the merger consideration, while the portion attributable to post-Merger services is recognized prospectively as compensation expense of Colony NorthStar in the post-Merger period.
The Colony NorthStar preferred stock issued as merger consideration upon the closing of the Merger to the holders of NRF preferred stock was on a
one
-for-one basis.
The Company assumed certain liabilities of NSAM and NRF which arose as a result of the Merger and were settled shortly after the Closing Date. These amounts included approximately
$226.1 million
which was paid to former NSAM stockholders, representing a one-time special dividend, and approximately
$78.9 million
in payroll taxes representing shares that were canceled and remitted to taxing authorities on behalf of employees whose equity-based compensation was accelerated and fully vested on the Closing Date. Cash and restricted cash assumed of
$437.4 million
is presented net of these payments as an investing cash inflow in the consolidated statement of cash flows.
Fair value of the merger consideration was determined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except price per share)
|
|
NSAM
|
|
NRF
|
|
Total
|
Outstanding shares of common stock prior to closing of the Merger
|
|
190,202
|
|
|
183,147
|
|
|
|
Replacement equity-based awards attributable to pre-combination services
(i)
|
|
300
|
|
|
150
|
|
|
|
|
|
190,502
|
|
|
183,297
|
|
|
|
Exchange ratio
(ii)
|
|
1.4663
|
|
|
1.3335
|
|
|
|
Implied shares of Colony common stock issued in consideration
|
|
129,920
|
|
|
137,456
|
|
|
267,376
|
|
Price per share of Colony class A common stock
|
|
$
|
21.52
|
|
|
$
|
21.52
|
|
|
$
|
21.52
|
|
Fair value of implied shares of Colony common stock issued in consideration
|
|
$
|
2,795,890
|
|
|
$
|
2,958,039
|
|
|
$
|
5,753,929
|
|
Fair value of Colony NorthStar preferred stock issued
(iii)
|
|
—
|
|
|
1,010,320
|
|
|
1,010,320
|
|
Fair value of NRF stock owned by NSAM
(iv)
|
|
(43,795
|
)
|
|
—
|
|
|
(43,795
|
)
|
Total merger consideration
|
|
$
|
2,752,095
|
|
|
$
|
3,968,359
|
|
|
$
|
6,720,454
|
|
__________
|
|
(i)
|
Represents the portion of non-employee restricted stock unit awards that did not vest upon consummation of the Merger and pertains to services rendered prior to the Merger.
|
|
|
(ii)
|
Represents (a) the pre-determined exchange ratio of one share of Colony common stock for
1.4663
shares of Colony NorthStar common stock; and (b) the derived exchange ratio of one share of Colony common stock for
1.3335
shares of NRF common stock based on the pre-determined exchange ratio of one NRF share of common stock for
1.0996
shares of Colony NorthStar common stock.
|
|
|
(iii)
|
Fair value of Colony NorthStar preferred stock issued was measured based on the shares of NRF preferred stock outstanding at the Closing Date and the closing traded price of the respective series of NRF preferred stock on the Closing Date, including accrued dividends, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except price per share)
|
|
Number of Shares Outstanding
|
|
Price Per Share
|
|
Fair Value
|
NRF preferred stock
|
|
|
|
|
|
|
Series A 8.75%
|
|
2,467
|
|
|
$
|
25.61
|
|
|
$
|
63,182
|
|
Series B 8.25%
|
|
13,999
|
|
|
25.15
|
|
|
352,004
|
|
Series C 8.875%
|
|
5,000
|
|
|
25.80
|
|
|
128,995
|
|
Series D 8.50%
|
|
8,000
|
|
|
25.82
|
|
|
206,597
|
|
Series E 8.75%
|
|
10,000
|
|
|
25.95
|
|
|
259,542
|
|
Fair value of Colony NorthStar preferred stock issued
|
|
39,466
|
|
|
|
|
$
|
1,010,320
|
|
|
|
(iv)
|
Represents
2.7 million
shares of NRF common stock owned by NSAM prior to the Merger and canceled upon consummation of the Merger, valued at the closing price of NRF common stock of
$16.13
on the Closing Date.
|
The following table presents the final allocation of the merger consideration to assets acquired, liabilities assumed and noncontrolling interests of NSAM and NRF based on their respective fair values as of the Closing Date. The resulting goodwill represents the value expected from the economies of scale and synergies created through combining the operations of the merged entities, and is assigned to the investment management segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final Amounts at December 31, 2017
|
(In thousands)
|
|
NSAM
|
|
NRF
|
|
Total
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
152,858
|
|
|
$
|
107,751
|
|
|
$
|
260,609
|
|
Restricted cash
|
|
18,052
|
|
|
158,762
|
|
|
176,814
|
|
Real estate
|
|
—
|
|
|
9,874,406
|
|
|
9,874,406
|
|
Loans receivable
|
|
28,485
|
|
|
331,056
|
|
|
359,541
|
|
Investments in unconsolidated ventures
|
|
76,671
|
|
|
544,111
|
|
|
620,782
|
|
Securities
|
|
3,065
|
|
|
427,560
|
|
|
430,625
|
|
Identifiable intangible assets
|
|
661,556
|
|
|
352,551
|
|
|
1,014,107
|
|
Management agreement between NSAM and NRF
|
|
1,514,085
|
|
|
—
|
|
|
1,514,085
|
|
Assets held for sale
|
|
—
|
|
|
2,096,671
|
|
|
2,096,671
|
|
Other assets
|
|
93,455
|
|
|
681,003
|
|
|
774,458
|
|
Total assets
|
|
2,548,227
|
|
|
14,573,871
|
|
|
17,122,098
|
|
Liabilities
|
|
|
|
|
|
|
Debt
|
|
—
|
|
|
6,723,222
|
|
|
6,723,222
|
|
Intangible liabilities
|
|
—
|
|
|
213,218
|
|
|
213,218
|
|
Management agreement between NSAM and NRF
|
|
—
|
|
|
1,514,085
|
|
|
1,514,085
|
|
Liabilities related to assets held for sale
|
|
—
|
|
|
1,281,406
|
|
|
1,281,406
|
|
Tax liabilities
|
|
169,387
|
|
|
60,446
|
|
|
229,833
|
|
Accrued and other liabilities
|
|
979,969
|
|
|
307,450
|
|
|
1,287,419
|
|
Total liabilities
|
|
1,149,356
|
|
|
10,099,827
|
|
|
11,249,183
|
|
Redeemable noncontrolling interests
|
|
78,843
|
|
|
—
|
|
|
78,843
|
|
Noncontrolling interests—investment entities
|
|
—
|
|
|
505,685
|
|
|
505,685
|
|
Noncontrolling interests—Operating Company
|
|
8,162
|
|
|
—
|
|
|
8,162
|
|
Fair value of net assets acquired
|
|
$
|
1,311,866
|
|
|
$
|
3,968,359
|
|
|
$
|
5,280,225
|
|
|
|
|
|
|
|
|
Merger consideration
|
|
2,752,095
|
|
|
3,968,359
|
|
|
6,720,454
|
|
Goodwill
|
|
$
|
1,440,229
|
|
|
$
|
—
|
|
|
$
|
1,440,229
|
|
The Merger effectively resulted in the settlement of the pre-merger management agreement between NSAM and NRF. The terms of the management agreement were determined to be off-market when compared to the terms of similar management agreements of other externally managed mortgage and equity REITs. The off-market component was valued at
$1.5 billion
based on a discounted cash flow analysis using a discount rate of
10%
, and recorded as an intangible asset attributed to NSAM and a corresponding intangible liability attributed to NRF, in each case as of the Closing Date. Upon settlement of the management agreement, the intangible asset and the corresponding intangible liability were eliminated. No net gain or loss was recognized by Colony NorthStar from the settlement.
Certain deferred tax liabilities were recognized in connection with the Merger, related primarily to NSAM's investment management contract intangible assets and basis differences in NRF's real estate assets in the United Kingdom arising from recording those assets at fair value on the Closing Date.
Fair value of other assets acquired, liabilities assumed and noncontrolling interests were measured as follows:
Real Estate and Related Intangibles
—Fair value is based on the income approach which includes a direct capitalization method, applying overall capitalization rates ranging between
4.4%
and
12.5%
. For real estate held for sale, fair value was determined based on contracted sale price or a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangible assets such as land, building and leaseholds, tenant and land improvements as well as identified intangible assets and liabilities such as above- and below-market leases, below-market ground lease obligations and in-place lease value. Useful lives of the intangibles acquired range from
6
to
90
years for ground lease obligations and
1
to
17
years for all other real estate related intangibles.
Loans Receivable
—Fair value is determined by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment; or based on discounted cash flow projections of principal and interest expected to be collected, which include consideration of borrower or sponsor credit, as well as operating results of the underlying collateral. For certain loans receivable considered to be impaired, their carrying value approximated fair value.
Investments in Unconsolidated Ventures
—Fair value is based on timing and amount of expected future cash flows for income as well as realization events of the underlying assets of the investees, and for certain investments in funds, a proportionate share of its most recent net asset value.
Securities
—Fair value is based on quotations from brokers or financial institutions that act as underwriters of the debt securities, third-party pricing service or discounted cash flows depending on the type of debt securities. Fair value of NorthStar Realty Europe Corp ("NRE") common stock is based on the closing stock price on the Closing Date.
Investment Management Related Intangible Assets
—These consist primarily of management contracts, customer relationships, trade names and the broker-dealer license, including those related to an
84%
interest acquired by NSAM in January 2016 in Townsend, which provides real estate investment management and advisory services. The fair value of management contracts represents the discounted excess earnings attributable to the future management fee income from in-place management contracts, with discount rates ranging between
8%
and
10%
. The management contracts have useful lives ranging from
2
years to
18
years.
The fair value of customer relationships represents the potential fee income from repeat customers through future sponsored investment vehicles, with the useful lives of such vehicles ranging from
20
to
30
years. The trade names of NSAM and Townsend were valued as the discounted savings of royalty fees by applying a royalty rate of
1.5%
and
2%
, respectively, against expected fee income, and have useful lives of
20
years and
30
years, respectively. The fair value of NSAM's broker-dealer license represents the estimated cost of obtaining a license. On December 29, 2017, the Company sold its 84% interest in Townsend.
Debt
—Fair value of exchangeable notes was determined based on unadjusted quoted prices in a non-active market. Fair value of mortgage and other notes payable was estimated by reviewing rates currently available with similar terms and remaining maturities. Fair value of securitization bonds payable was based on quotations from brokers or financial institutions that act as underwriters of the securitized bonds. Fair value of junior subordinated debt was based on unadjusted quotations from a third party valuation firm, with such quotes derived using a combination of internal valuation models, comparable trades in non-active markets and other market data.
Noncontrolling Interests
—Fair value of noncontrolling interests in investment entities was estimated as their share of fair values of the net assets of the underlying investment entities, including any incentive distributions. The fair value of noncontrolling interests in Operating Company was determined based upon the closing price of Colony class A common stock multiplied by the number of OP Units assumed in the Merger, after applying the exchange ratio.
Merger-Related Costs
Merger-related costs include transactions costs consisting primarily of professional fees for legal, financial advisory, accounting and consulting services, and fees incurred on a bridge facility commitment that was terminated on the Closing Date. Merger-related costs also include costs incurred to transition and integrate the operations of the combined entity, including compensation costs and various administrative costs, such as system integration, lease termination and professional fees paid to third party advisors and consultants. Merger-related costs are expensed as incurred. Costs expensed by NSAM and NRF prior to the Closing Date are excluded from the Company's results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Transaction costs
|
|
|
|
|
Fees to investment bankers contingent upon consummation of the Merger
|
|
$
|
—
|
|
|
$
|
66,800
|
|
Other fees
|
|
716
|
|
|
16,828
|
|
|
|
716
|
|
|
83,628
|
|
Compensation expense
|
|
|
|
|
Equity-based compensation for replacement awards to NSAM executives
|
|
3,297
|
|
|
26,049
|
|
Severance and other employee transition
|
|
2,685
|
|
|
15,498
|
|
|
|
5,982
|
|
|
41,547
|
|
Administrative expense
|
|
2,138
|
|
|
3,968
|
|
Total Merger-related costs
|
|
$
|
8,836
|
|
|
$
|
129,143
|
|
Restructuring of Real Estate Loans into Equity Ownership
In the normal course of business, the Company may foreclose on the underlying asset in settlement of its loan receivable or otherwise undertake various restructuring measures in connection with its investments.
CPI Group
On January 25, 2017, the Company and its joint venture partners, through a consolidated investment venture of the Company, acquired a controlling equity interest in a defaulted borrower, a real estate investment group in Europe ("CPI") in connection with a restructuring of the CPI group. Certain entities within the CPI group were in receivership proceedings at the time of the restructuring. The Company acquired CPI's real estate portfolio, consisting of hotels, offices and mixed-use properties, and assumed the underlying mortgage debt, some of which were in payment default, including maturity default. Certain CPI employees responsible for asset and property management became employees of the Company. As a result of the acquisition, the Company's outstanding loans receivable to CPI were deemed to be effectively settled at their carrying value and formed part of the consideration transferred.
The following table summarizes the consideration and allocation to assets acquired and liabilities assumed.
|
|
|
|
|
|
(In thousands)
|
|
Final Amounts at December 31, 2017
|
Consideration
|
|
|
Carrying value of loans receivable outstanding at the time of restructuring
|
|
$
|
182,644
|
|
Cash
|
|
49,537
|
|
Total consideration
|
|
$
|
232,181
|
|
Identifiable assets acquired and liabilities assumed
|
|
|
Cash
|
|
$
|
303
|
|
Real estate
|
|
543,649
|
|
Real estate held for sale
|
|
21,605
|
|
Lease intangibles and other assets
|
|
40,285
|
|
Debt
|
|
(277,590
|
)
|
Tax liabilities
|
|
(32,078
|
)
|
Lease intangibles and other liabilities
|
|
(61,205
|
)
|
Liabilities related to assets held for sale
|
|
(2,788
|
)
|
Fair value of net assets acquired
|
|
$
|
232,181
|
|
Fair value of assets acquired and liabilities assumed were measured as follows:
Real Estate and Related Intangibles
—Fair value of real estate is based upon a discounted cash flow analysis with a weighted average discount rate of
6.6%
or direct capitalization analysis with weighted average capitalization rate of
13.5%
. For real estate held for sale, fair value was determined based upon a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangible assets of land, building and tenant and site improvements and identified intangibles, such as above- and below-market leases and in-place lease values.
Debt
—Fair value of debt is estimated by discounting expected future cash outlays at interest rates currently available for instruments with similar terms and remaining maturities, applying discount rates ranging between
1.25%
and
3.6%
, with such debt fair values not exceeding the fair value of their underlying collateral, or estimated based upon expected payoff amounts.
THL Hotel Portfolio
In May 2013, the Company and certain investment vehicles managed by the Company participated in the refinancing of a limited service hospitality portfolio, primarily located across the Southwest and Midwest U.S. (the "THL Hotel Portfolio"), through the origination of a junior and senior mezzanine loan. On July 1, 2017, the Company and certain investment vehicles managed by the Company took control of the THL Hotel Portfolio of
148
limited service hotels through a consensual foreclosure following a maturity default by the borrower on the Company's outstanding junior mezzanine loan. Through the consensual foreclosure, the Company assumed the borrower's in-place hotel management contracts with third party operators, which were determined to be at market, the borrower's in-place franchise obligations, primarily with Marriott, as well as the borrower's outstanding senior mortgage debt and senior mezzanine debt.
The consideration for the consensual foreclosure consisted of the following:
|
|
•
|
Carrying value of the Company’s junior mezzanine loan to the borrower which is considered to be effectively settled upon the consensual foreclosure;
|
|
|
•
|
Cash to pay down principal and accrued interest on the borrower’s senior mortgage and senior mezzanine debt to achieve a compliant debt yield, and payment of an extension fee to exercise an extension option on the senior mortgage debt; and
|
|
|
•
|
In consideration of the former preferred equity holder of the borrower providing certain releases, waivers and covenants to and in favor of the Company and certain investment vehicles managed by the Company in executing the consensual foreclosure, the former preferred equity holder is entitled to an amount up to
$13.0 million
based on the performance of the THL Hotel Portfolio, subject to meeting certain repayment and return thresholds to the Company (and certain investment vehicles managed by the Company).
|
The following table summarizes the consideration and preliminary allocation to assets acquired and liabilities assumed. The estimated fair values and preliminary purchase price allocation were based on information available at the time of acquisition and the Company continues to evaluate the underlying inputs and assumptions. Accordingly, these preliminary estimates are subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of acquisition. During the
first
quarter of 2018, adjustments were made to the allocation of values between lease intangible assets, lease intangible liabilities and land.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
As Reported At December 31, 2017
|
|
Measurement Period Adjustments
|
|
As Reported
At March 31, 2018
|
Consideration
|
|
|
|
|
|
|
Carrying value of the Company's junior mezzanine loan receivable at the time of foreclosure
|
|
$
|
310,932
|
|
|
$
|
—
|
|
|
$
|
310,932
|
|
Cash
|
|
43,643
|
|
|
—
|
|
|
43,643
|
|
Contingent consideration (Note 14)
|
|
6,771
|
|
|
—
|
|
|
6,771
|
|
Total consideration
|
|
$
|
361,346
|
|
|
$
|
—
|
|
|
$
|
361,346
|
|
Identifiable assets acquired and liabilities assumed
|
|
|
|
|
|
|
Cash
|
|
$
|
16,188
|
|
|
$
|
—
|
|
|
$
|
16,188
|
|
Real estate
|
|
1,193,205
|
|
|
(130
|
)
|
|
1,193,075
|
|
Real estate held for sale
|
|
68,625
|
|
|
—
|
|
|
68,625
|
|
Intangible and other assets
|
|
34,913
|
|
|
3,062
|
|
|
37,975
|
|
Debt
|
|
(907,867
|
)
|
|
—
|
|
|
(907,867
|
)
|
Intangible and other liabilities
|
|
(43,718
|
)
|
|
(2,932
|
)
|
|
(46,650
|
)
|
Fair value of net assets acquired
|
|
$
|
361,346
|
|
|
$
|
—
|
|
|
$
|
361,346
|
|
Fair value of assets acquired and liabilities assumed were estimated as follows:
Real Estate and Related Intangibles
—Fair value of real estate was based on a combination of the cost, income and market approaches which applies capitalization rates between
7.0%
and
11.5%
(weighted average rate of
11.1%
) as well as discount rates between
8.3%
and
13.0%
(weighted average rate of
9.5%
), and also considers future capital expenditure needs of the hotels. For real estate held for sale, fair value was determined based on a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangible assets of land, building, site improvements and furniture, fixtures and equipment as well as identified intangibles for below-market ground lease obligations.
Debt
—The assumed senior mortgage and senior mezzanine debt had carrying values that approximated fair values based on current market rates and recent rates on the Company's refinancing of its other hotel portfolios.
4
. Colony NorthStar Credit
The contribution of the CLNS Contributed Portfolio (as described in Note
1
) to Colony NorthStar Credit and the concurrent all-stock merger of Colony NorthStar Credit with NorthStar Income I and NorthStar Income II closed on January 31, 2018. Colony NorthStar Credit's class A common stock began trading on the New York Stock Exchange ("NYSE") on February 1, 2018 under the symbol "CLNC."
Upon closing of the Combination, the Company and its affiliates, NorthStar Income I stockholders and NorthStar Income II stockholders each owned approximately
37%
,
32%
and
31%
, respectively, of Colony NorthStar Credit on a fully diluted basis.
The Company, through certain of its subsidiaries, received
44,399,444
shares of Colony NorthStar Credit's class B-3 common stock and
3,075,623
common membership units in Colony NorthStar Credit's operating company (the “CLNC OP Units”) in exchange for its contribution of the CLNS Contributed Portfolio to Colony NorthStar Credit.
The CLNS Contributed Portfolio comprised the Company's interests in certain commercial real estate loans, net lease properties and limited partnership interests in third party sponsored funds, which represented a select portfolio of U.S. investments within the Company’s other equity and debt segment that were transferable assets consistent with Colony NorthStar Credit's strategy.
Each share of Colony NorthStar Credit's class B-3 common stock will automatically convert into Colony NorthStar Credit's class A common stock on a
one
for
one
basis upon close of trading on February 1, 2019. The CLNC OP Units are redeemable for cash or Colony NorthStar Credit’s Class A common stock on a
one
-for-
one
basis, in the sole discretion of Colony NorthStar Credit. Subject to certain limited exceptions, the Company has agreed not to make any transfers of the CLNC OP Units to non-affiliates until the
one
-year anniversary of the closing of the Combination, unless such transfer is approved by a majority of Colony NorthStar Credit’s board of directors, including a majority of its independent directors.
In connection with the merger of NorthStar Income I and NorthStar Income II with and into Colony NorthStar Credit, their respective stockholders received shares of Colony NorthStar Credit's class A common stock based on pre-determined exchange ratios.
As contemplated in the combination agreement, a certain loan receivable previously held by NorthStar Income I in the original principal amount of
$150.2 million
was not transferred to Colony NorthStar Credit (the “NorthStar I Excluded Asset”). Upon closing of the Combination, the Company acquired a
$65 million
senior participation interest in the NorthStar I Excluded Asset at par, and the remaining junior participation interest in the NorthStar I Excluded Asset (the "NorthStar I Retained Asset") was transferred to a liquidating trust in exchange for beneficial interests in the liquidating trust, which was subsequently distributed pro rata to NorthStar Income I stockholders.
As a result of the Combination, the Company's management contracts with NorthStar Income I and NorthStar Income II ceased to exist and the related management contract intangible assets totaling
$139.0 million
were written off (Note
14
). Concurrent with the closing of the Combination, a wholly-owned subsidiary of the Company entered into a management agreement with Colony NorthStar Credit.
Upon closing of the Combination, the Company's contribution of the CLNS Contributed Portfolio to Colony NorthStar Credit, and the merger of Colony NorthStar Credit with Northstar Income I and NorthStar Income II, resulted in a deconsolidation of the CLNS Investment Entities. The following table presents the assets, liabilities and noncontrolling interests of the CLNS Investment Entities that were deconsolidated on January 31, 2018:
|
|
|
|
|
|
(In thousands)
|
|
January 31, 2018
|
Assets
|
|
|
Cash and cash equivalents
|
|
$
|
99,883
|
|
Restricted cash
|
|
41,270
|
|
Real estate
|
|
219,748
|
|
Loans receivable
|
|
1,287,994
|
|
Investments in unconsolidated ventures
|
|
208,738
|
|
Deferred leasing costs and intangible assets
|
|
10,831
|
|
Other assets
|
|
25,755
|
|
|
|
1,894,219
|
|
Liabilities
|
|
|
Debt
|
|
$
|
379,927
|
|
Accrued and other liabilities
|
|
41,318
|
|
|
|
421,245
|
|
Noncontrolling interests
|
|
|
Noncontrolling interests—investment entities
|
|
330,980
|
|
Noncontrolling interests—Operating Company
|
|
64,294
|
|
|
|
395,274
|
|
Equity attributable to Colony NorthStar, Inc.
|
|
$
|
1,077,700
|
|
The Company does not control Colony NorthStar Credit as the Company's role as the external manager of Colony NorthStar Credit is under the supervision and direction of the Board of Directors of Colony NorthStar Credit, the majority of whom are independent directors. However, the Company has significant influence over Colony NorthStar Credit through its representation on the Board of Directors and through its role as the external manager. Accordingly, the Company accounts for its approximately
37%
ownership interest in Colony NorthStar Credit under the equity method.
The Company measured its interest in Colony NorthStar Credit based upon its proportionate share of Colony NorthStar Credit's fair value at the closing date of the Combination. The excess of fair value over carrying value of the Company's equity interest in the CLNS Investment Entities of
$9.9 million
was recognized in other gain on the consolidated statement of operations.
5
. Real Estate
As discussed in Note
4
, upon closing of the Combination on January 31, 2018, the Company contributed its interests in the CLNS Investment Entities to Colony NorthStar Credit and deconsolidated these entities, including
$219.7 million
of primarily net lease properties.
The Company's real estate, including foreclosed properties, was as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Land
|
|
$
|
2,307,415
|
|
|
$
|
2,011,794
|
|
Buildings and improvements
|
|
11,848,970
|
|
|
12,403,794
|
|
Tenant improvements
|
|
148,629
|
|
|
134,709
|
|
Furniture, fixtures and equipment
|
|
371,059
|
|
|
383,855
|
|
Construction in progress
|
|
106,001
|
|
|
108,403
|
|
|
|
14,782,074
|
|
|
15,042,555
|
|
Less: Accumulated depreciation
|
|
(681,200
|
)
|
|
(578,297
|
)
|
Real estate assets, net
|
|
$
|
14,100,874
|
|
|
$
|
14,464,258
|
|
Real Estate Sales
Results from sales of real estate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Proceeds from sales of real estate
|
|
$
|
112,562
|
|
|
$
|
903,841
|
|
Gain on sale of real estate
|
|
18,444
|
|
|
8,970
|
|
Real estate sold or classified as held for sale during the
three months ended March 31, 2018
and
2017
did not constitute discontinued operations, other than the sale of a manufactured housing portfolio in 2017 that was acquired through the Merger and certain properties in the THL Hotel Portfolio which qualified as held for sale upon acquisition in July 2017, as discussed in Note
18
.
Real estate held for sale at
March 31, 2018
and
December 31, 2017
is presented in Note
10
.
Real Estate Acquisitions
The following table summarizes the Company's real estate acquisitions, excluding real estate acquired as part of business combinations discussed in Note
3
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Purchase Price Allocation
|
|
Acquisition Date
|
|
Property Type and Location
|
|
Number of Buildings
|
|
Purchase
Price
(1)
|
|
Land and Improvements
|
|
Building and Improvements
|
|
Lease Intangible Assets
|
|
Lease Intangible Liabilities
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Asset Acquisitions
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Various
|
|
Industrial—Various in U.S.
(3)
|
|
10
|
|
$
|
179,203
|
|
|
$
|
39,476
|
|
|
$
|
129,264
|
|
|
$
|
10,903
|
|
|
$
|
(440
|
)
|
Year Ended Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Asset Acquisitions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
Industrial—Spain
|
|
2
|
|
$
|
10,374
|
|
|
$
|
3,855
|
|
|
$
|
5,564
|
|
|
$
|
955
|
|
|
$
|
—
|
|
|
June
|
|
Office—Los Angeles, CA
(4)
|
|
1
|
|
455,699
|
|
|
93,577
|
|
|
314,590
|
|
|
50,518
|
|
|
(2,986
|
)
|
|
Various
|
|
Industrial—Various in U.S.
|
|
55
|
|
636,690
|
|
|
137,005
|
|
|
472,747
|
|
|
31,512
|
|
|
(4,574
|
)
|
|
|
|
|
|
|
|
$
|
1,102,763
|
|
|
$
|
234,437
|
|
|
$
|
792,901
|
|
|
$
|
82,985
|
|
|
$
|
(7,560
|
)
|
__________
|
|
(1)
|
Dollar amounts of purchase price and allocation to assets acquired and liabilities assumed are translated using foreign exchange rates as of the respective dates of acquisition, where applicable.
|
|
|
(2)
|
Useful life of real estate acquired in
2018
is
30
years for buildings,
8
to
14
years for site improvements,
4
to
10
years for tenant improvements and
4
to
10
years for lease intangibles.
|
|
|
(3)
|
Includes acquisition of
$11.0 million
of land for co-development with operating partners.
|
|
|
(4)
|
In September 2017,
90%
of equity in the property holding entity was syndicated to third party investors. The new equity partners were granted certain participation rights in the business, resulting in a deconsolidation of the investment. The interest retained by the Company is reflected as an equity method investment.
|
Depreciation and Impairment
Depreciation expense on real estate was
$118.4 million
and
$104.3 million
for the
three months ended March 31, 2018
and
2017
, respectively.
Refer to Note
14
for discussion of impairment on real estate.
Property Operating Income
The components of property operating income were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Rental income
|
|
$
|
162,614
|
|
|
$
|
151,243
|
|
Tenant reimbursements
|
|
38,922
|
|
|
31,525
|
|
Resident fee income
(1)
|
|
69,217
|
|
|
65,694
|
|
Hotel operating income
|
|
283,977
|
|
|
178,392
|
|
|
|
$
|
554,730
|
|
|
$
|
426,854
|
|
__________
|
|
(1)
|
Healthcare properties that operate through management agreements with independent third-party operators through structures permitted by the REIT Investment Diversification and Empowerment Act of 2007 (“RIDEA”) allows us, through a TRS, to have direct exposure to resident fee income and incur customary related operating expenses.
|
Commitments and Contractual Obligations
Guarantee Agreements—
In connection with the THL Hotel Portfolio, the Company entered into guarantee agreements with various hotel franchisors, pursuant to which the Company guaranteed the payment of its obligations as a franchisee, including payments of franchise fees and marketing fees for the term of the agreements, which expire between
2018 and 2037
. In the event of default or termination of the franchise agreements, the Company is liable for liquidated damages not to exceed
$100 million
. The Company had similar provisions related to its core hotel portfolio in the hospitality segment, but has met the required minimum payments under the respective franchise agreements and no longer has an obligation to the franchisors.
Ground Lease Obligation—
In connection with real estate acquisitions, the Company assumed certain noncancelable operating ground leases as lessee or sublessee. Rents on certain ground leases are paid directly by the tenants or operators. Ground rent expense, including contingent rent, was
$2.0 million
and
$0.9 million
for the three months ended
March 31, 2018
and
2017
, respectively.
6
. Loans Receivable
As discussed in Note
4
, upon closing of the Combination on January 31, 2018, the Company contributed its interests in the CLNS Investment Entities to Colony NorthStar Credit and deconsolidated these entities, including
$1.29 billion
of loans receivable.
The following table provides a summary of the Company’s loans held for investment, including purchased credit-impaired ("PCI") loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
($ in thousands)
|
|
Unpaid Principal Balance
|
|
Carrying
Value
|
|
Weighted
Average
Coupon
|
|
Weighted Average Maturity in Years
|
|
Unpaid Principal Balance
|
|
Carrying
Value
|
|
Weighted
Average
Coupon
|
|
Weighted Average Maturity in Years
|
Loans at amortized cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
$
|
626,159
|
|
|
$
|
635,516
|
|
|
9.7
|
%
|
|
3.3
|
|
$
|
1,081,030
|
|
|
$
|
1,082,513
|
|
|
9.1
|
%
|
|
2.8
|
Securitized loans
(1)
|
|
32,219
|
|
|
33,083
|
|
|
5.8
|
%
|
|
17.0
|
|
35,566
|
|
|
36,603
|
|
|
5.9
|
%
|
|
16.8
|
Mezzanine loans
|
|
337,543
|
|
|
334,861
|
|
|
11.8
|
%
|
|
1.7
|
|
459,433
|
|
|
456,463
|
|
|
12.2
|
%
|
|
2.3
|
Corporate loans
|
|
46,837
|
|
|
46,539
|
|
|
9.9
|
%
|
|
9.8
|
|
46,840
|
|
|
46,592
|
|
|
9.9
|
%
|
|
10.0
|
|
|
1,042,758
|
|
|
1,049,999
|
|
|
|
|
|
|
1,622,869
|
|
|
1,622,171
|
|
|
|
|
|
Variable rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
212,809
|
|
|
222,920
|
|
|
3.5
|
%
|
|
0.8
|
|
414,428
|
|
|
423,199
|
|
|
6.0
|
%
|
|
1.7
|
Securitized loans
(1)
|
|
79,612
|
|
|
78,625
|
|
|
5.2
|
%
|
|
17.8
|
|
461,489
|
|
|
462,203
|
|
|
6.4
|
%
|
|
3.5
|
Mezzanine loans
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
0.0
|
|
34,391
|
|
|
34,279
|
|
|
9.8
|
%
|
|
1.3
|
|
|
292,421
|
|
|
301,545
|
|
|
|
|
|
|
910,308
|
|
|
919,681
|
|
|
|
|
|
|
|
1,335,179
|
|
|
1,351,544
|
|
|
|
|
|
|
2,533,177
|
|
|
2,541,852
|
|
|
|
|
|
PCI Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans
|
|
1,817,498
|
|
|
623,434
|
|
|
|
|
|
|
1,865,423
|
|
|
682,125
|
|
|
|
|
|
Securitized loans
|
|
22,986
|
|
|
3,180
|
|
|
|
|
|
|
23,298
|
|
|
3,400
|
|
|
|
|
|
Mezzanine loans
|
|
7,425
|
|
|
3,671
|
|
|
|
|
|
|
7,425
|
|
|
3,671
|
|
|
|
|
|
|
|
1,847,909
|
|
|
630,285
|
|
|
|
|
|
|
1,896,146
|
|
|
689,196
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
(53,980
|
)
|
|
|
|
|
|
|
|
|
(52,709
|
)
|
|
|
|
|
|
|
3,183,088
|
|
|
1,927,849
|
|
|
|
|
|
|
4,429,323
|
|
|
3,178,339
|
|
|
|
|
|
Loans at fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized loans
(2)
|
|
72,122
|
|
|
44,330
|
|
|
|
|
|
|
72,511
|
|
|
45,423
|
|
|
|
|
|
Total loans receivable
|
|
$
|
3,255,210
|
|
|
$
|
1,972,179
|
|
|
|
|
|
|
$
|
4,501,834
|
|
|
$
|
3,223,762
|
|
|
|
|
|
__________
|
|
(1)
|
Represents loans held in securitization trusts that are consolidated by the Company (Note
15
).
|
|
|
(2)
|
Represents loans held by a securitization trust that is consolidated by a NorthStar CDO. The NorthStar CDO is in turn consolidated by the Company. The Company elected the fair value option and adopted the measurement alternative to value the loans receivable at the same fair value as the bonds payable issued by the consolidated securitization trust. (Note
14
)
|
Nonaccrual and Past Due Loans
Non-PCI loans, excluding loans carried at fair value, that are
90 days
or more past due as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual status.
The following table provides an aging summary of non-PCI loans held for investment at carrying values before allowance for loan losses, excluding loans carried at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Current or Less Than 30 Days Past Due
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90 Days or More Past Due and Nonaccrual
|
|
Total Non-PCI Loans
|
March 31, 2018
|
$
|
1,126,605
|
|
|
$
|
4,251
|
|
|
$
|
89,315
|
|
|
$
|
131,373
|
|
|
$
|
1,351,544
|
|
December 31, 2017
|
2,268,599
|
|
|
145,986
|
|
|
9,410
|
|
|
117,857
|
|
|
2,541,852
|
|
Troubled Debt Restructuring
During the
three months ended March 31, 2018
and
2017
, there were
no
loans modified as TDRs, in which the Company provided borrowers, who are experiencing financial difficulties, with various concessions in interest rates, payment terms or default waivers. At
March 31, 2018
and
December 31, 2017
, carrying value of existing TDR loans before allowance for loan losses was
$37.8 million
and
$66.4 million
, respectively. These TDR loans were not in default post-modification. As of
March 31, 2018
, the Company has
no
additional commitments to lend to borrowers with TDR loans.
Non-PCI Impaired Loans
Non-PCI loans, excluding loans carried at fair value, are identified as impaired when it is no longer probable that interest or principal will be collected according to the contractual terms of the original loan agreement. Non-PCI impaired loans include predominantly loans under nonaccrual, performing and nonperforming TDRs, as well as loans in maturity default.
The following table summarizes non-PCI impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance
|
|
Gross Carrying Value
|
|
Allowance for Loan Losses
|
(In thousands)
|
|
|
With Allowance for Loan Losses
|
|
Without Allowance for Loan Losses
|
|
Total
|
|
March 31, 2018
|
|
$
|
160,684
|
|
|
$
|
84,858
|
|
|
$
|
75,069
|
|
|
$
|
159,927
|
|
|
$
|
6,308
|
|
December 31, 2017
|
|
383,594
|
|
|
138,136
|
|
|
248,759
|
|
|
386,895
|
|
|
7,424
|
|
The average carrying value and interest income recognized on non-PCI impaired loans were as follows. There was
no
cash basis interest income recognized on non-PCI impaired loans in all periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Average carrying value before allowance for loan losses
|
|
$
|
273,410
|
|
|
$
|
103,795
|
|
Total interest income recognized during the period impaired
|
|
29
|
|
|
756
|
|
Purchased Credit-Impaired Loans
PCI loans are acquired loans with evidence of credit quality deterioration for which it is probable at acquisition that the Company will collect less than the contractually required payments. PCI loans are recorded at the initial investment in the loans and accreted to the estimated cash flows expected to be collected as measured at acquisition date. The excess of cash flows expected to be collected, measured as of acquisition date, over the estimated fair value represents the accretable yield and is recognized in interest income over the remaining life of the loan. The difference between contractually required payments as of the acquisition date and the cash flows expected to be collected, which represents the nonaccretable difference, is not recognized as an adjustment of yield, loss accrual or valuation allowance.
Factors that most significantly affect estimates of cash flows expected to be collected, and accordingly the accretable yield, include: (i) estimate of the remaining life of acquired loans which may change the amount of future interest income; (ii) changes to prepayment assumptions; (iii) changes to collateral value assumptions for loans expected to foreclose; and (iv) changes in interest rates on variable rate loans.
There were no PCI loans acquired in the
three months ended March 31, 2018
.
In January 2017, the Company acquired additional PCI loans through the Merger as well as part of a loan portfolio secured by commercial properties in Ireland. Information about these PCI loans at the time of their acquisition is presented below:
|
|
|
|
|
|
(In thousands)
|
|
January 2017
|
Contractually required payments including interest
|
|
$
|
1,154,596
|
|
Less: Nonaccretable difference
|
|
(878,257
|
)
|
Cash flows expected to be collected
|
|
276,339
|
|
Less: Accretable yield
|
|
(23,594
|
)
|
Fair value of loans acquired
|
|
$
|
252,745
|
|
Changes in accretable yield of PCI loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Beginning accretable yield
|
|
$
|
42,435
|
|
|
$
|
52,572
|
|
Additions
|
|
—
|
|
|
23,594
|
|
Dispositions
|
|
(2,565
|
)
|
|
—
|
|
Changes in accretable yield
|
|
1,989
|
|
|
5,187
|
|
Accretion recognized in earnings
|
|
(12,579
|
)
|
|
(15,809
|
)
|
Effect of changes in foreign exchange rates
|
|
354
|
|
|
81
|
|
Ending accretable yield
|
|
$
|
29,634
|
|
|
$
|
65,625
|
|
The Company applied either the cash basis or cost recovery method for recognition of interest income on PCI loans with carrying value before allowance for loan losses of
$195.8 million
at
March 31, 2018
and
$196.5 million
at
December 31, 2017
, as the Company did not have reasonable expectations of the timing and amount of future cash receipts on these loans.
Allowance for Loan Losses
On a periodic basis, the Company analyzes the extent and effect of any credit migration from underwriting and the initial investment review associated with the performance of a loan and/or value of its underlying collateral, financial and operating capability of the borrower or sponsor, as well as amount and status of any senior loan, where applicable. Specifically, operating results of collateral properties and any cash reserves are analyzed and used to assess whether cash from operations are sufficient to cover debt service requirements currently and into the future, ability of the borrower to refinance the loan, liquidation value of collateral properties, financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the collateral properties. Such analysis is performed at least quarterly, or more often as needed when impairment indicators are present.
Allowance for loan losses represents the estimated probable credit losses inherent in loans held for investment at balance sheet date and is generally measured as the difference between the carrying value of the loan and either the present value of cash flows expected to be collected or an observable market price for the loan.
For PCI loans, provision for loan losses is recorded if it is assessed that decreases in cash flows expected to be collected would result in a decrease in the estimated fair value of the loan below its amortized cost.
The allowance for loan losses and related carrying values of loans held for investment, excluding loans carried at fair value, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(In thousands)
|
|
Allowance for Loan Losses
|
|
Carrying Value
|
|
Allowance for Loan Losses
|
|
Carrying Value
|
Non-PCI loans
|
|
$
|
6,308
|
|
|
$
|
84,858
|
|
|
$
|
7,424
|
|
|
$
|
138,136
|
|
PCI loans
|
|
47,672
|
|
|
161,098
|
|
|
45,285
|
|
|
169,789
|
|
|
|
$
|
53,980
|
|
|
$
|
245,956
|
|
|
$
|
52,709
|
|
|
$
|
307,925
|
|
Changes in allowance for loan losses is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Allowance for loan losses at January 1
|
|
$
|
52,709
|
|
|
$
|
67,980
|
|
Contribution to Colony NorthStar Credit (Note 4)
|
|
(518
|
)
|
|
—
|
|
Provision for loan losses, net
|
|
5,375
|
|
|
6,724
|
|
Charge-off
|
|
(3,586
|
)
|
|
(5,234
|
)
|
Allowance for loan losses at March 31
|
|
$
|
53,980
|
|
|
$
|
69,470
|
|
Included in the
$2.7 million
and
$4.2 million
of provision for loan losses on PCI loans for the
three months ended March 31, 2018
and
2017
, respectively, were recoveries of
$0.1 million
and
$1.0 million
, respectively, of provision previously recorded. Additionally, there was
$0.8 million
of recoveries in provision for loan losses on non-PCI loans of
$2.7 million
for the
three months ended March 31, 2018
, while there were
no
recoveries on the
$2.5 million
of provision for loan losses on non-PCI loans for the
three months ended March 31, 2017
.
Lending Commitments
The Company has lending commitments to borrowers pursuant to certain loan agreements in which the borrower may submit a request for funding contingent on achieving certain criteria, which must be approved by the Company as lender, such as leasing, performance of capital expenditures and construction in progress with an approved budget. At
March 31, 2018
, assuming the terms to qualify for future fundings, if any, have been met, total unfunded lending commitments was
$88.8 million
, of which the Company's share was
$81.8 million
, net of amounts attributable to noncontrolling interests.
7
. Investments in Unconsolidated Ventures
As discussed in Note
4
, upon closing of the Combination on January 31, 2018, the Company contributed its interests in the CLNS Investment Entities to Colony NorthStar Credit and deconsolidated these entities, which included interests in third party private funds and acquisition, development and construction ("ADC") loans with a combined carrying value of approximately
$208.7 million
. In consideration for its contribution, the Company received interests in Colony NorthStar Credit, accounted for under the equity method.
The Company's investments in unconsolidated ventures represent noncontrolling equity interests in various entities, including investments for which fair value option was elected, as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Equity method investments
|
|
|
|
|
Investment ventures
|
|
$
|
2,240,057
|
|
|
$
|
1,297,180
|
|
Private funds
|
|
199,661
|
|
|
229,874
|
|
|
|
2,439,718
|
|
|
1,527,054
|
|
Other equity investments
|
|
|
|
|
Investment ventures
|
|
89,129
|
|
|
89,261
|
|
Private funds and retail companies
|
|
20,783
|
|
|
38,924
|
|
|
|
109,912
|
|
|
128,185
|
|
|
|
$
|
2,549,630
|
|
|
$
|
1,655,239
|
|
Equity Method Investments
The Company owns significant interests in Colony NorthStar Credit and NRE, both publicly-traded REITs that it manages. The Company accounts for its investments under the equity method as it exercises significant influence over operating and financial policies of these entities through a combination of its ownership interest, its role as the external manager and board representation, but does not control these entities. The Company also owns equity method investments that are structured as joint ventures with one or more private funds or other investment vehicles managed by the Company, or with third party joint venture partners. These investment ventures are generally capitalized through equity contributions from the members and/or leveraged through various financing arrangements. The Company elected fair value option to account for its interests in certain investment ventures as well as limited partnership interests in third party private funds acquired through the Merger (see Note
14
).
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.
The Company’s investments accounted for under the equity method, including investments for which fair value option was elected, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Ownership Interest
at
March 31, 2018
(1)
|
|
Carrying Value at
|
Investments
|
|
Description
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Colony NorthStar Credit Real Estate, Inc.
|
|
Common equity in publicly traded commercial real estate credit REIT managed by the Company and membership units in its operating subsidiary
|
(2)
|
36.6%
|
|
$
|
1,161,930
|
|
|
$
|
—
|
|
NorthStar Realty Europe Corp
|
|
Common equity in publicly traded equity REIT managed by the Company
|
(2)
|
10.3%
|
|
73,978
|
|
|
73,578
|
|
RXR Realty
|
|
Common equity in investment venture with a real estate investor, developer and investment manager
|
|
27.2%
|
|
107,468
|
|
|
105,082
|
|
Preferred equity
|
|
Preferred equity investments with underlying real estate
|
(3)
|
NA
|
|
465,527
|
|
|
440,704
|
|
ADC investments
|
|
Investments in acquisition, development and construction loans in which the Company participates in residual profits from the projects, and the risk and rewards of the arrangements are more similar to those associated with investments in joint ventures
|
(4)
|
Various
|
|
166,464
|
|
|
331,268
|
|
Private funds
|
|
General partner and/or limited partner interests in private funds
|
|
Various
|
|
27,716
|
|
|
25,101
|
|
Other investment ventures
|
|
Interests in 16 investments, each with no more than $61 million carrying value at March 31, 2018
|
|
Various
|
|
188,652
|
|
|
187,420
|
|
Fair value option
|
|
Interests in initial stage or real estate development ventures and limited partnership interests in private funds
|
|
Various
|
|
247,983
|
|
|
363,901
|
|
|
|
|
|
|
|
$
|
2,439,718
|
|
|
$
|
1,527,054
|
|
__________
|
|
(1)
|
The Company's ownership interest represents capital contributed to date and may not be reflective of the Company's economic interest in the entity because of provisions in operating agreements governing various matters, such as classes of partner or member interests, allocations of profits and losses, preferential returns and guaranty of debt. Each equity method investment has been determined to be either a VIE for which the Company was not deemed to be the primary beneficiary or a voting interest entity in which the Company does not have the power to control through a majority of voting interest or through other arrangements.
|
|
|
(2)
|
The Company's role as manager is under the supervision and direction of the respective board of directors, which includes representatives from the Company but the majority of whom are independent directors. In connection with the Company's investment in NRE, the Company has an ownership waiver under NRE’s charter which allows the Company to own up to
45%
of NRE’s common stock, and to the extent the Company owns more than
25%
of NRE’s common stock, the Company will vote the excess shares in the same proportion that the remaining NRE shares not owned by the Company are voted.
|
|
|
(3)
|
Some preferred equity investments may not have a stated ownership interest.
|
|
|
(4)
|
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.
|
In March 2017 and June 2017, the Company sold all of its shares in an equity method investment in Starwood Waypoint Homes
(formerly known as Colony Starwood Homes) for total net proceeds of
$500.5 million
and recognized a gain of
$191.2 million
in aggregate, included in earnings from investments in unconsolidated ventures.
As of
March 31, 2018
, the Company has assessed that there are no equity method investments that are other-than-temporarily impaired.
Other Equity Investments
Investments that do not qualify for equity method accounting consist of the following:
Investment Ventures
—This represents common equity in the Albertsons/Safeway supermarket chain (with 50% ownership by a co-investment partner) which is carried at cost, adjusted for any impairment and observable price changes, where applicable.
Retail Companies
—The Company has immaterial interests in its sponsored non-traded REITs, NorthStar Healthcare Income, Inc. ("NorthStar Healthcare") and NorthStar/RXR New York Metro Real Estate, Inc. ("NorthStar/RXR NY Metro") for which the Company applies the NAV practical expedient (see Note
14
).
Private Funds
—This represents a limited partnership interest in a third party private fund sponsored by an equity method investee for which the Company elected the NAV practical expedient (see Note
14
).
Investment and Other Commitments
Investment Ventures—
Pursuant to the operating agreements of certain unconsolidated ventures, the venture partners may be required to fund additional amounts for future investments, unfunded lending commitments, ordinary operating costs, guaranties or commitments of the venture entities. The Company also has lending commitments under ADC arrangements which are accounted for as equity method investments. At
March 31, 2018
, the Company’s share of these commitments was
$46.6 million
.
Private Funds—
At
March 31, 2018
, the Company had unfunded commitments of
$274.9 million
to funds sponsored or co-sponsored by the Company that are accounted for as equity method investments.
8
. Securities
The following table summarizes the Company's investment in debt securities classified as available-for-sale ("AFS") and equity securities held by a consolidated fund that are accounted for at fair value through earnings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Cumulative Unrealized
|
|
|
(in thousands)
|
|
Amortized Cost
|
|
Gains
|
|
Losses
|
|
Fair Value
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
CRE securities of consolidated N-Star CDOs
(1)
:
|
|
|
|
|
|
|
|
|
CMBS
|
|
$
|
136,192
|
|
|
$
|
2,687
|
|
|
$
|
(7,361
|
)
|
|
$
|
131,518
|
|
Other securities
(2)
|
|
11,549
|
|
|
2,093
|
|
|
(190
|
)
|
|
13,452
|
|
N-Star CDO bonds
(3)
|
|
83,411
|
|
|
2,498
|
|
|
(5,744
|
)
|
|
80,165
|
|
CMBS and other securities
(4)
|
|
27,861
|
|
|
568
|
|
|
(6
|
)
|
|
28,423
|
|
|
|
259,013
|
|
|
7,846
|
|
|
(13,301
|
)
|
|
253,558
|
|
Equity securities of consolidated fund
|
|
|
|
|
|
|
|
35,342
|
|
|
|
|
|
|
|
|
|
$
|
288,900
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
|
CRE securities of consolidated N-Star CDOs
(1)
:
|
|
|
|
|
|
|
|
|
CMBS
|
|
$
|
144,476
|
|
|
$
|
3,999
|
|
|
$
|
(530
|
)
|
|
$
|
147,945
|
|
Other securities
(2)
|
|
61,302
|
|
|
5,994
|
|
|
(313
|
)
|
|
66,983
|
|
N-Star CDO bonds
(3)
|
|
88,374
|
|
|
2,778
|
|
|
(219
|
)
|
|
90,933
|
|
CMBS and other securities
(4)
|
|
38,928
|
|
|
3,739
|
|
|
(186
|
)
|
|
42,481
|
|
|
|
333,080
|
|
|
16,510
|
|
|
(1,248
|
)
|
|
348,342
|
|
Equity securities of consolidated fund
|
|
|
|
|
|
|
|
35,600
|
|
|
|
|
|
|
|
|
|
$
|
383,942
|
|
__________
(1)
Carrying value of CDO bonds payable in consolidated N-Star CDOs was
$196.4 million
at
March 31, 2018
and
$215.5 million
at
December 31, 2017
.
(2)
Represents primarily agency debentures, and to a lesser extent, unsecured REIT debt and trust preferred securities.
|
|
(3)
|
Excludes principal amount of N-Star CDO bonds held by the Company in its consolidated CDOs that are eliminated upon consolidation of
$136.9 million
at
March 31, 2018
and
$140.1 million
at
December 31, 2017
.
|
|
|
(4)
|
Includes CMBS of
$27.6 million
at
March 31, 2018
and
$25.1 million
at
December 31, 2017
held by a sponsored investment company, which is consolidated by the Company through its seed capital. Other securities include a trust preferred security and certain investments in other third party CDO bonds.
|
N-Star CDOs
—The Company acquired, upon the Merger, NRF's legacy CDOs. NRF had sponsored collateralized debt obligations ("CDOs"), collateralized primarily by commercial real estate ("CRE") debt and CRE securities, of which
two
of the sponsored CRE securities CDOs are consolidated. Additionally, NRF had acquired the equity interests of CRE debt focused CDOs sponsored by third parties. These CDOs are collectively referred to as the N-Star CDOs.
At the time of issuance of the sponsored CDOs, NRF retained investment-grade subordinate bonds. NRF also retained equity interests in the form of preferred shares in all of its sponsored CDOs. Additionally, NRF repurchased CDO bonds originally issued to third parties at discounts to par. These repurchased CDO bonds and retained investment-grade subordinate bonds are collectively referred to as N-Star CDO bonds. All N-Star CDOs are past their reinvestment period and are amortizing over time as the underlying assets pay down or are sold.
CMBS and Other Securities
—These securities are predominantly commercial mortgage-backed securities (“CMBS”), including investments in mezzanine positions.
At
March 31, 2018
, contractual maturities of CRE securities ranged from
four months
to
43 years
, with a weighted average expected maturity of
5.9 years
.
Equity Securities of Consolidated Fund
—These are publicly traded equity securities held by a consolidated open-end fund. These equity securities comprise listed stock predominantly in the U.S. and to a lesser extent, in the United Kingdom, and primarily in the financial, real estate and consumer sectors.
Disposition of Securities
Realized gains (losses) from sale of securities are recorded in other gain (loss), as follows.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Available-for-sale debt securities:
|
|
|
|
|
Proceeds from sale
|
|
$
|
63,185
|
|
|
$
|
24,788
|
|
Gross realized gain
|
|
8,384
|
|
|
567
|
|
Equity securities of consolidated fund:
|
|
|
|
|
Realized gain, net
|
|
499
|
|
|
—
|
|
Impairment of AFS Debt Securities
The following table presents AFS debt securities in a gross unrealized loss position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Less Than 12 Months
|
|
More Than 12 Months
|
|
Less Than 12 Months
|
(In thousands)
|
Fair Value
|
|
Gross Unrealized Loss
|
|
Fair Value
|
|
Gross Unrealized Loss
|
|
Fair Value
|
|
Gross Unrealized Loss
|
CRE securities of consolidated N-Star CDOs:
|
|
|
|
|
|
|
|
|
|
|
|
CMBS
|
$
|
83,214
|
|
|
$
|
(6,930
|
)
|
|
$
|
1,966
|
|
|
$
|
(431
|
)
|
|
$
|
2,229
|
|
|
$
|
(530
|
)
|
Other securities
|
4,603
|
|
|
(190
|
)
|
|
—
|
|
|
—
|
|
|
8,218
|
|
|
(313
|
)
|
N-Star CDO bonds
|
43,125
|
|
|
(5,744
|
)
|
|
—
|
|
|
—
|
|
|
13,392
|
|
|
(219
|
)
|
CMBS and other securities
|
—
|
|
|
—
|
|
|
1
|
|
|
(6
|
)
|
|
12,956
|
|
|
(186
|
)
|
|
$
|
130,942
|
|
|
$
|
(12,864
|
)
|
|
$
|
1,967
|
|
|
$
|
(437
|
)
|
|
$
|
36,795
|
|
|
$
|
(1,248
|
)
|
At
December 31, 2017
, there were
no
AFS debt securities in a gross unrealized loss position for more than 12 months. Any unrealized loss on securities acquired through the Merger were reset on the Closing Date.
The Company performs an assessment, at least quarterly, to determine whether a decline in fair value below amortized cost of AFS debt securities is other than temporary. OTTI exists when either (i) the holder has the intent to sell the impaired security, (ii) it is more likely than not the holder will be required to sell the security, or (iii) the holder does not expect to recover the entire amortized cost of the security. In assessing OTTI and estimating future expected cash flows, factors considered include, but are not limited to, credit rating of the security, financial condition of the issuer, defaults for similar securities, performance and value of assets underlying an asset-backed security.
For the
three months ended March 31, 2018
, the Company recorded
$4.4 million
of OTTI loss in other gain (loss) in the consolidated statements of operations due to an adverse change in expected cash flows on N-Star CDOs, some of which are PCI debt securities, and CMBS held by consolidated N-Star CDOs. The Company believed that it was not likely that it would recover the amortized cost on these securities prior to selling them. There was no OTTI loss recognized in the
three months ended March 31, 2017
.
At
March 31, 2018
, the Company believes that the remaining AFS securities with unrealized loss in accumulated other comprehensive income were not other than temporarily impaired. At
December 31, 2017
, there were no AFS securities with unrealized loss in accumulated other comprehensive income that have not been other than temporarily impaired.
Purchased Credit-Impaired Debt Securities
Certain debt securities acquired by the Company through the Merger, consisting of certain N-Star CDOs, other CDOs and CMBS securities, were considered to be credit-impaired at acquisition, with the following outstanding balance:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Outstanding principal
|
|
$
|
377,993
|
|
|
$
|
411,174
|
|
Amortized cost
|
|
14,196
|
|
|
26,761
|
|
Carrying value
|
|
21,599
|
|
|
31,789
|
|
PCI debt securities are recorded at their initial investment and accreted to the estimated cash flows expected to be collected as measured at acquisition date. The excess of cash flows expected to be collected, measured at acquisition date, over the estimated fair value represents the accretable yield and is recognized in interest income over the remaining life of the security. The difference between contractually required payments at the acquisition date and the cash flows expected to be collected, which represents the nonaccretable difference, reflects the estimated future credit losses expected to be incurred over the life of the security and is not accreted to interest income nor recorded on the balance sheet. Subsequent decreases in undiscounted expected cash flows attributable to further credit deterioration as well as changes in expected timing of future cash flows can result in recognition of OTTI.
Information about these PCI debt securities upon acquisition, including the effect of measurement period adjustments recorded during the year ended
December 31, 2017
, is presented below:
|
|
|
|
|
|
(In thousands)
|
|
January 2017
|
Contractually required payments including interest
|
|
$
|
574,088
|
|
Less: Nonaccretable difference
|
|
(449,261
|
)
|
Cash flows expected to be collected
|
|
124,827
|
|
Less: Accretable yield
|
|
(70,283
|
)
|
Fair value of PCI debt securities acquired
|
|
$
|
54,544
|
|
The table below presents changes in accretable yield related to these PCI debt securities. The
three months ended March 31, 2017
reflects the effect of measurement period adjustments subsequently recorded during the year ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Beginning accretable yield
|
|
$
|
44,610
|
|
|
$
|
—
|
|
Assumed through the Merger
|
|
—
|
|
|
70,283
|
|
Accretion recognized in earnings
|
|
(2,143
|
)
|
|
(4,146
|
)
|
Reduction due to payoffs or disposals
|
|
(9,335
|
)
|
|
—
|
|
Net reclassifications to nonaccretable difference
|
|
819
|
|
|
(5,437
|
)
|
Ending accretable yield
|
|
$
|
33,951
|
|
|
$
|
60,700
|
|
9
. Goodwill, Deferred Leasing Costs and Other Intangibles
Goodwill
The following tables present changes in the carrying value of goodwill and the goodwill balance by reporting segment.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
1,534,561
|
|
|
$
|
680,127
|
|
Business combinations
(1)
|
|
—
|
|
|
1,285,502
|
|
Transfer to held for sale
(2)
|
|
—
|
|
|
(248,264
|
)
|
Ending balance
(3)
|
|
$
|
1,534,561
|
|
|
$
|
1,717,365
|
|
__________
|
|
(1)
|
Amount does not reflect the effects of subsequent measurement period adjustments that were made within a one year period following consummation of the Merger.
|
|
|
(2)
|
Represents goodwill assigned to the Townsend investment management reporting unit that was acquired as part of the Merger, transferred to held for sale as of March 31, 2017 and subsequently sold on December 29, 2017.
|
|
|
(3)
|
Total goodwill amount is not deductible for income tax purposes.
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Balance by reporting segment:
|
|
|
|
|
Industrial
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Investment management
|
|
1,514,561
|
|
|
1,514,561
|
|
|
|
$
|
1,534,561
|
|
|
$
|
1,534,561
|
|
Impairment
Goodwill is assessed for impairment at the Company's operating segments or one level below. The Company performs its annual impairment test in the fourth quarter of each year. As a result of the Company's annual impairment test in 2017, the Company recognized an impairment to the investment management goodwill of
$316.0 million
.
No goodwill impairment was recognized during the
three months ended March 31, 2018
and
2017
.
Deferred Leasing Costs, Other Intangible Assets and Intangible Liabilities
The Company's deferred leasing costs, other intangible assets and intangible liabilities are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(In thousands)
|
Carrying Amount (Net of Impairment)
(1)
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Carrying Amount (Net of Impairment)
(1)
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Deferred Leasing Costs and Intangible Assets
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease values
|
$
|
245,989
|
|
|
$
|
(111,770
|
)
|
|
$
|
134,219
|
|
|
$
|
243,037
|
|
|
$
|
(98,021
|
)
|
|
$
|
145,016
|
|
Above-market lease values
|
163,270
|
|
|
(39,521
|
)
|
|
123,749
|
|
|
166,571
|
|
|
(34,968
|
)
|
|
131,603
|
|
Below-market ground lease obligations
|
36,100
|
|
|
(524
|
)
|
|
35,576
|
|
|
29,625
|
|
|
(316
|
)
|
|
29,309
|
|
Deferred leasing costs
|
125,581
|
|
|
(41,809
|
)
|
|
83,772
|
|
|
121,765
|
|
|
(38,389
|
)
|
|
83,376
|
|
Lease incentives
|
14,578
|
|
|
(560
|
)
|
|
14,018
|
|
|
14,565
|
|
|
(298
|
)
|
|
14,267
|
|
Trade name
(2)
|
79,700
|
|
|
(3,932
|
)
|
|
75,768
|
|
|
79,700
|
|
|
(3,131
|
)
|
|
76,569
|
|
Investment management contracts
|
201,698
|
|
|
(75,925
|
)
|
|
125,773
|
|
|
342,127
|
|
|
(70,394
|
)
|
|
271,733
|
|
Customer relationships
|
59,400
|
|
|
(11,572
|
)
|
|
47,828
|
|
|
59,400
|
|
|
(10,421
|
)
|
|
48,979
|
|
Other
(3)
|
53,741
|
|
|
(2,548
|
)
|
|
51,193
|
|
|
54,061
|
|
|
(2,041
|
)
|
|
52,020
|
|
Total deferred leasing costs and intangible assets
|
$
|
980,057
|
|
|
$
|
(288,161
|
)
|
|
$
|
691,896
|
|
|
$
|
1,110,851
|
|
|
$
|
(257,979
|
)
|
|
$
|
852,872
|
|
Intangible Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Below-market lease values
|
$
|
215,866
|
|
|
$
|
(43,057
|
)
|
|
$
|
172,809
|
|
|
$
|
214,833
|
|
|
$
|
(36,426
|
)
|
|
$
|
178,407
|
|
Above-market ground lease obligations
|
16,019
|
|
|
(964
|
)
|
|
15,055
|
|
|
13,417
|
|
|
(715
|
)
|
|
12,702
|
|
Total intangible liabilities
|
$
|
231,885
|
|
|
$
|
(44,021
|
)
|
|
$
|
187,864
|
|
|
$
|
228,250
|
|
|
$
|
(37,141
|
)
|
|
$
|
191,109
|
|
__________
|
|
(1)
|
For intangible assets and intangible liabilities recognized in connection with business combinations, purchase price allocations may be subject to adjustments during the measurement period, not to exceed one year from date of acquisition, based upon new information obtained about facts and circumstances that existed at time of acquisition. Amounts are presented net of impairments and write-offs, including contracts written off in connection with the Combination (Notes
4
and
14
).
|
|
|
(2)
|
The NSAM trade name is amortized over its useful life of
20 years
, while Colony trade name is determined to have an indefinite useful life and not currently subject to amortization.
|
|
|
(3)
|
Represents primarily the value of certificates of need associated with certain healthcare portfolios which are not amortized and franchise agreements associated with certain hotel properties which are amortized over
10
to
15
years.
|
Impairment of investment management contracts is discussed in Note
14
.
The following table summarizes the amortization of deferred leasing costs and finite-lived intangible assets and intangible liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Above-market lease values
|
|
$
|
(5,183
|
)
|
|
$
|
(5,514
|
)
|
Below-market lease values
|
|
7,108
|
|
|
7,440
|
|
Lease incentives
|
|
(262
|
)
|
|
—
|
|
Net increase (decrease) to rental income
|
|
$
|
1,663
|
|
|
$
|
1,926
|
|
|
|
|
|
|
Above-market ground lease obligations
|
|
$
|
(286
|
)
|
|
$
|
(171
|
)
|
Below-market ground lease obligations
|
|
463
|
|
|
119
|
|
Net increase (decrease) to ground rent expense
|
|
$
|
177
|
|
|
$
|
(52
|
)
|
|
|
|
|
|
In-place lease values
|
|
$
|
12,405
|
|
|
$
|
19,935
|
|
Deferred leasing costs
|
|
4,171
|
|
|
4,246
|
|
Trade name
|
|
804
|
|
|
856
|
|
Investment management contracts
|
|
5,686
|
|
|
8,218
|
|
Customer relationships
|
|
1,152
|
|
|
2,940
|
|
Other
|
|
515
|
|
|
2,275
|
|
Amortization expense
|
|
$
|
24,733
|
|
|
$
|
38,470
|
|
The following table presents future amortization of deferred leasing costs and finite-lived intangible assets and intangible liabilities, excluding those related to assets held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
|
(In thousands)
|
Remaining 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023 and Thereafter
|
|
Total
|
Above-market lease values
|
$
|
(13,186
|
)
|
|
$
|
(16,696
|
)
|
|
$
|
(15,823
|
)
|
|
$
|
(14,962
|
)
|
|
$
|
(13,649
|
)
|
|
$
|
(49,433
|
)
|
|
$
|
(123,749
|
)
|
Below-market lease values
|
19,187
|
|
|
23,962
|
|
|
21,714
|
|
|
19,941
|
|
|
18,510
|
|
|
69,495
|
|
|
172,809
|
|
Lease incentives
|
796
|
|
|
1,061
|
|
|
1,066
|
|
|
1,128
|
|
|
1,127
|
|
|
8,840
|
|
|
14,018
|
|
Increase to rental income
|
$
|
6,797
|
|
|
$
|
8,327
|
|
|
$
|
6,957
|
|
|
$
|
6,107
|
|
|
$
|
5,988
|
|
|
$
|
28,902
|
|
|
$
|
63,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Above-market ground lease obligations
|
$
|
(664
|
)
|
|
$
|
(867
|
)
|
|
$
|
(867
|
)
|
|
$
|
(867
|
)
|
|
$
|
(867
|
)
|
|
$
|
(10,923
|
)
|
|
$
|
(15,055
|
)
|
Below-market ground lease obligations
|
752
|
|
|
796
|
|
|
796
|
|
|
796
|
|
|
796
|
|
|
31,640
|
|
|
35,576
|
|
Increase to rent expense
|
$
|
88
|
|
|
$
|
(71
|
)
|
|
$
|
(71
|
)
|
|
$
|
(71
|
)
|
|
$
|
(71
|
)
|
|
$
|
20,717
|
|
|
$
|
20,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease values
|
$
|
21,224
|
|
|
$
|
21,050
|
|
|
$
|
16,209
|
|
|
$
|
11,112
|
|
|
$
|
8,954
|
|
|
$
|
55,670
|
|
|
$
|
134,219
|
|
Deferred leasing costs
|
12,936
|
|
|
14,730
|
|
|
12,090
|
|
|
9,314
|
|
|
7,327
|
|
|
27,375
|
|
|
83,772
|
|
Trade name
|
2,412
|
|
|
3,214
|
|
|
3,214
|
|
|
3,214
|
|
|
3,214
|
|
|
45,000
|
|
|
60,268
|
|
Investment management contracts
|
12,211
|
|
|
14,586
|
|
|
13,746
|
|
|
13,137
|
|
|
12,719
|
|
|
59,374
|
|
|
125,773
|
|
Customer relationships
|
3,455
|
|
|
4,607
|
|
|
4,607
|
|
|
4,607
|
|
|
4,607
|
|
|
25,945
|
|
|
47,828
|
|
Other
|
1,506
|
|
|
2,013
|
|
|
2,013
|
|
|
2,013
|
|
|
2,014
|
|
|
14,040
|
|
|
23,599
|
|
Amortization expense
|
$
|
53,744
|
|
|
$
|
60,200
|
|
|
$
|
51,879
|
|
|
$
|
43,397
|
|
|
$
|
38,835
|
|
|
$
|
227,404
|
|
|
$
|
475,459
|
|
10
. Assets and Related Liabilities Held For Sale
The Company's assets and related liabilities held for sale are summarized below:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Assets
|
|
|
|
|
Restricted cash
|
|
$
|
1,533
|
|
|
$
|
1,020
|
|
Real estate, net
|
|
935,096
|
|
|
720,686
|
|
Goodwill
(1)
|
|
20,000
|
|
|
20,000
|
|
Intangible assets, net
|
|
34,935
|
|
|
37,337
|
|
Other assets
|
|
11,274
|
|
|
2,587
|
|
Total assets held for sale
|
|
$
|
1,002,838
|
|
|
$
|
781,630
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Secured debt, net
(2)
|
|
$
|
215,366
|
|
|
$
|
196,905
|
|
Lease intangibles and other liabilities, net
|
|
58,412
|
|
|
76,393
|
|
Total liabilities related to assets held for sale
|
|
$
|
273,778
|
|
|
$
|
273,298
|
|
__________
|
|
(1)
|
Associated with the broker-dealer business that is held for sale.
|
|
|
(2)
|
Represents only debt that is expected to be assumed by the buyer upon sale of the related asset.
|
Assets held for sale at
March 31, 2018
did not constitute discontinued operations, other than those acquired through business combinations that qualified as held for sale upon acquisition, as discussed in Note
18
.
11
. Restricted Cash, Other Assets and Other Liabilities
Restricted Cash
The following table summarizes the Company's restricted cash balance:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Capital expenditures reserves
(1)
|
|
$
|
238,368
|
|
|
$
|
249,612
|
|
Real estate escrow reserves
(2)
|
|
36,441
|
|
|
42,420
|
|
Borrower escrow deposits
|
|
11,419
|
|
|
41,545
|
|
Working capital and other reserves
(3)
|
|
22,518
|
|
|
23,043
|
|
Tenant lock boxes
(4)
|
|
18,422
|
|
|
16,486
|
|
Restricted cash of consolidated N-Star CDOs
(5)
|
|
55,058
|
|
|
13,656
|
|
Other
|
|
71,140
|
|
|
84,316
|
|
Total restricted cash
|
|
$
|
453,366
|
|
|
$
|
471,078
|
|
__________
|
|
(1)
|
Represents primarily capital improvements, furniture, fixtures and equipment, tenant improvements, lease renewal and replacement reserves related to real estate assets.
|
|
|
(2)
|
Represents primarily insurance, real estate tax, repair and maintenance, tenant security deposits and other escrows related to real estate assets.
|
|
|
(3)
|
Represents reserves for working capital and property development expenditures, as well as in connection with letter of credit provisions, as required in joint venture arrangements with the Federal Deposit Insurance Corporation.
|
|
|
(4)
|
Represents tenant rents held in lock boxes controlled by the lender. The Company receives the monies after application of rent receipts to service its debt.
|
|
|
(5)
|
Represents proceeds from repayments and/or sales of debt securities which are pending distribution in consolidated N-Star CDOs
.
|
Other Assets
The following table summarizes the Company's other assets:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Interest receivable
|
|
$
|
15,211
|
|
|
$
|
21,529
|
|
Straight-line rents
|
|
52,522
|
|
|
45,598
|
|
Hotel-related reserves
(1)
|
|
31,603
|
|
|
29,208
|
|
Investment deposits and pending deal costs
|
|
3,231
|
|
|
1,706
|
|
Deferred financing costs, net
(2)
|
|
9,044
|
|
|
10,068
|
|
Contingent consideration escrow account
(3)
|
|
17,302
|
|
|
15,730
|
|
Derivative assets
(Note 13)
|
|
7,267
|
|
|
10,152
|
|
Prepaid taxes and deferred tax assets, net
|
|
53,445
|
|
|
79,063
|
|
Receivables from resolution of investments
(4)
|
|
5,539
|
|
|
15,215
|
|
Contributions receivable
(5)
|
|
12,000
|
|
|
25,501
|
|
Accounts receivable
(6)
|
|
95,446
|
|
|
87,744
|
|
Prepaid expenses
|
|
37,291
|
|
|
29,526
|
|
Other assets
|
|
49,693
|
|
|
20,296
|
|
Fixed assets, net
|
|
52,245
|
|
|
53,632
|
|
Total other assets
|
|
$
|
441,839
|
|
|
$
|
444,968
|
|
__________
|
|
(1)
|
Represents reserves held by the Company's third party managers at certain of the Company's hotel properties to fund furniture, fixtures and equipment expenditures. Funding is made periodically based on a percentage of hotel operating income.
|
|
|
(2)
|
Deferred financing costs relate to revolving credit arrangements.
|
|
|
(3)
|
Contingent consideration escrow account holds certificates of deposit and cash for dividends paid on OP units held in escrow for the contingent consideration that may be earned by certain executives in connection with the acquisition of the investment management business of Colony's former manager (Note
14
). Upon settlement of the contingent consideration in connection with the Internalization at the end of the earnout period on June 30, 2018, dividends that were paid on OP units earned will be paid to the executives.
|
|
|
(4)
|
Represents primarily proceeds from loan payoffs held in escrow at
March 31, 2018
.
|
|
|
(5)
|
Represents contributions receivable from noncontrolling interests in investment entities as a result of capital calls made at quarter end.
|
|
|
(6)
|
Includes receivables for hotel operating income and resident fees as well as rent and other tenant receivables. Presented net of total allowance for bad debt of approximately
$7.0 million
and
$5.6 million
at
March 31, 2018
and December 31,
2017
, respectively.
|
Accrued and Other Liabilities
The following table summarizes the Company's accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Tenant security deposits
|
|
$
|
28,107
|
|
|
$
|
27,560
|
|
Borrower escrow deposits
|
|
16,925
|
|
|
46,231
|
|
Deferred income
(1)
|
|
47,639
|
|
|
42,457
|
|
Interest payable
|
|
40,523
|
|
|
42,462
|
|
Derivative liabilities (Note 13)
|
|
150,798
|
|
|
204,848
|
|
Contingent consideration—THL Hotel Portfolio (Note 3)
|
|
7,760
|
|
|
7,419
|
|
Share repurchase payable
(2)
|
|
36,166
|
|
|
—
|
|
Current and deferred income tax liability
|
|
130,444
|
|
|
166,276
|
|
Accrued compensation
|
|
33,877
|
|
|
77,483
|
|
Accrued real estate and other taxes
|
|
77,155
|
|
|
77,060
|
|
Other accrued expenses
|
|
88,394
|
|
|
107,508
|
|
Accounts payable and other liabilities
|
|
133,651
|
|
|
98,857
|
|
Total accrued and other liabilities
|
|
$
|
791,439
|
|
|
$
|
898,161
|
|
__________
|
|
(1)
|
Represents primarily prepaid rental income and interest income held in reserve accounts.
|
Includes deferred asset management fee income of
$3.7 million
and
$2.7 million
at
March 31, 2018
and
December 31, 2017
, respectively, which will be recognized as fee income on a straightline basis through
2025
. Adoption of the new revenue recognition standard had resulted in approximately
$1.6 million
increase to deferred management fee income on January 1, 2018. For the
three months ended March 31, 2018
, approximately
$0.6 million
relating to the deferred asset management fee balance at January 1, 2018 was recognized as fee income.
|
|
(2)
|
Represents the Company's common stock repurchases with trade date in March 2018 and settlement date in April 2018.
|
12
. Debt
As discussed in Note
4
, upon closing of the Combination on January 31, 2018, the Company contributed its interests in the CLNS Investment Entities to Colony NorthStar Credit and deconsolidated these entities, which included
$379.9 million
of debt.
The Company's debt consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Corporate Credit Facility
(1)
|
|
Convertible and Exchangeable Senior Notes
|
|
Secured and Unsecured Debt
(2)
|
|
Securitization Bonds Payable
|
|
Junior Subordinated Notes
|
|
Total Debt
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt at amortized cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
100,000
|
|
|
$
|
616,105
|
|
|
$
|
9,531,911
|
|
|
$
|
253,829
|
|
|
$
|
280,117
|
|
|
$
|
10,781,962
|
|
Premium (discount), net
|
|
NA
|
|
|
3,024
|
|
|
(70,648
|
)
|
|
(84,971
|
)
|
|
(82,552
|
)
|
|
(235,147
|
)
|
Deferred financing costs
|
|
NA
|
|
|
(8,351
|
)
|
|
(87,104
|
)
|
|
(34
|
)
|
|
—
|
|
|
(95,489
|
)
|
|
|
100,000
|
|
|
610,778
|
|
|
9,374,159
|
|
|
168,824
|
|
|
197,565
|
|
|
10,451,326
|
|
Debt at fair value
(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,103
|
|
|
—
|
|
|
44,103
|
|
|
|
$
|
100,000
|
|
|
$
|
610,778
|
|
|
$
|
9,374,159
|
|
|
$
|
212,927
|
|
|
$
|
197,565
|
|
|
$
|
10,495,429
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt at amortized cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
$
|
50,000
|
|
|
$
|
616,105
|
|
|
$
|
9,792,169
|
|
|
$
|
391,231
|
|
|
$
|
280,117
|
|
|
$
|
11,129,622
|
|
Premium (discount), net
|
|
NA
|
|
|
3,131
|
|
|
(78,634
|
)
|
|
(87,319
|
)
|
|
(83,064
|
)
|
|
(245,886
|
)
|
Deferred financing costs
|
|
NA
|
|
|
(8,905
|
)
|
|
(91,360
|
)
|
|
(203
|
)
|
|
—
|
|
|
(100,468
|
)
|
|
|
50,000
|
|
|
610,331
|
|
|
9,622,175
|
|
|
303,709
|
|
|
197,053
|
|
|
10,783,268
|
|
Debt at fair value
(3)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
44,542
|
|
|
—
|
|
|
44,542
|
|
|
|
$
|
50,000
|
|
|
$
|
610,331
|
|
|
$
|
9,622,175
|
|
|
$
|
348,251
|
|
|
$
|
197,053
|
|
|
$
|
10,827,810
|
|
__________
|
|
(1)
|
Deferred financing costs related to the corporate credit facility is recorded in other assets.
|
|
|
(2)
|
Debt with carrying value of
$168.5 million
at
March 31, 2018
and
$202.8 million
at
December 31, 2017
were related to financing on assets held for sale. Debt associated with assets held for sale that will be assumed by the buyer is included in liabilities related to assets held for sale (Note
10
).
|
|
|
(3)
|
Represents a securitization trust that is consolidated by a NorthStar CDO. The NorthStar CDO is in turn consolidated by the Company. The Company elected the fair value option to value the bonds payable issued by the consolidated securitization trust (Note
14
).
|
The following table summarizes certain information about the different components of debt carried at amortized cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
Variable Rate
|
|
Total
|
($ in thousands)
|
Outstanding Principal
|
|
Weighted Average Interest Rate (Per Annum)
|
|
Weighted Average Years Remaining to Maturity
|
|
Outstanding Principal
|
|
Weighted Average Interest Rate (Per Annum)
|
|
Weighted Average Years Remaining to Maturity
|
|
Outstanding Principal
|
|
Weighted Average Interest Rate (Per Annum)
|
|
Weighted Average Years Remaining to Maturity
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate credit facility
|
$
|
—
|
|
|
—
|
%
|
|
0.0
|
|
|
$
|
100,000
|
|
|
4.13
|
%
|
|
2.8
|
|
|
$
|
100,000
|
|
|
4.13
|
%
|
|
2.8
|
Convertible and exchangeable senior notes
|
616,105
|
|
|
4.27
|
%
|
|
3.8
|
|
|
—
|
|
|
—
|
%
|
|
0.0
|
|
|
616,105
|
|
|
4.27
|
%
|
|
3.8
|
Junior subordinated debt
|
—
|
|
|
—
|
%
|
|
0.0
|
|
|
280,117
|
|
|
5.18
|
%
|
|
18.2
|
|
|
280,117
|
|
|
5.18
|
%
|
|
18.2
|
Secured debt
(1)
|
38,714
|
|
|
5.02
|
%
|
|
7.7
|
|
|
—
|
|
|
—
|
%
|
|
0.0
|
|
|
38,714
|
|
|
5.02
|
%
|
|
7.7
|
|
654,819
|
|
|
|
|
|
|
380,117
|
|
|
|
|
|
|
1,034,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate
|
|
Variable Rate
|
|
Total
|
($ in thousands)
|
Outstanding Principal
|
|
Weighted Average Interest Rate (Per Annum)
|
|
Weighted Average Years Remaining to Maturity
|
|
Outstanding Principal
|
|
Weighted Average Interest Rate (Per Annum)
|
|
Weighted Average Years Remaining to Maturity
|
|
Outstanding Principal
|
|
Weighted Average Interest Rate (Per Annum)
|
|
Weighted Average Years Remaining to Maturity
|
Non-recourse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization bonds payable
|
17,279
|
|
|
2.73
|
%
|
|
31.5
|
|
|
236,550
|
|
|
2.38
|
%
|
|
34.4
|
|
|
253,829
|
|
|
2.41
|
%
|
|
34.2
|
Secured debt
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
2,168,925
|
|
|
4.65
|
%
|
|
2.7
|
|
|
1,109,495
|
|
|
6.30
|
%
|
|
1.7
|
|
|
3,278,420
|
|
|
5.21
|
%
|
|
2.4
|
Industrial
|
1,014,030
|
|
|
3.81
|
%
|
|
11.1
|
|
|
—
|
|
|
—
|
%
|
|
0.0
|
|
|
1,014,030
|
|
|
3.81
|
%
|
|
11.1
|
Hospitality
|
9,918
|
|
|
12.78
|
%
|
|
0.4
|
|
|
2,599,681
|
|
|
4.99
|
%
|
|
0.9
|
|
|
2,609,599
|
|
|
5.02
|
%
|
|
0.9
|
Other Real Estate Equity
|
272,909
|
|
|
3.96
|
%
|
|
4.4
|
|
|
1,809,348
|
|
|
4.25
|
%
|
|
2.1
|
|
|
2,082,257
|
|
|
4.21
|
%
|
|
2.4
|
Real Estate Debt
|
—
|
|
|
—
|
%
|
|
0.0
|
|
|
508,891
|
|
|
4.33
|
%
|
|
2.6
|
|
|
508,891
|
|
|
4.33
|
%
|
|
2.6
|
|
3,483,061
|
|
|
|
|
|
|
6,263,965
|
|
|
|
|
|
|
9,747,026
|
|
|
|
|
|
Total debt
|
$
|
4,137,880
|
|
|
|
|
|
|
$
|
6,644,082
|
|
|
|
|
|
|
$
|
10,781,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recourse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate credit facility
|
$
|
—
|
|
|
—
|
%
|
|
—
|
|
|
$
|
50,000
|
|
|
3.51
|
%
|
|
3.0
|
|
|
$
|
50,000
|
|
|
3.51
|
%
|
|
3.0
|
Convertible and exchangeable senior notes
|
616,105
|
|
|
4.27
|
%
|
|
4.0
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
616,105
|
|
|
4.27
|
%
|
|
4.0
|
Junior subordinated debt
|
—
|
|
|
—
|
%
|
|
—
|
|
|
280,117
|
|
|
4.56
|
%
|
|
18.4
|
|
|
280,117
|
|
|
4.56
|
%
|
|
18.4
|
Secured debt
(1)
|
39,219
|
|
|
5.02
|
%
|
|
7.9
|
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
39,219
|
|
|
5.02
|
%
|
|
7.9
|
|
655,324
|
|
|
|
|
|
|
330,117
|
|
|
|
|
|
|
985,441
|
|
|
|
|
|
Non-recourse
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization bonds payable
|
30,132
|
|
|
3.45
|
%
|
|
29.9
|
|
|
361,099
|
|
|
3.02
|
%
|
|
28.4
|
|
|
391,231
|
|
|
3.05
|
%
|
|
28.5
|
Secured debt
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
2,168,936
|
|
|
4.65
|
%
|
|
2.9
|
|
|
1,119,320
|
|
|
5.75
|
%
|
|
2.0
|
|
|
3,288,256
|
|
|
5.03
|
%
|
|
2.6
|
Industrial
|
1,014,229
|
|
|
3.50
|
%
|
|
11.4
|
|
|
—
|
|
|
—
|
%
|
|
0.0
|
|
|
1,014,229
|
|
|
3.50
|
%
|
|
11.4
|
Hospitality
|
9,038
|
|
|
11.00
|
%
|
|
0.6
|
|
|
2,599,681
|
|
|
4.67
|
%
|
|
1.1
|
|
|
2,608,719
|
|
|
4.69
|
%
|
|
1.1
|
Other Real Estate Equity
|
374,789
|
|
|
4.07
|
%
|
|
5.5
|
|
|
1,841,209
|
|
|
4.02
|
%
|
|
2.3
|
|
|
2,215,998
|
|
|
4.03
|
%
|
|
2.8
|
Real Estate Debt
|
—
|
|
|
—
|
%
|
|
—
|
|
|
625,748
|
|
|
4.05
|
%
|
|
2.6
|
|
|
625,748
|
|
|
4.05
|
%
|
|
2.6
|
|
3,597,124
|
|
|
|
|
|
|
6,547,057
|
|
|
|
|
|
|
10,144,181
|
|
|
|
|
|
Total debt
|
$
|
4,252,448
|
|
|
|
|
|
|
$
|
6,877,174
|
|
|
|
|
|
|
$
|
11,129,622
|
|
|
|
|
|
__________
|
|
(1)
|
The fixed rate recourse debt represents
two
promissory notes secured by the Company's aircraft.
|
|
|
(2)
|
Mortgage debt in the healthcare and other real estate equity segments with aggregate outstanding principal of
$447.2 million
at
March 31, 2018
and
$384.5 million
at
December 31, 2017
were either in payment default or were not in compliance with certain debt and/or lease covenants. The Company is negotiating with the lenders to restructure or otherwise refinance the debt.
|
Corporate Credit Facility
On January 10, 2017, the OP entered into an amended and restated credit agreement (the “JPM Credit Agreement”) with several lenders and JPMorgan Chase Bank, N.A. as administrative agent, and Bank of America, N.A. as syndication agent. The JPM Credit Agreement provides a secured revolving credit facility in the maximum principal amount of
$1.0 billion
, with an option to increase up to
$1.5 billion
, subject to agreement of existing or substitute lenders to provide the additional loan commitment and satisfaction of customary closing conditions. The credit facility is scheduled to mature in
January 2021
, with
two
6
-month extension options, each subject to a fee of
0.10%
of the commitment amount upon exercise.
The maximum amount available at any time is limited by a borrowing base of certain investment assets, with the valuation of such investment assets generally determined according to a percentage of adjusted net book value or a multiple of base management fee EBITDA (as defined in the JPM Credit Agreement). At
March 31, 2018
, the borrowing base was sufficient to permit borrowings up to the full
$1.0 billion
commitment.
Advances under the JPM Credit Agreement accrue interest at a per annum rate equal to the sum of one-month London Inter-bank Offered Rate ("LIBOR") plus
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
March 31, 2018
), depending upon the amount of facility utilization.
Some of the Company’s subsidiaries guarantee the obligations of the Company under the JPM Credit Agreement. As security for the advances under the JPM Credit Agreement, the Company and some of its affiliates pledged their equity interests in certain subsidiaries through which the Company directly or indirectly owns substantially all of its assets.
The JPM Credit Agreement contains various affirmative and negative covenants, including financial covenants that require the Company to maintain minimum tangible net worth, liquidity levels and financial ratios, as defined in the JPM Credit Agreement. At
March 31, 2018
, the Company was in compliance with all of the financial covenants.
The JPM Credit Agreement also includes customary events of default, in certain cases subject to reasonable and customary periods to cure. The occurrence of an event of default may result in the termination of the credit facility, accelerate the Company’s repayment obligations, in certain cases limit the Company’s ability to make distributions, and allow the lenders to exercise all rights and remedies available to them with respect to the collateral. There have been no events of default since the inception of the credit facility.
Convertible and Exchangeable Senior Notes
Convertible senior notes and exchangeable senior notes (assumed from NRF at fair value in the Merger) are senior unsecured obligations of the Company and are guaranteed by the Company on a senior unsecured basis.
Convertible and exchangeable senior notes issued by the Company and outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Issuance Date
|
|
Due Date
|
|
Interest Rate
|
|
Conversion or Exchange Price (per share of common stock)
|
|
Conversion or Exchange Ratio
(2)
(In Shares)
|
|
Conversion or Exchange Shares (in thousands)
|
|
Earliest Redemption Date
|
|
Outstanding Principal
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
5.00% Convertible Notes
|
|
April 2013
|
|
April 15, 2023
|
|
5.00
|
|
$
|
15.76
|
|
|
63.4700
|
|
|
12,694
|
|
|
April 22, 2020
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
3.875% Convertible Notes
|
|
January and June 2014
|
|
January 15, 2021
|
|
3.875
|
|
16.57
|
|
|
60.3431
|
|
|
24,288
|
|
|
January 22, 2019
|
|
402,500
|
|
|
402,500
|
|
5.375% Exchangeable Notes
|
|
June 2013
(1)
|
|
June 15, 2033
|
|
5.375
|
|
12.04
|
|
|
83.0837
|
|
|
1,155
|
|
|
June 15, 2023
|
|
13,605
|
|
|
13,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
616,105
|
|
|
$
|
616,105
|
|
__________
|
|
(1)
|
Represents initial date of issuance of exchangeable senior notes by NRF prior to the Merger.
|
|
|
(2)
|
The conversion or exchange rate for convertible and exchangeable senior notes is subject to periodic adjustments to reflect the carried-forward adjustments relating to common stock splits, reverse stock splits, common stock adjustments in connection with spin-offs and cumulative cash dividends paid on the Company's common stock since the issuance of the convertible and exchangeable senior notes. The conversion or exchange ratios are presented in shares of common stock per
$1,000
principal of each convertible or exchangeable note.
|
The convertible and exchangeable senior notes mature on their respective due dates, unless redeemed, repurchased or exchanged prior to such date in accordance with the terms of their respective governing documents. The convertible and exchangeable senior notes are redeemable at a redemption price equal to
100%
of their principal amount, plus accrued and unpaid interest up to, but excluding, the redemption date.
The Company may redeem the convertible notes for cash at its option at any time on or after their respective redemption dates if the last reported sale price of the Company's common stock has been at least
130%
of the conversion price of the convertible notes then in effect for at least
20
trading days (whether or not consecutive) during any
30
consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption.
The exchangeable notes may be exchanged for cash, common stock or a combination thereof, at the Company's election, upon the occurrence of specified events, and at any time on or after their respective redemption dates, and on the second business day immediately preceding their maturity dates. The holders of the exchangeable notes have the right, at their option, to require the Company to repurchase the exchangeable notes for cash on certain specific dates in accordance with the terms of their respective governing documents.
In June 2017 and July 2017, the Company repurchased all
$13.0 million
of the outstanding principal of the
7.25%
exchangeable notes for
$13.4 million
in aggregate, equal to the sum of outstanding principal and accrued interest, upon exercise of the repurchase option by note holders.
In August 2017 and November 2017, the Company exchanged a combined
$2.8 million
of the outstanding principal of the
5.375%
exchangeable notes into
232,669
shares of the Company's class A common stock. The excess of fair value of the class A common stock issued over carrying value of the corresponding notes on the exchange date resulted in an immaterial charge to earnings.
Secured and Unsecured Debt
These are primarily investment level financing, which are generally subject to customary non-recourse carve-outs, secured by underlying commercial real estate and mortgage loans receivable.
Securitization Bonds Payable
Securitization bonds payable represent debt issued by securitization vehicles consolidated by the Company (Note
15
). This includes CMBS debt as well as collateralized loan obligation debt, which were bonds issued by the consolidated N-Star CDO I and CDO IX that were assumed by the Company at fair value upon the Merger.
Senior notes issued by these securitization trusts were generally sold to third parties and subordinated notes retained by the Company. Payments from underlying collateral loans or securities must be applied to repay the notes until fully paid off, irrespective of the contractual maturities of the notes.
Junior Subordinated Debt
The junior subordinated debt was assumed by the Company through the Merger at fair value. Prior to the Merger, subsidiaries of NRF, which were formed as statutory trusts, NRF Realty Trust Financial LLC I through VIII (the “Trusts”), issued trust preferred securities ("TruPS") in private placement offerings. The sole assets of the Trusts consist of a like amount of junior subordinated notes issued by NRF at the time of the offerings (the "Junior Notes").
The Company may redeem the Junior Notes at par, in whole or in part, for cash, after
five
years. To the extent the Company redeems the Junior Notes, the Trusts are required to redeem a corresponding amount of TruPS. The ability of the Trusts to pay dividends depends on the receipt of interest payments on the Junior Notes. The Company has the right, pursuant to certain qualifications and covenants, to defer payments of interest on the Junior Notes for up to
six
consecutive quarters. If payment of interest on the Junior Notes is deferred, the Trust will defer the quarterly distributions on the TruPS for a corresponding period. Additional interest accrues on deferred payments at the annual rate payable on the Junior Notes, compounded quarterly.
Interest Incurred
Total interest incurred on the Company's debt, including interest capitalized on real estate under development or construction, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
2018
|
|
2017
|
Interest expensed
|
|
$
|
148,889
|
|
|
$
|
126,278
|
|
Interest capitalized
|
|
429
|
|
|
—
|
|
Total interest incurred
|
|
$
|
149,318
|
|
|
$
|
126,278
|
|
13
. Derivatives
The Company uses derivative instruments to manage the risk of changes in interest rates and foreign exchange rates, arising from both its business operations and economic conditions. Specifically, the Company enters into derivative instruments to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and cash payments, the values of which are driven by interest rates, principally relating to the Company’s investments and borrowings. Additionally, the Company’s foreign operations expose the Company to fluctuations in foreign interest rates and exchange rates. The Company enters into derivative instruments to protect the value or fix certain of these foreign denominated amounts in terms of its functional currency, the U.S. dollar. Derivative instruments used in the Company’s risk management activities may be designated as qualifying hedge accounting relationships (“designated hedges”) or otherwise used for economic hedging purposes (“non-designated hedges”).
Fair value of derivative assets and derivative liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(In thousands)
|
|
Designated Hedges
|
|
Non-Designated Hedges
|
|
Total
|
|
Designated Hedges
|
|
Non-Designated Hedges
|
|
Total
|
Derivative Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
4,594
|
|
|
$
|
1,373
|
|
|
$
|
5,967
|
|
|
$
|
8,009
|
|
|
$
|
975
|
|
|
$
|
8,984
|
|
Interest rate contracts
|
|
—
|
|
|
1,300
|
|
|
1,300
|
|
|
—
|
|
|
1,168
|
|
|
1,168
|
|
Included in other assets
|
|
$
|
4,594
|
|
|
$
|
2,673
|
|
|
$
|
7,267
|
|
|
$
|
8,009
|
|
|
$
|
2,143
|
|
|
$
|
10,152
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(39,404
|
)
|
|
$
|
(7,854
|
)
|
|
$
|
(47,258
|
)
|
|
$
|
(39,101
|
)
|
|
$
|
(5,307
|
)
|
|
$
|
(44,408
|
)
|
Interest rate contracts
|
|
—
|
|
|
(103,540
|
)
|
|
(103,540
|
)
|
|
—
|
|
|
(160,440
|
)
|
|
(160,440
|
)
|
Included in accrued and other liabilities
|
|
$
|
(39,404
|
)
|
|
$
|
(111,394
|
)
|
|
$
|
(150,798
|
)
|
|
$
|
(39,101
|
)
|
|
$
|
(165,747
|
)
|
|
$
|
(204,848
|
)
|
Certain counterparties to the derivative instruments require the Company to deposit cash or other eligible collateral. The Company had
$10.9 million
and
$1.9 million
of cash collateral on deposit at
March 31, 2018
and
December 31, 2017
, respectively, included in other assets.
Foreign Exchange Contracts
The following table summarizes the aggregate notional amounts of designated and non-designated foreign exchange contracts in place at
March 31, 2018
, along with certain key terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Currency
|
|
Instrument Type
|
|
Notional Amount
(in thousands)
|
|
|
|
Range of Expiration Dates
|
|
|
Designated
|
|
Non-Designated
|
|
FX Rates
($ per unit of foreign currency)
|
|
EUR
|
|
FX Collar
|
|
€
|
117,938
|
|
|
€
|
25
|
|
|
Min $1.06 / Max $1.53
|
|
December 2018 to January 2021
|
GBP
|
|
FX Collar
|
|
£
|
42,948
|
|
|
£
|
3,802
|
|
|
Min $1.45 / Max $1.82
|
|
June 2019 to December 2019
|
EUR
|
|
FX Forward
|
|
€
|
271,616
|
|
|
€
|
9,853
|
|
|
Min $1.10 / Max $1.38
|
|
April 2018 to January 2022
|
GBP
|
|
FX Forward
|
|
£
|
95,729
|
|
|
£
|
47,421
|
|
|
Min $1.23 / Max $1.27
|
|
December 2018 to December 2020
|
NOK
|
|
FX Forward
|
|
NOK
|
771,211
|
|
|
NOK
|
151,789
|
|
|
0.13
|
|
August 2018
|
Designated Net Investment Hedges
The Company’s foreign denominated net investments in subsidiaries or joint ventures were
€452.5 million
,
£243.4 million
and
NOK785.7 million
, or a total of
$998.9 million
at
March 31, 2018
, and
€499.2 million
,
£250.6 million
and
NOK771.2 million
, or a total of
$1,139.0 million
at
December 31, 2017
.
The Company entered into foreign exchange contracts to hedge the foreign currency exposure of certain investments in foreign subsidiaries or equity method joint ventures, designated as net investment hedges, as follows:
|
|
•
|
forward contracts whereby the Company agrees to sell an amount of foreign currency for an agreed upon amount of U.S. dollars; and
|
|
|
•
|
foreign exchange collars (caps and floors) without upfront premium costs, which consist of a combination of currency options with single date expirations, whereby the Company gains protection against foreign currency weakening below a specified level and pays for that protection by giving up gains from foreign currency appreciation above a specified level.
|
These foreign exchange contracts are used to protect certain of the Company’s foreign denominated investments and receivables from adverse foreign currency fluctuations, with notional amounts and termination dates based upon the anticipated return of capital from the investments.
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.
Following the liquidation of underlying investments of foreign subsidiaries, net realized gain of
$2.6 million
and
$1.3
million on net investment hedges were transferred out of accumulated other comprehensive income into earnings, recorded in other gain (loss) for the years ended
March 31, 2018
and
2017
, respectively.
Non-Designated Hedges
At the end of each quarter, the Company reassesses the effectiveness of its net investment hedges and as appropriate, dedesignates the portion of the derivative notional 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). For the years ended
March 31, 2018
and
2017
, dedesignated net investment hedges yielded unrealized losses of
$2.9 million
and
$0.5 million
, respectively.
Interest Rate Contracts
The Company uses various interest rate contracts, some of which may be designated as cash flows hedges, to limit its exposure to changes in interest rates on various floating rate debt obligations.
At
March 31, 2018
, the Company held the following interest rate contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount
(in thousands)
|
|
|
|
Strike Rate / Forward Rate
|
|
|
Instrument Type
|
|
Non-Designated
|
|
Index
|
|
|
Expiration
|
Interest rate swaps
|
|
$
|
2,000,000
|
|
|
3-Month LIBOR
|
|
3.39%
|
|
December 2029
|
Interest rate swaps
|
|
$
|
229
|
|
|
1-Month LIBOR
|
|
5.12%
|
|
July 2018
|
Interest rate caps
|
|
$
|
6,427,513
|
|
|
1-Month LIBOR
|
|
2.46% - 5.70%
|
|
June 2018 to November 2019
|
Interest rate caps
|
|
$
|
221,270
|
|
|
3-Month LIBOR
|
|
3.50%
|
|
August 2018 to March 2019
|
Interest rate caps
|
|
€
|
555,589
|
|
|
3-Month EURIBOR
|
|
0.75% - 1.50%
|
|
October 2018 to September 2022
|
Interest rate caps
|
|
£
|
429,904
|
|
|
3-Month GBP LIBOR
|
|
2.0% - 2.5%
|
|
November 2018 to February 2020
|
Basis swap
|
|
$
|
10,000
|
|
|
(1)
|
|
(1)
|
|
January 2019
|
Deliverable swap futures
|
|
$
|
16,134
|
|
|
(2)
|
|
(2)
|
|
June 2018
|
__________
|
|
(1)
|
Basis swap is held by a consolidated N-Star CDO, paying 3-month LIBOR plus
1.95%
and receiving 1-month LIBOR plus
1.88%
, used to economically hedge the timing of payments between certain underlying securities and corresponding bonds issued by the consolidated N-Star CDO.
|
|
|
(2)
|
A consolidated sponsored investment company sold a 10-year USD deliverable swap futures contract to economically hedge the interest rate exposure on its long dated fixed rate securities.
|
Amounts recorded in other gain (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Unrealized gain (loss):
|
|
|
|
|
Non-designated interest rate contracts
|
|
$
|
56,657
|
|
|
$
|
22,592
|
|
Offsetting Assets and Liabilities
The Company enters into agreements subject to enforceable master netting arrangements with its derivative counterparties that allow the Company to offset the settlement of derivative assets and liabilities in the same currency by derivative instrument type or, in the event of default by the counterparty, to offset all derivative assets and liabilities with the same counterparty. The Company has elected not to net derivative asset and liability positions, notwithstanding the conditions for right of offset may have been met. The Company presents derivative assets and liabilities with the same counterparty on a gross basis on the consolidated balance sheets.
The following table sets forth derivative positions where the Company has a right of offset under netting arrangements with the same counterparty.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Assets (Liabilities) Included on Consolidated Balance Sheets
|
|
Gross Amounts Not Offset on Consolidated Balance Sheets
|
|
Net Amounts of Assets (Liabilities)
|
(In thousands)
|
|
|
(Assets) Liabilities
|
|
Cash Collateral Received (Pledged)
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
5,967
|
|
|
$
|
(5,920
|
)
|
|
$
|
—
|
|
|
$
|
47
|
|
Interest rate contracts
|
|
1,300
|
|
|
(1
|
)
|
|
—
|
|
|
1,299
|
|
|
|
$
|
7,267
|
|
|
$
|
(5,921
|
)
|
|
$
|
—
|
|
|
$
|
1,346
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(47,258
|
)
|
|
$
|
5,920
|
|
|
$
|
6,403
|
|
|
$
|
(34,935
|
)
|
Interest rate contracts
|
|
(103,540
|
)
|
|
1
|
|
|
4,500
|
|
|
(99,039
|
)
|
|
|
$
|
(150,798
|
)
|
|
$
|
5,921
|
|
|
$
|
10,903
|
|
|
$
|
(133,974
|
)
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Derivative Assets
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
8,984
|
|
|
$
|
(8,944
|
)
|
|
$
|
—
|
|
|
$
|
40
|
|
Interest rate contracts
|
|
1,168
|
|
|
(4
|
)
|
|
—
|
|
|
1,164
|
|
|
|
$
|
10,152
|
|
|
$
|
(8,948
|
)
|
|
$
|
—
|
|
|
$
|
1,204
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
(44,408
|
)
|
|
$
|
8,944
|
|
|
$
|
—
|
|
|
$
|
(35,464
|
)
|
Interest rate contracts
|
|
(160,440
|
)
|
|
4
|
|
|
1,900
|
|
|
(158,536
|
)
|
|
|
$
|
(204,848
|
)
|
|
$
|
8,948
|
|
|
$
|
1,900
|
|
|
$
|
(194,000
|
)
|
14
. Fair Value
Recurring Fair Values
The table below presents a summary of financial assets and financial liabilities carried at fair value on a recurring basis, including financial instruments for which the fair value option was elected but excluding financial assets under the NAV practical expedient, categorized into the following three tier hierarchy:
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Loans receivable—securitized loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
44,330
|
|
|
$
|
44,330
|
|
Investments in unconsolidated ventures
|
|
—
|
|
|
—
|
|
|
247,983
|
|
|
247,983
|
|
Debt securities available for sale
|
|
|
|
|
|
|
|
|
CRE securities of consolidated N-Star CDOs:
|
|
|
|
|
|
|
|
|
CMBS
|
|
—
|
|
|
—
|
|
|
131,518
|
|
|
131,518
|
|
Other securities
|
|
—
|
|
|
—
|
|
|
13,452
|
|
|
13,452
|
|
N-Star CDO bonds
|
|
—
|
|
|
—
|
|
|
80,165
|
|
|
80,165
|
|
CMBS and other securities
|
|
—
|
|
|
27,619
|
|
|
804
|
|
|
28,423
|
|
Equity securities of consolidated fund
|
|
35,342
|
|
|
—
|
|
|
—
|
|
|
35,342
|
|
Other assets—derivative assets
|
|
—
|
|
|
7,267
|
|
|
—
|
|
|
7,267
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt—securitization bonds payable
|
|
—
|
|
|
—
|
|
|
44,103
|
|
|
44,103
|
|
Other liabilities
—
derivative liabilities
|
|
—
|
|
|
150,798
|
|
|
—
|
|
|
150,798
|
|
Other liabilities—contingent consideration for THL Hotel Portfolio
|
|
—
|
|
|
—
|
|
|
7,760
|
|
|
7,760
|
|
Due to affiliates—contingent consideration for Internalization
|
|
—
|
|
|
—
|
|
|
10,170
|
|
|
10,170
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Loans receivable—securitized loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,423
|
|
|
$
|
45,423
|
|
Investments in unconsolidated ventures
|
|
—
|
|
|
—
|
|
|
363,901
|
|
|
363,901
|
|
Debt securities available for sale
|
|
|
|
|
|
|
|
|
CRE securities of consolidated N-Star CDOs:
|
|
|
|
|
|
|
|
|
CMBS
|
|
—
|
|
|
—
|
|
|
147,945
|
|
|
147,945
|
|
Other securities
|
|
—
|
|
|
—
|
|
|
66,983
|
|
|
66,983
|
|
N-Star CDO bonds
|
|
—
|
|
|
—
|
|
|
90,933
|
|
|
90,933
|
|
CMBS and other securities
|
|
—
|
|
|
25,099
|
|
|
17,382
|
|
|
42,481
|
|
Equity securities of consolidated fund
|
|
35,600
|
|
|
—
|
|
|
—
|
|
|
35,600
|
|
Other assets—derivative assets
|
|
—
|
|
|
10,152
|
|
|
—
|
|
|
10,152
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Debt—securitization bonds payable
|
|
—
|
|
|
—
|
|
|
44,542
|
|
|
44,542
|
|
Other liabilities
—
derivative liabilities
|
|
—
|
|
|
204,848
|
|
|
—
|
|
|
204,848
|
|
Other liabilities—contingent consideration for THL Hotel Portfolio
|
|
—
|
|
|
—
|
|
|
7,419
|
|
|
7,419
|
|
Due to affiliates—contingent consideration for Internalization
|
|
—
|
|
|
—
|
|
|
20,650
|
|
|
20,650
|
|
Loans Receivable and Debt
The Company elected the fair value option for loans receivable and bonds payable issued by a securitization trust consolidated by a NorthStar CDO. The NorthStar CDO is in turn consolidated by the Company. The financial assets of the securitization trust can be used only to settle its financial liabilities, and the financial liabilities of the securitization trust can be settled only with its financial assets. As such, the Company has adopted the measurement alternative to measure the fair value of the loans receivable held by the securitization trust using the fair value of the bonds payable issued by the securitization trust as the latter represents the more observable fair value. Accordingly, the net gain or loss reflected in earnings is limited to changes in fair value of the beneficial interest held by the Company in the consolidated securitization trust, and not as a result of a remeasurement of the loans receivable and bonds payable held by third parties in the consolidated securitization trust.
Fair value of the bonds payable issued by the securitization trust is determined based on broker quotes, which are generally derived from unobservable inputs, and therefore classified as Level 3 of the fair value hierarchy. Correspondingly, the fair value of the loans receivable held by the securitization trust is also classified as Level 3. Management determines the quotes are representative of fair value through a review of available data, including recent transactions as well as its knowledge of and experience in the market.
Investments in Unconsolidated Ventures
Equity investments carried at fair value on a recurring basis consist of investments in certain unconsolidated ventures, including investments in private funds acquired in connection with the Merger, for which fair value option was elected. Fair values are determined using discounted cash flow models based on expected future cash flows for income and realization events of the underlying assets, transaction price for recently acquired investments, or pending sales price on an investment, as applicable. The Company considers cash flow provided by general partners of private funds and the implied yields of those funds in valuing its investments in private funds. However, the Company has not elected the practical expedient to measure the fair value of its investments in these private funds using the NAV of the underlying funds. Fair value of investments in unconsolidated ventures is classified as Level 3 of the fair value hierarchy, with changes in fair value recorded in earnings from investments in unconsolidated ventures.
Securities
N-Star CDO bonds—Fair value of N-Star CDO bonds are determined internally based on recent trades, if any with such securitizations, the Company's knowledge of the underlying collateral and are determined using an internal price interpolated based on third party prices of the senior N-Star CDO bonds of the respective CDOs. All N-Star CDO bonds are classified as Level 3 of the fair value hierarchy.
CMBS and other securities—Fair value is determined based on broker quotes, third party pricing services or an internal price, all of which are generally derived from unobservable inputs, and therefore classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including recent transactions as well as its knowledge of and experience in the market.
Equity securities of consolidated fund—Fair value of equity securities held by a consolidated open-end fund is based on listed prices in active markets and classified as Level 1 of the fair value hierarchy.
Derivatives
Derivative instruments consist of interest rate contracts and foreign exchange contracts that are generally traded over-the-counter, and are valued using a third-party service provider, except for exchange traded futures contracts which are Level 1 fair values. Quotations on over-the-counter derivatives are not adjusted and are generally valued using observable inputs such as contractual cash flows, yield curve, foreign currency rates and credit spreads, and are classified as Level 2 of the fair value hierarchy. 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.
Due To Affiliates
—
Contingent Consideration for Internalization
In connection with the Company's acquisition of the investment management business and operations of its former
manager in April 2015 (the "Internalization"), contingent consideration is payable to certain senior executives of the
Company. Contingent consideration is to be paid in a combination of up to approximately
1.29 million
shares of class A common stock,
115,226
shares of class B common stock and approximately
4.40 million
OP Units. The contingent consideration is subject to multi-year performance targets for achievement of a contractually-defined funds from operations ("Benchmark FFO") per share target and capital-raising thresholds from the funds management business, adjusted for certain targets that have not been met and that have expired. If the minimum performance target for either of these metrics is not met or exceeded, a portion of the contingent consideration paid in respect of the other metric would not be paid out in full. The contingent consideration is remeasured at fair value each reporting period using a third party valuation service provider and classified as Level 3 of the fair value hierarchy, with changes in fair value recorded in other gain (loss) in the consolidated statement of operations. Fair value of the contingent consideration is measured using a Monte Carlo probability simulation model for the Benchmark FFO component and a discounted payout analysis based on probabilities of achieving prescribed targets for the capital-raising component. The Company's class A common stock price and related equity volatilities are applied to convert the contingent consideration payout into shares.
Other Liabilities
—
Contingent Consideration for THL Hotel Portfolio
In connection with a consensual foreclosure of the THL Hotel Portfolio, contingent consideration is payable to the former preferred equity holder of the borrower in an amount up to
$13.0 million
(Note
3
). Fair value of the contingent
consideration is measured using discounted cash flows based on the probability of the former preferred equity holder receiving such payment.
Level 3 Recurring Fair Value Measurements
The Company relies on the third party pricing exception with respect to the requirement to provide quantitative disclosures about significant Level 3 inputs being used to determine fair value measurements for CRE debt securities, except for N-Star CDO bonds, loans receivable and bonds payable issued by a consolidated securitization trust held by a consolidated N-Star CDO. The Company believes that the pricing service or broker quotations for these instruments may be based on market transactions of comparable securities, inputs including forecasted market rates, contractual terms, observable discount rates for similar securities and credit, such as credit support and delinquency rates.
Quantitative information about recurring level 3 fair value measurements, for which information about unobservable inputs is reasonably available to the Company, are as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Technique
|
|
Key Unobservable Inputs
|
|
Input Value
|
|
Effect on Fair Value from Increase in Input Value
(1)
|
Financial Instrument
|
|
Fair Value
(In thousands)
|
|
|
|
Weighted Average
(Range)
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated ventures—private funds
|
|
$
|
171,945
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
14.6%
(12.0% - 20.0%)
|
|
Decrease
|
Investments in unconsolidated ventures—others
|
|
26,712
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
14.3%
(8.8% - 15.5%)
|
|
Decrease
|
Investments in unconsolidated ventures—others
|
|
49,326
|
|
|
Recent transaction price
(2)
|
|
Not applicable
|
|
Not applicable
|
|
Not applicable
|
N-Star CDO bonds
|
|
80,165
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
19.5%
(10.6% - 68.3%)
|
|
Decrease
|
Due to affiliates—contingent consideration for Internalization
|
|
10,170
|
|
|
Monte Carlo simulation
|
|
Benchmark FFO volatility
|
|
11.8%
|
|
Increase
|
|
|
|
|
|
|
Equity volatility
|
|
18.7%
|
|
Increase
|
|
|
|
|
|
|
Correlation
(3)
|
|
80.0%
|
|
Increase
|
Other liabilities—contingent consideration for THL Hotel Portfolio
|
|
7,760
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
20.0%
|
|
Decrease
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated ventures—private funds
|
|
$
|
204,774
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
14.6%
(11.0% - 20.0%)
|
|
Decrease
|
Investments in unconsolidated ventures—others
|
|
26,408
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
14.2%
(8.8% - 14.8%)
|
|
Decrease
|
Investments in unconsolidated ventures—others
|
|
132,719
|
|
|
Recent transaction price
(2)
|
|
Not applicable
|
|
Not applicable
|
|
Not applicable
|
N-Star CDO bonds
|
|
90,933
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
24.0%
(10.8% - 87.4%)
|
|
Decrease
|
Due to affiliates—contingent consideration for Internalization
|
|
20,650
|
|
|
Monte Carlo simulation
|
|
Benchmark FFO volatility
|
|
11.8%
|
|
Increase
|
|
|
|
|
|
|
Equity volatility
|
|
18.7%
|
|
Increase
|
|
|
|
|
|
|
Correlation (3)
|
|
80.0%
|
|
Increase
|
Other liabilities—contingent consideration for THL Hotel Portfolio
|
|
7,419
|
|
|
Discounted cash flows
|
|
Discount rate
|
|
20.0%
|
|
Decrease
|
__________
|
|
(1)
|
Represents the directional change in fair value that would result from an increase to the corresponding unobservable input. A decrease to the unobservable input would have the reverse effect. Significant increases or decreases in these inputs in isolation could result in significantly higher or lower fair value measures.
|
|
|
(2)
|
Represents transacted price for investments acquired in the fourth quarter of 2017 and first quarter of 2018.
|
|
|
(3)
|
Represents assumed correlation between Benchmark FFO and the Company's class A common stock price.
|
The following table presents changes in recurring Level 3 fair value measurements, including realized and unrealized gains (losses) included in earnings and accumulated other comprehensive income. Any transfers in or out of Level 3 are assumed to occur at the beginning of the year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 Assets
|
|
Level 3 Liabilities
|
(In thousands)
|
|
Loans Receivable
|
|
Investments in Unconsolidated Ventures
|
|
Securities
|
|
Debt
|
|
Due To Affiliates
—
Contingent Consideration for Internalization
|
|
Other Liabilities—Contingent Consideration for THL Hotel Portfolio
|
Fair value at December 31, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(41,250
|
)
|
|
$
|
—
|
|
Acquired through the Merger
|
|
—
|
|
|
416,696
|
|
|
427,560
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Purchases or contributions
|
|
—
|
|
|
73
|
|
|
21,321
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Paydowns or distributions
|
|
—
|
|
|
(26,746
|
)
|
|
(31,321
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Realized gains (losses) in earnings
|
|
—
|
|
|
—
|
|
|
(1,193
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
In earnings
|
|
—
|
|
|
10,961
|
|
|
—
|
|
|
—
|
|
|
3,400
|
|
|
—
|
|
In other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
(5,652
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value at March 31, 2017
|
|
$
|
—
|
|
|
$
|
400,984
|
|
|
$
|
410,715
|
|
|
$
|
—
|
|
|
$
|
(37,850
|
)
|
|
$
|
—
|
|
Unrealized gains (losses) on ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
In earnings
|
|
$
|
—
|
|
|
$
|
10,961
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,400
|
|
|
$
|
—
|
|
In other comprehensive income (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5,652
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at December 31, 2017
|
|
$
|
45,423
|
|
|
$
|
363,901
|
|
|
$
|
323,243
|
|
|
$
|
(44,542
|
)
|
|
$
|
(20,650
|
)
|
|
$
|
(7,419
|
)
|
Purchases or contributions
|
|
—
|
|
|
60,044
|
|
|
2,969
|
|
|
389
|
|
|
—
|
|
|
—
|
|
Paydowns, distributions or sales
|
|
(389
|
)
|
|
(158,943
|
)
|
|
(83,588
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Contribution to Colony NorthStar Credit (Note 4)
|
|
—
|
|
|
(26,134
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Realized gains (losses) in earnings
|
|
—
|
|
|
2,842
|
|
|
4,030
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
In earnings
|
|
(704
|
)
|
|
6,273
|
|
|
—
|
|
|
50
|
|
|
10,480
|
|
|
(341
|
)
|
In other comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
(20,715
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value at March 31, 2018
|
|
$
|
44,330
|
|
|
$
|
247,983
|
|
|
$
|
225,939
|
|
|
$
|
(44,103
|
)
|
|
$
|
(10,170
|
)
|
|
$
|
(7,760
|
)
|
Unrealized gains (losses) on ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
In earnings
|
|
$
|
(704
|
)
|
|
$
|
6,021
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
10,480
|
|
|
$
|
(341
|
)
|
In other comprehensive income (loss)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(5,457
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments Carried at Fair Value Using Net Asset Value
Investments in non-traded REITs and limited partnership interest in a third party private fund are valued using NAV of the respective vehicles effective January 1, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
(In thousands)
|
|
Fair Value
|
|
Unfunded Commitments
|
Private fund—real estate
|
|
$
|
11,630
|
|
|
$
|
14,493
|
|
Non-traded REITs—real estate
|
|
9,153
|
|
|
—
|
|
The Company's limited partnership interest in a third party sponsored closed-end private fund is not subject to redemption, with distributions to be received through liquidation of underlying investments of the fund. The fund has an expected life of
eight
years at its inception in 2017, which may be extended in
one
year increments up to
two
years at the discretion of its general partner, an equity method investee of the Company.
No secondary market currently exists for shares of the non-traded REITs. The Company-sponsored non-traded REITs have each adopted share repurchase programs, which provide for limited share repurchases and such programs may be amended, suspended or terminated at any time at the discretion of their respective Board of Directors. Subject to then-existing market conditions, the Company, as sponsor, expects to consider alternatives for providing liquidity to the non-traded REIT shares beginning five years from completion of the offering stage, but with no definitive date by which it must do so. In addition, the Company has agreed that its right to have its shares redeemed is subordinated to third party stockholders for so long as its advisory agreements are in effect.
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, measured at the time of impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(In thousands)
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 2
|
|
Level 3
|
|
Total
|
Real estate held for sale
|
|
$
|
32,842
|
|
|
$
|
157,217
|
|
|
$
|
190,059
|
|
|
$
|
13,252
|
|
|
$
|
36,246
|
|
|
$
|
49,498
|
|
Real estate held for investment
|
|
—
|
|
|
51,747
|
|
|
51,747
|
|
|
—
|
|
|
224,935
|
|
|
224,935
|
|
Intangible assets—investment management contracts
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51,100
|
|
|
51,100
|
|
Investments in unconsolidated ventures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,871
|
|
|
11,871
|
|
The following table summarizes the fair value write-downs to assets carried at nonrecurring fair values during the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Impairment loss
|
|
|
|
|
Real estate held for sale
|
|
$
|
8,763
|
|
|
$
|
3,351
|
|
Real estate held for investment
|
|
4,206
|
|
|
5,168
|
|
Intangible assets—investment management contracts
|
|
140,429
|
|
|
—
|
|
Earnings from investments in unconsolidated ventures
|
|
—
|
|
|
2,144
|
|
Real Estate Held For Sale
—The write down to fair value less cost to sell was estimated based on contracted sales prices, classified as Level 2 of the fair value hierarchy, or based on broker price opinions, discounted cash flows or income capitalization approach, classified as Level 3 of the fair value hierarchy, with discount rates between
8%
and
10%
or capitalization rate of
7%
, and net of selling costs between
2%
to
8%
of the respective fair values.
Real Estate Held For Investment
—Impaired real estate held for investment consisted primarily of properties in the Company's European portfolio, resulting from a combination of a reduction in the estimated holding period of these properties, tenant vacancy as well as exposure to the retail and leisure markets in the United Kingdom. Fair value of the impaired properties were determined using a future cash flow analysis that included an eventual sale of the properties, with expected sale price based on broker price opinions, and applying terminal capitalization rates ranging from
5.5%
to
13.3%
, with longer term cash flow projections discounted at
10%
. Additionally, as of
December 31, 2017
, impaired real estate included certain RIDEA properties that were converted into net lease properties in the healthcare segment, as well as certain properties in our healthcare segment and THL portfolio that experienced some damage from hurricanes.
Investment Management Contract Intangibles
—Upon closing of the Combination on January 31, 2018, the Company's management contracts with NorthStar Income I and NorthStar Income II ceased to exist. Consequently, the carrying value of management contract intangible assets that were recognized for NorthStar Income I and NorthStar Income II at the time of the Merger, which aggregated to approximately
$139.0 million
, were written off.
Additionally, in the first quarter of 2018, the remaining balance of the NorthStar/RXR NY Metro management contract intangible of
$1.4 million
was impaired in consideration of the termination of its offering period effective
March 31, 2018
.
In 2017, the investment management contracts of non-traded REITs acquired through the Merger were impaired in the fourth quarter, with
$55.3 million
related to NorthStar Healthcare following an amendment to its advisory agreement
and
$3.7 million
related to NorthStar/RXR NY Metro based on revised capital raising projections. Fair value of management contract intangibles were estimated based on an analysis of discounted excess earnings attributable to future fee income from each management contract, utilizing a discount rate of
9%
.
Investment In Unconsolidated Ventures
—In 2017, impairment loss was recorded in earnings from investment in unconsolidated ventures on an ADC loan accounted for as an equity method investment. The residential land development project was impaired based on a projection of future cash flows that include the incurrence of additional engineering costs and an estimated residual land value in an as-is sale to a developer.
Refer to Notes
6
and
9
for impairment on loans receivable and goodwill, respectively.
Fair Value Information on Financial Instruments Reported at Cost
Carrying amounts and estimated fair values of financial instruments reported at amortized cost are presented below. The carrying values of cash, interest receivable, accounts receivable, due from and to affiliates, interest payable and accounts payable approximate fair value due to their short term nature and credit risk, if any, are negligible.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Carrying Value
|
(In thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Loans at amortized cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,978,977
|
|
|
$
|
1,978,977
|
|
|
$
|
1,927,849
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt at amortized cost
|
|
|
|
|
|
|
|
|
|
|
Corporate credit facility
|
|
—
|
|
|
100,000
|
|
|
—
|
|
|
100,000
|
|
|
100,000
|
|
Convertible and exchangeable senior notes
|
|
565,350
|
|
|
13,979
|
|
|
—
|
|
|
579,329
|
|
|
610,778
|
|
Secured and unsecured debt
|
|
—
|
|
|
—
|
|
|
9,454,051
|
|
|
9,454,051
|
|
|
9,374,159
|
|
Securitization bonds payable
|
|
—
|
|
|
16,546
|
|
|
149,254
|
|
|
165,800
|
|
|
168,824
|
|
Junior subordinated debt
|
|
—
|
|
|
—
|
|
|
199,411
|
|
|
199,411
|
|
|
197,565
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Loans at amortized cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,232,301
|
|
|
$
|
3,232,301
|
|
|
$
|
3,178,339
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt at amortized cost
|
|
|
|
|
|
|
|
|
|
|
Corporate credit facility
|
|
—
|
|
|
50,000
|
|
|
—
|
|
|
50,000
|
|
|
9,622,175
|
|
Convertible senior notes
|
|
608,491
|
|
|
13,979
|
|
|
—
|
|
|
622,470
|
|
|
610,331
|
|
Secured and unsecured debt
|
|
—
|
|
|
—
|
|
|
9,703,680
|
|
|
9,703,680
|
|
|
9,622,175
|
|
Securitization bonds payable
|
|
—
|
|
|
132,815
|
|
|
169,908
|
|
|
302,723
|
|
|
303,709
|
|
Junior subordinated debt
|
|
—
|
|
|
—
|
|
|
216,316
|
|
|
216,316
|
|
|
197,053
|
|
Loans Receivable
—Loans receivable carried at amortized cost consist of first mortgages, subordinated mortgages and corporate loans, including such loans held by securitization trusts consolidated by the Company. Fair values were determined by comparing the current yield to the estimated yield of newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment; or based on discounted cash flow projections of principal and interest expected to be collected, which includes consideration of the financial standing of the borrower or sponsor as well as operating results of the underlying collateral. Carrying values of loans held for investment carried at amortized cost are presented net of allowance for loan losses, where applicable.
Debt
—Fair value of the credit facility approximated carrying value as its prevailing interest rate and applicable terms were renegotiated within the last
12 months
. Fair value of convertible notes was determined using the last trade price in active markets. Fair value of exchangeable notes was determined based on unadjusted quoted prices in a non-active market. Fair value of secured and unsecured debt were estimated by discounting expected future cash outlays at interest rates currently available to the Company for instruments with similar terms and remaining maturities; and such fair values approximated carrying value for floating rate debt with credit spreads that approximate market rates. Fair value of securitization bonds payable was based on quotations from brokers or financial institutions that act as underwriters of the securitized bonds. Fair value of junior subordinated debt was based on unadjusted quotations from a third party valuation firm, with such quotes derived using a combination of internal valuation models, comparable trades in non-active markets and other market data.
Other
—The carrying values of cash, interest receivable, accounts receivable, due from and to affiliates, interest payable and accounts payable approximate fair value due to their short term nature and credit risk, if any, are negligible.
15
. Variable Interest Entities
Consolidated VIEs
Operating Subsidiary
The Company's operating subsidiary, OP, is a limited liability company that has governing provisions that are the functional equivalent of a limited partnership. The Company holds the majority of membership interest in OP, acts as the managing member of OP and exercises full responsibility, discretion and control over the day-to-day management of OP. The noncontrolling interests in OP do not have substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of noncontrolling interest members (including by such a member unilaterally). The absence of such rights, which represent voting rights in a limited partnership equivalent structure, would render OP to be a VIE. The Company, as managing member, has the power to direct the core activities of OP that most significantly affect OP's performance, and through its majority interest in OP, has both the right to receive benefits from and the obligation to absorb losses of OP. Accordingly, the Company is the primary beneficiary of OP and consolidates OP. As the Company conducts its business and holds its assets and liabilities through OP, the total assets and liabilities of OP represent substantially all of the total consolidated assets and liabilities of the Company.
Securitizations
The Company securitizes loans receivable and CRE debt securities using VIEs. The Company may also acquire securities issued by securitization trusts that are VIEs. The securitization vehicles are structured as pass-through entities that receive principal and interest on the underlying mortgage loans and debt securities and distribute those payments to the holders of the notes, certificates or bonds issued by the securitization vehicles. The loans and debt securities are transferred into securitization vehicles such that these assets are restricted and legally isolated from the creditors of the Company, and therefore are not available to satisfy the Company's obligations but only the obligations of the securitization vehicles. The obligations of the securitization vehicles do not have any recourse to the general credit of any other consolidated entities, nor to the Company.
The Company retains beneficial interests in the securitization vehicles, usually in the form of equity tranches or subordinate securities. Affiliates of the Company or appointed third parties act as special servicer of the underlying collateral mortgage loans and the Company acts as collateral manager of
two
N-Star CDOs. Additionally, the Company's acquired investment in securitization trusts, in certain cases, may become the controlling class, which would then give the Company the right to appoint or remove the special servicer. The special servicer has the power to direct activities during the loan workout process on defaulted and delinquent loans as permitted by the underlying contractual agreements, which is subject to the consent of the Company, as the controlling class representative or directing holder who, under certain circumstances, has the right to unilaterally remove the special servicer. The Company, as collateral manager of the
two
N-Star CDOs, has the power to invest in additional or replacement collateral during the investment period and subsequent to the investment period, has the power to identify an asset as distressed or credit risk and sell certain distressed collateral. As the Company’s rights as the directing holder and controlling class representative or as the collateral manager of the CDOs provide the Company the ability to direct activities that most significantly impact the economic performance of the securitization vehicles, the Company maintains effective control over the loans and debt securities transferred into the securitization vehicles. Considering the interests retained by the Company in the securitization vehicles together with its role as controlling class representative or directing holder or collateral manager of the
two
N-Star CDOs, the Company is deemed to be the primary beneficiary and consolidates these securitization vehicles. Accordingly, these securitizations did not qualify as sale transactions and are accounted for as secured financing with the underlying mortgage loans and debt securities pledged as collateral.
All of the underlying assets, liabilities, equity, revenues and expenses of these securitization vehicles are consolidated within the Company's consolidated financial statements. Consolidation of these securitization vehicles does not have an economic impact to the Company. The Company’s exposure to the obligations of these securitization vehicles is generally limited to its investment in these entities, which was
$186.3 million
and
$490.1 million
at
March 31, 2018
and
December 31, 2017
, respectively. The Company is not obligated to provide any financial support to these securitization vehicles, although it may, in its sole discretion, provide support such as protective and other advances as it deems appropriate. For the
three months ended March 31, 2018
and
2017
, the Company did not provide any such financial support to these securitization vehicles.
Company-Sponsored Private Fund
The Company sponsors certain private funds and other investment vehicles as general partner for the purpose of providing investment management services in exchange for management fees and performance-based fees. These funds are established as limited partnerships or equivalent structures. For certain sponsored private funds, limited partners of the funds do not have either substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of limited partners or by a single limited partner. Accordingly, the absence of such rights in certain sponsored private funds, which represent voting rights in a limited partnership, results in such funds being considered VIEs. The nature of the Company's involvement with its sponsored funds comprise fee arrangements and equity interests. The fee arrangements are commensurate with the level of management services provided by the Company, and contain terms and conditions that are customary to similar at-market fee arrangements.
The Company's equity interest in one of its sponsored open-end private funds is deemed to absorb more than insignificant variability during the early stages of the fund while additional third party capital is being raised. The Company is considered to be acting in the capacity of a principal of the fund, therefore the Company is the primary beneficiary and currently consolidates the fund. The Company’s exposure is limited to the value of its outstanding investment in the fund of
$10.1 million
at
March 31, 2018
and
$10.2 million
at
December 31, 2017
. The Company, as general partner, is not obligated to provide any financial support to the consolidated fund.
Unconsolidated VIEs
Securitizations
Prior to the Merger, NRF delegated the collateral management rights for certain sponsored CDOs and two third party-sponsored CDOs to a third party collateral manager or collateral manager delegate who is entitled to a percentage of the senior and subordinate collateral management fees. The Company continues to receive fees as named collateral manager or collateral manager delegate and retained administrative responsibilities. The Company determined that the fees paid to the third party collateral manager or collateral manager delegate represents a variable interest in the CDOs and that the third party is acting as a principal. The Company concluded that it does not have the power to direct the activities that most significantly impact the economic performance of these CDOs, which include but are not limited to the ability to sell distressed collateral, and therefore is no longer the primary beneficiary of such CDOs. As a result, the Company does not consolidate the assets and liabilities of the CDOs for which the Company does not retain the collateral management function. The Company’s exposure to loss is limited to its investment in these CDOs, comprising CDO equity and CDO bonds, which aggregate to
$83.5 million
at
March 31, 2018
and
$102.2 million
at
December 31, 2017
.
Trusts
The Company, through the Merger, acquired the Trusts, which are wholly-owned subsidiaries of NRF formed as statutory trusts. The Trusts issued preferred securities in private placement offerings, and used the proceeds to purchase junior subordinated notes to evidence loans made to NRF (Note
12
). The Company owns all of the common stock of the Trusts, however, the Company's interests in the Trusts do not represent variable interests. The Company determined that the holders of the preferred securities issued by the Trusts are the primary beneficiaries of the Trusts, therefore, the Company does not consolidate the Trusts. The Company accounts for its interest in the Trusts under the equity method and its maximum exposure to loss is limited to its investment carrying value of
$3.7 million
at both
March 31, 2018
and
December 31, 2017
, recorded in investments in unconsolidated ventures on the consolidated balance sheet (Note
7
). The junior subordinated notes are recorded as debt on the Company's consolidated balance sheet.
Company-Sponsored Private Funds
As general partner, the Company has capital commitments directly to its sponsored funds. The Company may also invest alongside certain of its sponsored private funds through joint ventures between the Company and its sponsored funds, with the co-investment joint ventures consolidated by the Company, and the Company may have capital commitments satisfied directly through the co-investment joint ventures as an affiliate of the general partner. The Company's equity interests in these sponsored funds absorb insignificant variability. As the Company is considered to be acting in the capacity of an agent of these sponsored funds, the Company is not the primary beneficiary and does not consolidate these sponsored funds. The Company accounts for its equity interests in these sponsored funds under the equity method. The Company's maximum exposure to loss is limited to the carrying value of its investment in these sponsored funds, totaling
$9.1 million
at
March 31, 2018
and
$6.9 million
at
December 31, 2017
, included within investments in unconsolidated ventures on the consolidated balance sheets.
16
. Stockholders’ Equity
The table below summarizes the share activities of the Company's preferred and common stock.
As a result of the Merger, each outstanding share of Colony's class A and class B common stock was converted into the right to receive
1.4663
shares of Colony NorthStar's class A and class B common stock, respectively. Accordingly, the Company's common shares outstanding for all periods prior to January 10, 2017 have been adjusted to reflect the Colony exchange ratio of
1.4663
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
(In thousands)
|
|
Preferred Stock
|
|
Class A Common Stock
|
|
Class B Common Stock
|
Shares outstanding at December 31, 2016
|
|
25,030
|
|
|
166,440
|
|
|
770
|
|
Consideration for the Merger
(1)
|
|
39,466
|
|
|
392,120
|
|
|
—
|
|
Shares canceled
(2)
|
|
—
|
|
|
(2,984
|
)
|
|
—
|
|
Shares issued upon redemption of OP units
|
|
—
|
|
|
45
|
|
|
—
|
|
Repurchase of common stock
|
|
—
|
|
|
(4,933
|
)
|
|
—
|
|
Equity-based compensation, net of forfeitures
|
|
—
|
|
|
7,075
|
|
|
—
|
|
Shares canceled for tax withholding on vested stock awards
|
|
—
|
|
|
(359
|
)
|
|
—
|
|
Shares outstanding at March 31, 2017
|
|
64,496
|
|
|
557,404
|
|
|
770
|
|
|
|
|
|
|
|
|
Shares outstanding at December 31, 2017
|
|
65,464
|
|
|
542,599
|
|
|
736
|
|
Shares issued upon redemption of OP Units
|
|
—
|
|
|
2
|
|
|
—
|
|
Repurchase of common stock
|
|
—
|
|
|
(42,306
|
)
|
|
—
|
|
Equity-based compensation, net of forfeitures
|
|
—
|
|
|
3,257
|
|
|
—
|
|
Shares canceled for tax withholding on vested stock awards
|
|
—
|
|
|
(2,909
|
)
|
|
—
|
|
Shares outstanding at March 31, 2018
|
|
65,464
|
|
|
500,643
|
|
|
736
|
|
__________
|
|
(1)
|
Shares were legally issued by Colony NorthStar, as the surviving combined company, as consideration for the Merger. However, as the Merger was accounted for as a reverse acquisition, the consideration transferred was measured based upon the number of shares of common stock and preferred stock that Colony, as the accounting acquirer, would theoretically have to issue to the shareholders of NSAM and NRF to achieve the same ratio of ownership in Colony NorthStar upon completion of the Merger (Note
3
).
|
|
|
(2)
|
Represents NRF shares held by NSAM that were canceled upon consummation of the Merger, after giving effect to the exchange ratio.
|
Preferred Stock
In the event of a liquidation or dissolution of the Company, preferred stockholders have priority over common stockholders for payment of dividends and distribution of net assets.
The table below summarizes the preferred stock issued and outstanding at
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Dividend Rate Per Annum
|
|
Initial Issuance Date
|
|
Shares Outstanding
(in thousands)
|
|
Par Value
(in thousands)
|
|
Liquidation Preference
(in thousands)
|
|
Earliest Redemption Date
|
Series B
|
|
8.25
|
%
|
|
February 2007
(1)
|
|
6,114
|
|
|
$
|
61
|
|
|
$
|
152,855
|
|
|
Currently redeemable
|
Series D
|
|
8.5
|
%
|
|
April 2013
(1)
|
|
8,000
|
|
|
80
|
|
|
200,000
|
|
|
April 10, 2018
|
Series E
|
|
8.75
|
%
|
|
May 2014
(1)
|
|
10,000
|
|
|
100
|
|
|
250,000
|
|
|
May 15, 2019
|
Series G
|
|
7.5
|
%
|
|
June 2014
(1)
|
|
3,450
|
|
|
35
|
|
|
86,250
|
|
|
June 19, 2019
|
Series H
|
|
7.125
|
%
|
|
April 2015
(1)
|
|
11,500
|
|
|
115
|
|
|
287,500
|
|
|
April 13, 2020
|
Series I
|
|
7.15
|
%
|
|
June 2017
|
|
13,800
|
|
|
138
|
|
|
345,000
|
|
|
June 5, 2022
|
Series J
|
|
7.125
|
%
|
|
September 2017
|
|
12,600
|
|
|
126
|
|
|
315,000
|
|
|
September 22, 2022
|
|
|
|
|
|
|
65,464
|
|
|
$
|
655
|
|
|
$
|
1,636,605
|
|
|
|
__________
|
|
(1)
|
Represents initial issuance date pre-Merger by NRF or Colony, as applicable.
|
All series of preferred stock are at parity with respect to dividends and distributions, including distributions upon liquidation, dissolution or winding up of the Company. Dividends on each series of preferred stock of Colony NorthStar are payable quarterly in arrears, in the case of the Series B, D and E preferred stock, in February, May, August and November, and in the case of Series G, H, I and J preferred stock, in January, April, July and October.
Each series of preferred stock is redeemable on or after the earliest redemption date for that series at
$25.00
per share plus accrued and unpaid dividends (whether or not declared) exclusively at the Company’s option. The redemption period for each series of preferred stock is subject to the Company’s right under limited circumstances to redeem the preferred stock earlier in order to preserve its qualification as a REIT or upon the occurrence of a change of control (as defined in the articles supplementary relating to each series of preferred stock).
Preferred stock generally does not have any voting rights, except if the Company fails to pay the preferred dividends for
six or more quarterly periods
(whether or not consecutive). Under such circumstances, the preferred stock will be entitled to vote, together as a single class with any other series of parity stock upon which like voting rights have been conferred and are exercisable, to elect
two
additional directors to the Company’s board of directors, until all unpaid dividends have been paid or declared and set aside for payment. In addition, certain changes to the terms of any series of preferred stock cannot be made without the affirmative vote of holders of at least
two-thirds
of the outstanding shares of each such series of preferred stock voting separately as a class for each series of preferred stock.
Issuance and Redemption of Preferred Stock
There were no issuances or redemptions of preferred stock in the
three months ended March 31, 2018
.
In 2017, the Company issued
13.8 million
shares of Series I preferred stock in June 2017 and
12.6 million
shares of Series J preferred stock in September 2017 with dividend rates of
7.15%
and
7.125%
per annum, respectively. Proceeds received for Series I and Series J preferred stock totaled
$637.9 million
, net of underwriting discounts and offering costs payable by the Company. The Company applied the proceeds from the offerings, combined with available cash, to redeem all of the outstanding shares of Series A, Series F and Series C preferred stock and a portion of the outstanding shares of Series B preferred stock for
$644.9 million
in aggregate, based on a redemption price of
$25.00
per share liquidation preference plus accrued and unpaid dividends prorated to the respective redemption dates. The excess or deficit of the
$25.00
per share liquidation preference over the carrying value of the preferred stock redeemed results in a decrease or increase to net income attributable to common stockholders, respectively.
Common Stock
Except with respect to voting rights, class A common stock and class B common stock have the same rights and privileges and rank equally, share ratably in dividends and distributions, and are identical in all respects as to all matters. Class A common stock has one vote per share and class B common stock has
thirty-six and one-half
votes per share. This gives the holders of class B common stock a right to vote that reflects the aggregate outstanding non-voting economic interest in the Company (in the form of OP Units) attributable to class B common stock holders and therefore, does not provide any disproportionate voting rights. Class B common stock was issued as consideration in the Company's acquisition in April 2015 of the investment management business and operations of its former manager, which was previously controlled by the Company's Executive Chairman. Each share of class B common stock shall convert automatically into
one
share of class A common stock if the Executive Chairman or his beneficiaries directly or indirectly transfer beneficial ownership of class B common stock or OP Units held by them, other than to certain qualified transferees, which generally includes affiliates and employees. In addition, each holder of class B common stock has the right, at the holder’s option, to convert all or a portion of such holder’s class B common stock into an equal number of shares of class A common stock.
In connection with the consummation of the Merger, on January 20, 2017, the Company paid a dividend of
$0.04444
per share of each Colony and NRF common stock to stockholders of record on January 9, 2017, representing a pro rata dividend for the period from January 1, 2017 through January 10, 2017 on a pre-exchange basis (or
$0.03
after giving effect to the Colony exchange ratio of
1.4663
). Additionally, the Company declared a dividend of
$0.24
per share for the period from January 11, 2017 through March 31, 2017. Accordingly, dividends declared for the first quarter of 2017 per common share is equivalent to
$0.27
per share after giving effect to the exchange ratio. On January 27, 2017, the Company paid a one-time special dividend of
$1.16
per share of common stock to former NSAM stockholders of record on January 3, 2017.
Common Stock Repurchases
On February 26, 2018, the Company's board of directors authorized a common stock repurchase program pursuant to which the Company may repurchase up to
$300 million
of its outstanding shares of class A common stock over a
one
-year period, either in the open market or through privately negotiated transactions. During the
three months ended March 31, 2018
, the Company repurchased
42,306,294
shares of its class A common stock, at an aggregate cost of approximately
$246.0 million
(excluding commissions), or a weighted-average price of
$5.82
per share.
In 2017, the Company had a similar stock repurchase program in which the Company repurchased the full authorized amount of
$300.0 million
(excluding commissions) of its outstanding class A common stock, equivalent to a total of
23,371,071
shares, at a weighted-average price of
$12.84
per share. This included
2,150,120
shares of class A common stock repurchased for
$29.8 million
concurrent with the termination of the Call Spread, as discussed below.
Dividend Reinvestment and Direct Stock Purchase Plan
The Company's Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) provides existing common stockholders and other investors the opportunity to purchase shares (or additional shares, as applicable) of the Company's class A common stock by reinvesting some or all of the cash dividends received on their shares of the Company's class A common stock or making optional cash purchases within specified parameters. The DRIP Plan involves the acquisition of the Company's class A common stock either in the open market, directly from the Company as newly issued common stock, or in privately negotiated transactions with third parties. There were
no
shares of class A common stock acquired under the DRIP Plan in the
three months ended March 31, 2018
or the year ended December 31, 2017 in the form of new issuances.
Call Spread
Subsequent to the Merger, the Company guaranteed NSAM's obligation to a third party counterparty under a call option previously sold by NSAM, specifically a call spread transaction (the “Call Spread”) in which NSAM had previously purchased and sold a call option on its common stock. In March 2017, the Company terminated the Call Spread and received
$21.9 million
in settlement, including the release of
$15.0 million
of cash pledged as collateral. The net settlement was accounted for as a capital transaction.
Accumulated Other Comprehensive Income (Loss) ("AOCI")
The following tables present the changes in each component of AOCI attributable to stockholders and noncontrolling interests in investment entities, net of immaterial tax effect. AOCI attributable to noncontrolling interests in Operating Company is immaterial.
Changes in Components of AOCI—Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Company's Share in AOCI of Equity Method Investments
|
|
Unrealized Gain (Loss) on Securities
|
|
Unrealized Gain (Loss) on Cash Flow Hedges
|
|
Foreign Currency Translation Gain (Loss)
|
|
Unrealized Gain (Loss) on Net Investment Hedges
|
|
Total
|
AOCI at December 31, 2016
|
|
$
|
85
|
|
|
$
|
(112
|
)
|
|
$
|
(41
|
)
|
|
$
|
(76,426
|
)
|
|
$
|
44,385
|
|
|
$
|
(32,109
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
76
|
|
|
(5,107
|
)
|
|
41
|
|
|
22,271
|
|
|
(8,813
|
)
|
|
8,468
|
|
Amounts reclassified from AOCI
|
|
23
|
|
|
(106
|
)
|
|
—
|
|
|
934
|
|
|
(960
|
)
|
|
(109
|
)
|
AOCI at March 31, 2017
|
|
$
|
184
|
|
|
$
|
(5,325
|
)
|
|
$
|
—
|
|
|
$
|
(53,221
|
)
|
|
$
|
34,612
|
|
|
$
|
(23,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI at December 31, 2017
|
|
$
|
5,616
|
|
|
$
|
14,418
|
|
|
$
|
—
|
|
|
$
|
45,931
|
|
|
$
|
(18,649
|
)
|
|
$
|
47,316
|
|
Cumulative effect of adoption of new accounting pronouncements
|
|
(202
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
(202
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
1,009
|
|
|
(15,736
|
)
|
|
—
|
|
|
35,759
|
|
|
(18,534
|
)
|
|
2,498
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
(3,800
|
)
|
|
—
|
|
|
4,163
|
|
|
(938
|
)
|
|
(575
|
)
|
AOCI at March 31, 2018
|
|
$
|
6,423
|
|
|
$
|
(5,118
|
)
|
|
$
|
—
|
|
|
$
|
85,853
|
|
|
$
|
(38,121
|
)
|
|
$
|
49,037
|
|
Changes in Components of AOCI—Noncontrolling Interests in Investment Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Unrealized Gain (Loss) on Securities
|
|
Foreign Currency Translation Gain (Loss)
|
|
Unrealized Gain (Loss) on Net Investment Hedges
|
|
Total
|
AOCI at December 31, 2016
|
|
$
|
(527
|
)
|
|
$
|
(57,213
|
)
|
|
$
|
11,798
|
|
|
$
|
(45,942
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
981
|
|
|
12,106
|
|
|
(1,954
|
)
|
|
11,133
|
|
Amounts reclassified from AOCI
|
|
(454
|
)
|
|
994
|
|
|
257
|
|
|
797
|
|
AOCI at March 31, 2017
|
|
$
|
—
|
|
|
$
|
(44,113
|
)
|
|
$
|
10,101
|
|
|
$
|
(34,012
|
)
|
|
|
|
|
|
|
|
|
|
AOCI at December 31, 2017
|
|
$
|
—
|
|
|
$
|
38,948
|
|
|
$
|
3,127
|
|
|
$
|
42,075
|
|
Other comprehensive income (loss) before reclassifications
|
|
—
|
|
|
29,242
|
|
|
(4,817
|
)
|
|
24,425
|
|
Amounts reclassified from AOCI
|
|
—
|
|
|
4,415
|
|
|
1,267
|
|
|
5,682
|
|
AOCI at March 31, 2018
|
|
$
|
—
|
|
|
$
|
72,605
|
|
|
$
|
(423
|
)
|
|
$
|
72,182
|
|
Reclassifications out of AOCI—Stockholders
Information about amounts reclassified out of AOCI attributable to stockholders by component is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Three Months Ended March 31,
|
|
Affected Line Item in the
Consolidated Statements of Operations
|
Component of AOCI reclassified into earnings
|
2018
|
|
2017
|
|
Realized gain (loss) on marketable securities
|
|
$
|
7,906
|
|
|
$
|
106
|
|
|
Other gain (loss), net
|
Other-than-temporary impairment and write-offs of securities
|
|
(4,106
|
)
|
|
—
|
|
|
Other gain (loss), net
|
Release of cumulative translation adjustments
|
|
(4,163
|
)
|
|
(934
|
)
|
|
Other gain (loss), net
|
Unrealized gain (loss) on dedesignated net investment hedges
|
|
(1,498
|
)
|
|
—
|
|
|
Other gain (loss), net
|
Realized gain (loss) on net investment hedges
|
|
2,436
|
|
|
960
|
|
|
Other gain (loss), net
|
Release of equity in AOCI of unconsolidated ventures
|
|
—
|
|
|
(23
|
)
|
|
Earnings from investments in unconsolidated ventures
|
17
. Noncontrolling Interests
Redeemable Noncontrolling Interests
This represents noncontrolling interests in a consolidated open-end fund sponsored by the Company beginning in August 2017, and in Townsend for the period from January 10, 2017 through December 29, 2017, the date the Company sold its interest in Townsend. In connection with the Townsend sale,
$20.0 million
of the consideration received was allocated to certain members of Townsend management and the noncontrolling interests in Townsend was fully redeemed.
The following table presents a summary of changes in redeemable noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Beginning balance
|
|
$
|
34,144
|
|
|
$
|
—
|
|
Assumed through the Merger
|
|
—
|
|
|
78,843
|
|
Contributions
|
|
250
|
|
|
—
|
|
Distributions
|
|
(2,050
|
)
|
|
—
|
|
Net income
|
|
(696
|
)
|
|
617
|
|
Currency translation adjustment and other
|
|
—
|
|
|
12
|
|
Ending balance
|
|
$
|
31,648
|
|
|
$
|
79,472
|
|
Noncontrolling Interests in Investment Entities
These are interests in consolidated investment entities held by private investment funds managed by the Company, or by third party joint venture parties.
In January 2017, the Company sold an
18.7%
noncontrolling interest in its healthcare real estate portfolio through a newly formed joint venture pursuant to a purchase and sale agreement executed in November 2016 based upon terms negotiated prior to the Merger. The net excess of the carrying value of the noncontrolling interest sold over the
consideration received resulted in a
$41.2 million
decrease to additional paid-in capital, including
$9.2 million
of cost of new capital. At March 31, 2018, noncontrolling interests own approximately
28.7%
of the Company's healthcare portfolio.
For the
three months ended March 31, 2018
, contributions from new limited partners reduced the Company's ownership interest in its industrial joint venture. The new limited partners were admitted at net asset value of the joint venture, based upon valuations determined by independent third parties, at the time of contributions. The difference between contributions received and the noncontrolling interests' share of the joint venture resulted in an increase to additional paid-in capital of
$5.8 million
.
Noncontrolling Interests in Operating Company
Certain employees of the Company directly or indirectly own interests in OP, presented as noncontrolling interests in the Operating Company. Noncontrolling interests in OP have the right to require OP to redeem part or all of such member’s OP Units for cash based on the market value of an equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a
one
-for-one basis. At the end of each period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP, as applicable.
For the
three months ended March 31, 2018
, the Company redeemed
1,940
OP Units with the issuance of an equal number of shares of class A common stock on a
one
-for-one basis.
For the year ended
December 31, 2017
, the Company redeemed
2,076,214
OP Units through the issuance of
1,684,170
shares of class A common stock (adjusted for the Merger exchange ratio) on a
one
-for-one basis and cash settlement of approximately
$5.1 million
to satisfy tax obligations of the OP unitholders.
18
. Discontinued Operations
Asset groups acquired in connection with purchase business combinations that meet the criteria to be accounted for as held for sale at the date of acquisition are reported as discontinued operations.
Discontinued operations consisted primarily of a manufactured housing portfolio acquired through the Merger in January 2017 and certain properties acquired through consensual foreclosure of the THL Hotel Portfolio in July 2017.
The manufactured housing portfolio was valued at its contracted sale price of
$2.0 billion
upon closing of the Merger, with
$1.3 billion
of related mortgage financing assumed by the buyer. The sale of the manufactured housing portfolio closed in March 2017, with the Company having received approximately
$664.4 million
in net proceeds, as adjusted for prorations and other reimbursements, for its interest in the portfolio.
Net income generated from operations of these held for sale asset groups is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
Property operating income
|
|
$
|
716
|
|
|
$
|
33,857
|
|
Other income
|
|
—
|
|
|
2,257
|
|
Expenses
|
|
|
|
|
Property operating expenses
|
|
(589
|
)
|
|
(12,395
|
)
|
Interest expense
|
|
—
|
|
|
(9,028
|
)
|
Loss on sale of real estate assets
|
|
—
|
|
|
(2,108
|
)
|
Other expenses
|
|
(10
|
)
|
|
(23
|
)
|
Net income from discontinued operations
|
|
117
|
|
|
12,560
|
|
Net income from discontinued operations attributable to:
|
|
|
|
|
Noncontrolling interests in investment entities
|
|
(53
|
)
|
|
—
|
|
Noncontrolling interests in Operating Company
|
|
(3
|
)
|
|
—
|
|
Net income from discontinued operations attributable to Colony NorthStar, Inc.
|
|
$
|
61
|
|
|
$
|
12,560
|
|
19
. Earnings per Share
The following table provides the basic and diluted earnings per common share computations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands, except per share data)
|
|
2018
|
|
2017
|
Net income (loss) allocated to common stockholders
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
(26,416
|
)
|
|
$
|
39,630
|
|
Income from discontinued operations
|
|
117
|
|
|
12,560
|
|
Net income (loss)
|
|
(26,299
|
)
|
|
52,190
|
|
Net (income) loss attributable to noncontrolling interests:
|
|
|
|
|
Redeemable noncontrolling interests
|
|
696
|
|
|
(617
|
)
|
Investment entities
|
|
(20,102
|
)
|
|
(27,059
|
)
|
Operating Company
|
|
4,378
|
|
|
1,083
|
|
Net income (loss) attributable to Colony NorthStar, Inc.
|
|
(41,327
|
)
|
|
25,597
|
|
Preferred dividends
|
|
(31,387
|
)
|
|
(30,813
|
)
|
Net loss attributable to common stockholders
|
|
(72,714
|
)
|
|
(5,216
|
)
|
Net income allocated to participating securities
|
|
(629
|
)
|
|
(2,238
|
)
|
Net loss allocated to common stockholders—basic
|
|
(73,343
|
)
|
|
(7,454
|
)
|
Interest expense attributable to convertible notes
(1)
|
|
—
|
|
|
—
|
|
Net loss allocated to common stockholders—diluted
|
|
$
|
(73,343
|
)
|
|
$
|
(7,454
|
)
|
Weighted average common shares outstanding
(2)
|
|
|
|
|
Weighted average number of common shares outstanding—basic
|
|
530,680
|
|
|
506,405
|
|
Weighted average effect of dilutive shares
(1)(3)
|
|
—
|
|
|
—
|
|
Weighted average number of common shares outstanding—diluted
|
|
530,680
|
|
|
506,405
|
|
Basic loss per share
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.14
|
)
|
|
$
|
(0.03
|
)
|
Income from discontinued operations
|
|
0.00
|
|
|
0.02
|
|
Net loss attributable to common stockholders per basic common share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
Diluted loss per share
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(0.14
|
)
|
|
$
|
(0.03
|
)
|
Income from discontinued operations
|
|
0.00
|
|
|
0.02
|
|
Net loss attributable to common stockholders per diluted common share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.01
|
)
|
__________
|
|
(1)
|
For the three months ended
March 31, 2018
and
2017
, excluded from the calculation of diluted earnings per share is the effect of adding back
$7.1 million
and
$7.3 million
of interest expense, respectively, and
38,112,100
and
38,717,000
weighted average dilutive common share equivalents, respectively, for the assumed conversion or exchange of the Company's outstanding convertible and exchangeable notes, as applicable, as their inclusion would be antidilutive.
|
|
|
(2)
|
As a result of the Merger, each outstanding share of common stock of Colony was exchanged for
1.4663
of newly issued common shares of Colony NorthStar. Accordingly, the historical share counts used to calculate the weighted average number of shares for the three months ended March 31, 2017 reflect the exchange ratio of
1.4663
applied to shares outstanding prior to the Closing Date.
|
|
|
(3)
|
For the three months ended March 31, 2018,
662,900
weighted average unvested non-participating restricted shares were not included in the calculation of diluted earnings per share as their inclusion would be antidilutive. OP Units, subject to lock-up agreements, may be redeemed for registered or unregistered class A common shares on a
one
-for-one basis. At
March 31, 2018
and
2017
, there were
32,280,500
and
34,313,300
redeemable OP Units, respectively. These OP Units would not be dilutive and were not included in the computation of diluted earnings per share for all periods presented. Also excluded from the computation of diluted earnings per share are shares of the Company's class A common stock that are contingently issuable pursuant to the contingent consideration arrangement (Note
14
) and PSUs (Note
21
) as the performance targets would not have been met had the contingency period ended on
March 31, 2018
.
|
20
. Fee Income
The Company's real estate investment management platform manages capital on behalf of institutional and retail investors in private funds, traded and non-traded REITs and investment companies, for which the Company earns fee income. For investment vehicles in which the Company co-sponsors with a third party or for which the Company engages a third party sub-advisor, such fee income is shared with the respective co-sponsor or sub-advisor.
On December 29, 2017, the Company sold its interest in Townsend, an investment management subsidiary acquired through the Merger. Upon closing of the Combination on January 31, 2018, the Company's management contracts with NorthStar Income I and NorthStar Income II ceased to exist; concurrently, the Company entered into a new management agreement with Colony NorthStar Credit.
The Company's fee income is earned from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Institutional funds
|
|
$
|
13,141
|
|
|
$
|
14,827
|
|
Non-traded REITs
|
|
11,459
|
|
|
22,237
|
|
Public companies
—
NRE, Colony NorthStar Credit
|
|
12,172
|
|
|
3,170
|
|
Broker-dealer, Townsend and other clients
|
|
70
|
|
|
13,016
|
|
|
|
$
|
36,842
|
|
|
$
|
53,250
|
|
The following table presents the Company's fee income by type:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Base management fees ($34,176 and $38,984 from affiliates, respectively)
|
|
$
|
34,176
|
|
|
$
|
42,775
|
|
Asset management fees—from affiliates
|
|
674
|
|
|
606
|
|
Acquisition and disposition fees—from affiliates
|
|
1,922
|
|
|
5,929
|
|
Incentive fees—from affiliates
|
|
—
|
|
|
270
|
|
Other fee income
|
|
70
|
|
|
3,670
|
|
Total fee income
|
|
$
|
36,842
|
|
|
$
|
53,250
|
|
Base Management Fees
—
The Company earns base management fees for the day-to-day operations and administration of its managed private funds, non-traded REITs, investment companies and NRE, calculated as follows:
|
|
•
|
Private Funds
—
generally
1%
per annum of the limited partners' net funded capital;
|
|
|
•
|
Non-Traded REITs—
1%
to
1.25%
per annum of gross assets for NorthStar/RXR NY Metro and for NorthStar Income I and NorthStar Income II (through January 31, 2018 only), as well as
1.5%
per annum of most recently published net asset value (as may be subsequently adjusted for any special distribution) for NorthStar Healthcare. Effective January 1, 2018,
$2.5 million
per quarter of base management fee for NorthStar Healthcare will be paid in shares of NorthStar Healthcare common stock at a price per share equal to its most recently published net asset value per share (as may be subsequently adjusted for any special distribution);
|
|
|
•
|
Investment Companies—
1.25%
per annum of average net assets;
|
|
|
•
|
NRE
—
a variable fee based on the European Public Real Estate Association Net Asset Value, as defined in the management agreement. Prior to 2018, it was a fixed fee of
$14.2 million
per annum, subject to increase by an amount equal to
1.5%
per annum of certain provisions in accordance with terms set out in its governing agreement; and
|
|
|
•
|
Colony NorthStar Credit
—
1.5%
per annum of Colony NorthStar Credit's stockholders' equity (as defined in its management agreement).
|
In 2017, the Company also earned base management fees from Townsend private funds at a fixed percentage of either assets under management, net asset value, total assets, committed capital or invested capital.
Asset Management Fees
—
The Company earns asset management fees from its managed private funds, which represents
a
one-time fee upon closing of each investment, calculated as a fixed percentage, generally
0.5%
of the limited partners' net funded capital on each investment.
Acquisition and Disposition Fees
—
The Company earns an acquisition fee of
1%
of the amount funded or allocated to originate or acquire an investment by NorthStar Income I and NorthStar Income II (through January 31, 2018 only); and a disposition fee of
1%
to
2%
of the contractual sales price for disposition of an investment by NorthStar Income I and NorthStar Income II (through January 31, 2018 only) and by NorthStar Healthcare. The amended advisory agreement of NorthStar Healthcare no longer provides for an acquisition fee effective January 1, 2018.
Incentive Fees
—
The Company may earn contractual incentive fees from NRE and Colony NorthStar Credit (and in 2017, from Townsend segregated mandate accounts). Contractual incentive fees are determined based on the performance of the investment vehicles subject to the achievement of minimum return hurdles, with such thresholds varying across investment vehicles in accordance with the terms set out in their respective governing agreements. A portion of the incentive fees earned by the Company, generally at 40% consistent with market terms, is allocable to senior management, investment professionals and certain other employees of the Company through their participation in the Company-sponsored investment vehicles.
Other Fee Income
—
Other fees include advisory fees in connection with real estate acquisitions by a third party client, as well as selling commission and dealer manager fees. The Company, through NorthStar Securities, earns fees for selling equity in certain classes of shares in the retail companies, calculated as a percentage of the gross offering proceeds raised, up to
8%
for selling commissions and dealer manager fees, depending on the share classes of the retail companies. All or a portion of selling commission and dealer manager fees may be reallowed to participating broker-dealers. In 2017, other income included advisory fees from Townsend clients at a fixed annual retainer.
21
. Equity-Based Compensation
Upon consummation of the Merger, each outstanding Colony employee restricted stock award granted under the 2014 Equity Incentive Plan (the “Colony Equity Incentive Plan”) that did not vest and was not forfeited was assumed by the Company and was converted into an equivalent Colony NorthStar restricted stock award, after giving effect to the Colony exchange ratio. As of January 2, 2017, all shares reserved under the Colony Equity Incentive Plan had been issued. While the Colony Equity Incentive Plan continues to exist following the Merger, no new awards will be granted under this plan.
Outstanding equity awards granted under Colony's 2009 Non-Executive Director Stock Plan (the “Colony Director Stock Plan”) fully vested upon consummation of the Merger and was settled through the issuance of
44,464
shares of Colony NorthStar class A common stock. The Colony Director Stock Plan was assumed by Colony NorthStar upon closing of the Merger.
Substantially all of the outstanding NSAM and NRF equity awards prior to the Merger, except for certain awards as described below, vested upon consummation of the Merger. The vested equity awards were settled in NSAM and NRF shares respectively and converted into Colony NorthStar class A common stock based on their respective exchange ratios. All of the vested NSAM and NRF equity awards relate to pre-combination services and form part of the merger consideration.
NSAM 2014 Stock Plan
Upon consummation of the Merger, the Company assumed the following outstanding awards previously issued under NSAM's 2014 Omnibus Stock Incentive Plan ("NSAM 2014 Stock Plan"). Subsequent to the Merger, the Company adopted the NSAM 2014 Stock Plan, as further described below.
Townsend
—
Restricted stock awards granted to Townsend’s management team, who were previously employees of the Company, did not vest by their terms in connection with the Merger and were converted into Colony NorthStar restricted stock awards on a
one
-for-one basis. On December 29, 2017, the outstanding Townsend awards were fully vested upon the sale of the Company's interest in Townsend.
American Healthcare Investors Joint Venture
—
In December 2014, NSAM acquired a
43%
interest in American Healthcare Investors, LLC (“AHI"), structured as a joint venture between NSAM and the principals of AHI, a healthcare-focused real estate investment management firm, and James F. Flaherty III, former Chief Executive Officer of HCP, Inc., that is accounted for as an equity method investment.
In connection with this arrangement, certain AHI employees were granted equity awards for a fixed dollar amount with a variable number of shares, classified as a liability award. The outstanding award to certain AHI employees did not accelerate in the Merger. In March 2017,
$1.0 million
or the equivalent of
70,261
shares of class A common stock were issued in settlement of the equity award to certain AHI employees, and the corresponding
$1.0 million
outstanding liability was relieved. This was a non-employee award, with equity-based compensation recorded in earnings from investments in unconsolidated ventures on the consolidated statement of operations
Pursuant to a separate contractual arrangement entered into in connection with the investment in AHI, the AHI principals, subject to certain annual performance targets being met, are also entitled to incremental grants of the
Company's common stock, which will vest immediately upon issuance. As of
March 31, 2018
, no incremental awards have been granted.
NRF Incentive Plan
Upon consummation of the Merger, the Company assumed the following outstanding non-employee stock awards that were previously issued under NRF’s Third Amended and Restated 2004 Omnibus Stock Incentive Plan (the "NRF Incentive Plan"), and which continue to be governed by the terms of the NRF Incentive Plan subsequent to the Merger.
Healthcare Strategic Partnership
—
In January 2014, NRF entered into a strategic partnership with James F. Flaherty, III, focused on expanding the Company’s healthcare business (“Healthcare Strategic Partnership”). In connection with this arrangement, Mr. Flaherty was granted NRF restricted stock units ("RSUs"), which upon the spin-off of NSAM from NRF in July 2014, were adjusted to also relate to an equal number of units of NSAM RSUs, and continue to be governed by the NRF Incentive Plan. This RSU award did not vest by its terms in connection with the consummation of the Merger and was converted into the right to receive an award in the same form for that number of units of Colony NorthStar RSU, after giving effect to the relevant Merger exchange ratios. As a non-employee award, the RSUs were remeasured each period end based on the closing price of the Company's class A common stock as of such period end, with related equity-based compensation cost recorded in investment, servicing and commission expense on the consolidated statement of operations and in equity on the consolidated balance sheet. In September 2017, the RSU award was fully vested upon the occurrence of a vesting event under the terms of the applicable governing agreement.
CLNS Equity Incentive Plan
Following the Merger, the Company adopted the NSAM 2014 Stock Plan as the Company's successor equity incentive plan and renamed such plan the Colony NorthStar 2014 Omnibus Stock Incentive Plan (the "CLNS Equity Incentive Plan"). The CLNS Equity Incentive Plan provides for the grant of restricted stock, performance stock units ("PSUs"), Long Term Incentive Plan ("LTIP") units, RSUs, deferred stock units ("DSUs"), options, warrants or rights to purchase shares of the Company's common stock, cash incentives and other equity-based awards.
Shares reserved for the issuance of awards under the CLNS Equity Incentive Plan are subject to equitable adjustment upon the occurrence of certain corporate events, provided that this number automatically increases each January 1st by 2% of the outstanding number of shares of the Company’s class A common stock on the immediately preceding December 31st. At March 31, 2018, an aggregate of
44.7 million
shares of the Company's class A common stock were reserved for the issuance of awards under the CLNS Equity Incentive Plan.
In 2017, the Company issued certain equity awards, which have a service condition only, in connection with the Merger. This included replacement equity awards issued in January 2017 to certain executives of NSAM, consisting of an aggregate of
4,669,518
shares of restricted common stock and
3,506,387
LTIP units. The number of shares and units issued for the replacement awards were determined based on the volume-weighted average price of the Company's class A common stock over the first
five
trading days following the Closing Date, subject to a floor of
$15.00
per share. All of the replacement equity awards vested on January 10, 2018. Additionally, restricted stock awards were also granted to certain employees as retention awards, subject to graded vesting through January 2020.
Restricted Stock
—
Restricted stock awards relating to the Company's class A common stock are granted to senior executives and certain employees, with a service condition only and time-based vesting annually in equal tranches over a three-year period. Restricted stock is entitled to dividends declared and paid on the Company's class A common stock and such dividends are not forfeitable prior to vesting of the award. Restricted stock awards are valued based on the Company's class A common stock price on grant date and equity-based compensation expense is recognized on a straight-line basis over the requisite three-year service period.
Performance Stock Units ("PSUs")
—
PSUs are granted to senior executives and certain employees, and are subject to both a service condition and market condition. PSUs vest annually in equal tranches over a
three
-year period. Upon vesting, the recipient of PSUs will be issued a number of shares of CLNS class A common stock, ranging from
0%
to
200%
of the number of PSUs granted, to be determined based upon the performance of the Company's class A common stock relative to that of a specified peer group over a
three
-year measurement period (such measurement metric the "total shareholder return"). PSUs also contain dividend equivalent rights which entitle the recipients to a payment equal to the amount of dividends that would have been paid on the shares that are ultimately issued at the end of the measurement period.
Fair value of PSUs, including dividend equivalent rights, was determined using a Monte Carlo simulation under a risk-neutral premise, with the following assumptions:
|
|
|
|
|
2018 PSU Grant
|
Expected volatility of CLNS class A common stock
(1)
|
38
|
%
|
Expected CLNS annual dividend yield
(2)
|
7.6
|
%
|
Risk-free rate (per annum)
(3)
|
2.44
|
%
|
__________
|
|
(1)
|
Based on a combination of implied volatilities on actively traded stock options and historical volatilities, on the stock of the Company and the specified peer group.
|
|
|
(2)
|
Based on an average of the Company's current and historical dividend yields.
|
|
|
(3)
|
Based on the prevailing 3-year zero coupon US Treasury yield on grant date.
|
Fair value of the PSU award on grant date, excluding dividend equivalent rights, is recognized on a straight-line basis over the three-year measurement period as compensation expense, and is not subject to reversal even if the market condition is not achieved. The dividend equivalent right is accounted for as a liability-classified award. The fair value of the dividend equivalent right is recognized as compensation expense on a straight-line basis over the measurement period, and is subject to adjustment to fair value at each reporting period.
LTIP Units
—
LTIP units are designated as profits interests for federal income tax purposes. Unvested LTIP units do not accrue distributions. Each vested LTIP unit is convertible, at the election of the holder, into
one
common OP unit and upon conversion, subject to the redemption terms of OP units (Note
17
). LTIP units are valued based on the Company's class A common stock price on grant date, with equity-based compensation cost recognized on a straight-line basis over the service period and represent an allocation to noncontrolling interest in the Operating Company.
Deferred Stock Units
—
Certain non-employee directors may elect to defer the receipt of annual base fees and/or restricted stock awards, and in lieu, receive awards of DSUs. DSUs awarded in lieu of annual base fees are fully vested on their grant date, while DSUs awarded in lieu of restricted stock awards vest one year from their grant date. DSUs are entitled to a dividend equivalent, in the form of additional DSUs based on dividends declared and paid on the Company's class A common stock. Any such additional DSUs will also be credited with additional DSUs as cash dividends are paid, subject to the same restrictions and vesting conditions, if any. Upon separation of service from the Company, vested DSUs are to be settled in shares of the Company’s class A common stock or cash, at the option of the Company. Fair value of DSUs are determined based on the price of the Company's class A common stock on grant date and recognized immediately if fully vested upon grant, otherwise, on a straight-line basis over the vesting period as equity based compensation expense and equity.
Equity-based compensation expense is included in the following line items in the consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Compensation expense (including $22 and $0 amortization of fair value of dividend equivalent right)
|
|
$
|
12,191
|
|
|
$
|
31,577
|
|
Earnings from investments in unconsolidated ventures
|
|
—
|
|
|
61
|
|
Investment, servicing and commission expense
|
|
—
|
|
|
546
|
|
|
|
$
|
12,191
|
|
|
$
|
32,184
|
|
Changes in the Company’s unvested equity awards are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
Restricted Stock
|
|
LTIP Units
|
|
DSUs
|
|
PSUs
(1)
|
|
Total
|
|
PSUs
|
|
All Other Awards
|
Unvested shares and units at December 31, 2017
|
|
9,149,516
|
|
|
3,506,387
|
|
|
78,267
|
|
|
—
|
|
|
12,734,170
|
|
|
$
|
—
|
|
|
$
|
14.53
|
|
Granted
|
|
3,257,393
|
|
|
|
|
|
13,659
|
|
|
2,138,858
|
|
|
5,409,910
|
|
|
6.05
|
|
|
6.27
|
|
Vested
|
|
(6,160,624
|
)
|
|
(3,506,387
|
)
|
|
(11,615
|
)
|
|
—
|
|
|
(9,678,626
|
)
|
|
—
|
|
|
14.63
|
|
Forfeited
|
|
(674
|
)
|
|
|
|
|
|
|
|
—
|
|
|
(674
|
)
|
|
—
|
|
|
6.08
|
|
Unvested shares and units at March 31, 2018
|
|
6,245,611
|
|
|
—
|
|
|
80,311
|
|
|
2,138,858
|
|
|
8,464,780
|
|
|
$
|
6.05
|
|
|
$
|
10.11
|
|
__________
|
|
(1)
|
Represents the number of PSUs granted which does not reflect potential increases or decreases that could result from the final outcome of the total shareholder return at the end of the performance period.
|
Fair value of equity awards that vested, determined based on their respective fair values at vesting date, was
$105.0 million
and
$14.8 million
for the three months ended
March 31, 2018
and
2017
, respectively. For awards granted during the
three months ended March 31, 2018
and
2017
, the weighted average grant-date fair value per share was
$6.27
and
$14.59
, respectively.
At
March 31, 2018
, aggregate unrecognized compensation cost for all unvested equity awards was
$65.9 million
, which is expected to be recognized over a weighted-average period of
2.4
years.
Awards Granted by Managed Companies
In March 2018, NRE and Colony NorthStar Credit issued restricted stock and performance stock units to the Company or its employees (collectively, "managed company awards"). NRE awards generally have similar terms as the respective CLNS awards, except that the NRE performance stock units measure NRE's stock performance against either an absolute total shareholder return threshold or relative to the performance of a specified market index. Employees are entitled to receive shares of NRE common stock if service conditions and/or market condition are met. CLNC awards are primarily restricted stock grants and generally vest over a three-year period, subject to service conditions. The Company generally issues the managed company award it receives in its capacity as the manager to its employees with substantially the same terms and service requirements.
Managed company awards granted to the Company, pending grant to its employees, are recognized based on their fair value at grant date as an investment in unconsolidated ventures and deferred revenue on the consolidated balance sheet. The deferred revenue liability is amortized into other income as the awards vest to the Company. Awards that are subsequently issued by the Company to its employees are recognized on a straight-line basis as equity-based compensation expense over their vesting period upon grant by the Company. Both types of awards are subject to adjustment to fair value at each reporting period, with changes reflected as an adjustment to equity-based compensation.
Equity-based compensation expense recognized in relation to managed company awards was
$0.8 million
for the
three months ended March 31, 2018
. At
March 31, 2018
, aggregate unrecognized compensation cost for unvested managed company awards was
$22.2 million
, which is expected to be recognized over a weighted-average period of
2.9
years.
22
. Transactions with Affiliates
Affiliates include (i) private funds, traded and non-traded REITs and investment companies that the Company manages or sponsors, and in which the Company may have an equity interest or co-invests with; (ii) the Company's investments in unconsolidated ventures; and (iii) directors, senior executives and employees of the Company (collectively, "employees").
Amounts due from and due to affiliates consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Due from Affiliates
|
|
|
|
|
Investment vehicles and unconsolidated ventures
|
|
|
|
|
Fee income
|
|
$
|
25,338
|
|
|
$
|
19,366
|
|
Cost reimbursements and recoverable expenses
|
|
16,823
|
|
|
30,749
|
|
Employees and other affiliates
|
|
1,421
|
|
|
1,403
|
|
|
|
$
|
43,582
|
|
|
$
|
51,518
|
|
Due to Affiliates
|
|
|
|
|
Investment vehicles and unconsolidated ventures
|
|
$
|
2,935
|
|
|
$
|
2,884
|
|
Employees
—
contingent consideration for Internalization
|
|
10,170
|
|
|
20,650
|
|
|
|
$
|
13,105
|
|
|
$
|
23,534
|
|
Transactions with affiliates include the following:
Fee Income—
Fee income earned from investment vehicles in which the Company manages and/or sponsors, and has an equity interest in or co-invests with, are presented in Note
20
.
Cost Reimbursements—
The Company received cost reimbursement income related primarily to the following arrangements:
|
|
•
|
direct and indirect operating costs, including but not limited to compensation, overhead and other administrative costs, for managing the operations of the non-traded REITs, investment companies and Colony NorthStar Credit, with reimbursements for non-traded REITs limited to the greater of
2%
of average invested assets or
25%
of net income (net of base management fees);
|
|
|
•
|
direct costs of personnel dedicated solely to NRE plus
20%
of such personnel costs for related overhead charges, not to exceed, in aggregate, specified thresholds as set out in the NRE management agreement;
|
|
|
•
|
cost incurred in performing investment due diligence for retail companies and private funds managed by the Company (presented gross on the consolidated statement of operations effective January 1, 2018);
|
|
|
•
|
equity awards granted by NRE and Colony NorthStar Credit to employees of the Company, which are recorded gross on the consolidated statement of operations as other income and compensation expense (see Note
21
);
|
|
|
•
|
certain expenses incurred on behalf of the clients of Townsend such as legal, due diligence and investment advisory team travel expenses (in 2017 only);
|
|
|
•
|
services provided to the Company's unconsolidated investment ventures for servicing and managing their loan portfolios, including foreclosed properties;
|
|
|
•
|
administrative services provided to an equity method investee (through July 2017 only); and
|
|
|
•
|
administrative services provided to certain senior executives of the Company.
|
Cost reimbursements, included in other income, were as follows. This included
$1.2 million
of costs incurred by the Company which will be reimbursed by its managed private funds for the
three months ended March 31, 2018
that were presented gross on the consolidated statement of operations beginning in 2018.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Retail companies
|
|
$
|
2,387
|
|
|
$
|
5,335
|
|
Public companies
—
NRE and Colony NorthStar Credit
|
|
1,750
|
|
|
—
|
|
Private funds and other
|
|
1,844
|
|
|
703
|
|
Equity awards of NRE and Colony NorthStar Credit (Note 21)
|
|
812
|
|
|
—
|
|
Townsend
|
|
—
|
|
|
665
|
|
|
|
$
|
6,793
|
|
|
$
|
6,703
|
|
Recoverable Expenses—
The Company pays organization and offering costs associated with the formation and capital raising of the retail companies and private funds sponsored by the Company, for which the Company recovers from these investment vehicles, up to specified thresholds for certain private funds and up to
1%
of proceeds expected to be raised from the offering of retail companies
(excluding shares offered pursuant to distribution reinvestment plans).
Credit Facility—
The Company has committed to provide NorthStar Healthcare with an unsecured revolving credit facility at market terms with a maximum principal amount of
$35.0 million
. The credit facility matures on October 15, 2018,
with a
six
-month extension option. Advances under the credit facility accrue interest at LIBOR plus
3.5%
. There is
no
commitment fee for the unused portion of the facility. The credit facility is intended to provide additional liquidity to NorthStar Healthcare on an as needed basis. At
March 31, 2018
and
December 31, 2017
, there were
no
outstanding advances under the revolving credit facility.
Liquidating Trust—
In connection with the closing of the Combination, a wholly-owned subsidiary of the Company entered into a management services agreement with the liquidating trust that holds the NorthStar I Retained Asset (as discussed in Note
4
). The Company was engaged as an advisor to service and assist in the potential sale of the NorthStar I Retained Asset, and to provide administrative services to the liquidating trust on such terms and conditions as approved by the trustees for a management fee of
1.25%
per annum of the net assets of the liquidating trust. Such fee amount is immaterial.
Healthcare Strategic Partnership—
The Healthcare Strategic Partnership was formed to expand the Company’s healthcare business (see Note
21
). In connection with this arrangement, the Healthcare Strategic Partnership is entitled to incentive fees ranging from
20%
to
25%
of distributions above certain hurdles for new and existing healthcare real estate investments held by the Company and a portion of incentive fees earned from NorthStar Healthcare. To date, no incentive fees have been earned by the Healthcare Strategic Partnership.
American Healthcare Investors Joint Venture—
The Company has an equity method investment in AHI, through a joint venture with the principals of AHI and Mr. Flaherty (see Note
21
). AHI provides certain healthcare-focused real estate investment management and related services to the Company and NorthStar Healthcare in order to assist the Company in managing current and future healthcare assets (excluding certain joint venture assets) acquired by the Company and, subject to certain conditions, other managed companies. For the
three months ended March 31, 2018
and
2017
, the Company incurred property management fees and sub-advisory fees totaling
$1.3 million
and
$1.1 million
, respectively. In January 2018, the Company provided a notice of termination of its management agreement to AHI with such termination to be effective October 2018.
Arrangements with Company-Sponsored Private Fund—
The Company co-invests alongside a Company sponsored private fund through joint ventures between the Company and the sponsored private fund. These co-investment joint ventures are consolidated by the Company. The Company has capital commitments, as general partner, directly into the private fund and as an affiliate of the general partner, capital commitments satisfied through co-investment joint ventures. In connection with the Company's commitments as an affiliate of the general partner, the Company is allocated a proportionate share of the costs of the private fund such as financing and administrative costs. Such costs expensed during the three months ended
March 31, 2018
and
2017
were immaterial and relate primarily to the Company's share of the fund's operating costs and deferred financing costs on borrowings of the fund.
Contingent Consideration for Internalization
—Contingent consideration for Internalization is payable to certain senior executives of the Company in connection with Colony's acquisition of the real estate investment management business and operations of its former manager in April 2015, as discussed in Note
14
.
Selling Commissions
—Certain NorthStar Securities employees earn selling commissions related to the sale of equity in the retail companies. Commissions paid or payable to these employees are immaterial.
Equity Awards of NRE and Colony NorthStar Credit
—As discussed in Note
21
, NRE and Colony NorthStar Credit grant equity awards to employees of the Company, either directly or indirectly through the Company, which are recognized as equity-based compensation expense over the vesting period with a corresponding amount in other income.
Investment in Managed Investment Vehicles
—Subject to the Company's related party policies and procedures, senior management, investment professionals and certain other employees may participate on a discretionary basis in investment vehicles managed by the Company, either directly or indirectly through co-investment vehicles. These investments are generally not subject to management fees and incentive fees, but otherwise bear their proportionate share of other operating expenses of the investment vehicles. At
March 31, 2018
and
December 31, 2017
, there was
$4.8 million
of such investments in a consolidated private fund of the Company, reflected in redeemable noncontrolling interests on the consolidated balance sheet, and their share of net income, included in net income attributable to redeemable noncontrolling interests on the consolidated statement of operations, was immaterial for the
three months ended March 31, 2018
.
Advances to Employees
—The Company grants loans to certain employees in the form of promissory notes bearing interest at the prime rate with varying terms and repayment conditions. Outstanding advances were immaterial at
March 31, 2018
and
December 31, 2017
.
Corporate Aircraft—
The Company's corporate aircraft may occasionally be used for business purposes by affiliated entities or for personal use by certain senior executives of the Company. Affiliated entities and senior executives
reimburse the Company for their usage based on the incremental cost to the Company of making the aircraft available for such use, and includes direct and indirect variable costs of operating the flights. These reimbursements amounted to
$0.1 million
and
$0.6 million
for the
three months ended March 31, 2018
and
2017
, respectively.
23
. Commitments and Contingencies
Lease Commitments
Office Leases—
The Company leases office space under noncancelable operating leases. The lease agreements require minimum rent payments and reimbursement of operating expenses incurred by the landlord, subject to escalation clauses. Rent expense on office leases, included in administrative expenses, was
$2.7 million
for each of the
three months ended March 31, 2018
and
2017
.
Contingent Consideration
The consideration for the Company's acquisition of substantially all of the real estate investment management business and operations of its former manager in April 2015 included a contingent portion payable in shares of class A and class B common stock as well as OP Units, subject to multi-year performance targets, as discussed in Note
14
.
In connection with a consensual foreclosure of the THL Hotel Portfolio, contingent consideration is payable to a preferred equity holder of the borrower in an amount up to
$13.0 million
, as discussed in Notes
3
and
14
.
Litigation and Claims
The Company may be involved in litigation and claims in the ordinary course of business. As of
March 31, 2018
, 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.
24
. Segment Reporting
The Company conducts its business through the following
six
reportable segments:
|
|
•
|
Healthcare—
The Company's healthcare segment is composed of a diverse portfolio of medical office buildings, senior housing, skilled nursing facilities and other healthcare properties, including hospitals. The Company earns rental income from medical office buildings as well as senior housing and skilled nursing facilities structured under net leases to healthcare operators, and resident fee income from senior housing operating facilities that operate through management agreements with independent third party operators.
|
|
|
•
|
Industrial—
The Company's industrial segment is composed primarily of light industrial assets in infill locations throughout the U.S. that are vital for e-commerce and other tenants that require increasingly quick delivery times.
|
|
|
•
|
Hospitality—
The Company's hotel portfolio is composed of primarily extended stay hotels and premium branded select service hotels primarily located in major metropolitan markets in the U.S. with the majority affiliated with top hotel brands.
|
|
|
•
|
CLNC—
This represents the Company's investment in Colony NorthStar Credit, a commercial real estate credit REIT with a diverse portfolio consisting of senior mortgage loans, mezzanine loans, preferred equity, debt securities and net lease properties predominantly in the U.S. Following the Combination, the Company presents Colony NorthStar Credit in a separate reportable segment.
|
|
|
•
|
Other Equity and Debt—
The Company's other equity and debt segment includes our portfolios of net lease, multifamily and multi-tenant office properties, the THL Hotel Portfolio, our interest in a portfolio of CRE loans and securities, limited partnership interests in real estate private equity funds and various other equity investments.
|
|
|
•
|
Investment Management—
The Company generates fee income through investment management services, sponsoring numerous investment products across a diverse set of institutional and retail investors.
|
In 2018, the Company determined that its equity interests in various investment vehicles as sponsor and general partner, which were previously included in the industrial and other equity and debt segments, would be part of its investment management segment. The reclassification of investments in unconsolidated ventures and corresponding earnings on investments in unconsolidated ventures was applied retrospectively to all prior periods presented. The reclassification was not material to segment results.
Amounts not allocated to specific segments include corporate level cash and corresponding interest income, fixed assets, corporate level financing and related interest expense, income and expense related to cost reimbursement arrangements with certain affiliates, costs in connection with unconsummated investments, compensation expense not directly attributable to reportable segments, corporate level administrative and overhead costs as well as Merger-related transaction and integration costs.
The chief operating decision maker assesses the performance of the business based on net income (loss) of each of the reportable segments. The various reportable segments generate distinct revenue streams, consisting of property operating income, interest income and fee income. Costs which are directly attributable, or otherwise can be subjected to a reasonable and systematic allocation, have been allocated to each of the reportable segments.
Selected Segment Results of Operations
The following table presents selected results of operations of the Company's reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Healthcare
|
|
Industrial
|
|
Hospitality
|
|
CLNC
|
|
Other Equity and Debt
|
|
Investment Management
|
|
Amounts Not Allocated to Segments
|
|
Total
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
152,595
|
|
|
$
|
68,753
|
|
|
$
|
195,782
|
|
|
$
|
—
|
|
|
$
|
205,154
|
|
|
$
|
42,521
|
|
|
$
|
1,859
|
|
|
$
|
666,664
|
|
Property operating expenses
|
|
66,966
|
|
|
20,811
|
|
|
136,095
|
|
|
—
|
|
|
81,898
|
|
|
—
|
|
|
—
|
|
|
305,770
|
|
Interest expense
|
|
50,941
|
|
|
10,190
|
|
|
34,361
|
|
|
—
|
|
|
40,280
|
|
|
—
|
|
|
13,117
|
|
|
148,889
|
|
Depreciation and amortization
|
|
41,127
|
|
|
29,945
|
|
|
35,457
|
|
|
—
|
|
|
28,969
|
|
|
7,676
|
|
|
1,531
|
|
|
144,705
|
|
Provision for loan loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,375
|
|
|
—
|
|
|
—
|
|
|
5,375
|
|
Impairment loss
|
|
3,780
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,189
|
|
|
140,429
|
|
|
—
|
|
|
153,398
|
|
Gain on sale of real estate
|
|
—
|
|
|
2,293
|
|
|
—
|
|
|
—
|
|
|
16,151
|
|
|
—
|
|
|
—
|
|
|
18,444
|
|
Earnings (losses) from investments in unconsolidated ventures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,654
|
)
|
|
27,217
|
|
|
8,702
|
|
|
—
|
|
|
32,265
|
|
Income tax benefit (expense)
|
|
(998
|
)
|
|
(3
|
)
|
|
1,481
|
|
|
—
|
|
|
(4,539
|
)
|
|
36,803
|
|
|
64
|
|
|
32,808
|
|
Income (loss) from continuing operations
|
|
(12,534
|
)
|
|
6,321
|
|
|
(11,886
|
)
|
|
(3,654
|
)
|
|
68,431
|
|
|
(84,624
|
)
|
|
11,530
|
|
|
(26,416
|
)
|
Income from discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
117
|
|
|
—
|
|
|
—
|
|
|
117
|
|
Net income (loss)
|
|
(12,534
|
)
|
|
6,321
|
|
|
(11,886
|
)
|
|
(3,654
|
)
|
|
68,548
|
|
|
(84,624
|
)
|
|
11,530
|
|
|
(26,299
|
)
|
Net income (loss) attributable to Colony NorthStar, Inc.
|
|
(10,360
|
)
|
|
1,278
|
|
|
(10,050
|
)
|
|
(3,446
|
)
|
|
49,109
|
|
|
(80,520
|
)
|
|
12,662
|
|
|
(41,327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
138,813
|
|
|
$
|
57,042
|
|
|
$
|
175,713
|
|
|
$
|
—
|
|
|
$
|
175,086
|
|
|
$
|
59,640
|
|
|
$
|
871
|
|
|
$
|
607,165
|
|
Property operating expenses
|
|
60,686
|
|
|
16,497
|
|
|
118,491
|
|
|
—
|
|
|
20,675
|
|
|
—
|
|
|
—
|
|
|
216,349
|
|
Interest expense
|
|
41,092
|
|
|
12,426
|
|
|
27,249
|
|
|
—
|
|
|
30,819
|
|
|
—
|
|
|
14,692
|
|
|
126,278
|
|
Depreciation and amortization
|
|
40,881
|
|
|
24,639
|
|
|
30,041
|
|
|
—
|
|
|
28,218
|
|
|
12,483
|
|
|
1,158
|
|
|
137,420
|
|
Provision for loan loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,724
|
|
|
—
|
|
|
—
|
|
|
6,724
|
|
Impairment loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,519
|
|
|
—
|
|
|
—
|
|
|
8,519
|
|
Gain on sale of real estate
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,970
|
|
|
—
|
|
|
—
|
|
|
8,970
|
|
Earnings from investments in unconsolidated ventures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
108,837
|
|
|
5,155
|
|
|
—
|
|
|
113,992
|
|
Income tax benefit (expense)
|
|
(2,242
|
)
|
|
598
|
|
|
(38
|
)
|
|
—
|
|
|
(1,333
|
)
|
|
(2,069
|
)
|
|
1,375
|
|
|
(3,709
|
)
|
Income (loss) from continuing operations
|
|
(9,266
|
)
|
|
519
|
|
|
(3,616
|
)
|
|
—
|
|
|
179,908
|
|
|
19,989
|
|
|
(147,904
|
)
|
|
39,630
|
|
Income from discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,560
|
|
|
12,560
|
|
Net income (loss)
|
|
(9,266
|
)
|
|
519
|
|
|
(3,616
|
)
|
|
—
|
|
|
179,908
|
|
|
19,989
|
|
|
(135,344
|
)
|
|
52,190
|
|
Net income (loss) attributable to Colony NorthStar, Inc.
|
|
(8,438
|
)
|
|
(62
|
)
|
|
(2,993
|
)
|
|
—
|
|
|
143,912
|
|
|
18,260
|
|
|
(125,082
|
)
|
|
25,597
|
|
Total assets and equity method investments of the reportable segments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Healthcare
|
|
Industrial
|
|
Hospitality
|
|
CLNC
|
|
Other Equity and Debt
|
|
Investment Management
|
|
Amounts Not Allocated to Segments
|
|
Total
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,792,926
|
|
|
$
|
2,852,496
|
|
|
$
|
4,084,845
|
|
|
$
|
1,161,930
|
|
|
$
|
7,395,831
|
|
|
$
|
2,127,652
|
|
|
$
|
148,812
|
|
|
$
|
23,564,492
|
|
Equity method investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,161,930
|
|
|
1,058,206
|
|
|
215,840
|
|
|
3,742
|
|
|
2,439,718
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,813,552
|
|
|
$
|
2,810,135
|
|
|
$
|
4,094,596
|
|
|
$
|
—
|
|
|
$
|
9,251,829
|
|
|
$
|
2,714,974
|
|
|
$
|
100,564
|
|
|
$
|
24,785,650
|
|
Equity method investments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,315,629
|
|
|
207,683
|
|
|
3,742
|
|
|
1,527,054
|
|
Geography
Geographic information about the Company's total income and long-lived assets are as follows. Geography is generally presented as the location in which the income producing assets reside or the location in which income generating services are performed.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Total income by geography:
|
|
|
|
|
United States
|
|
$
|
613,661
|
|
|
$
|
643,128
|
|
Europe
|
|
78,173
|
|
|
70,427
|
|
Other
|
|
302
|
|
|
899
|
|
Total
(1)
|
|
$
|
692,136
|
|
|
$
|
714,454
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2018
|
|
December 31, 2017
|
Long-lived assets by geography:
|
|
|
|
|
United States
|
|
$
|
12,804,315
|
|
|
$
|
13,224,197
|
|
Europe
|
|
1,791,331
|
|
|
1,749,282
|
|
Total
(2)
|
|
$
|
14,595,646
|
|
|
$
|
14,973,479
|
|
__________
|
|
(1)
|
Total income includes earnings from investments in unconsolidated ventures and excludes cost reimbursement income from affiliates.
|
|
|
(2)
|
Long-lived assets comprise real estate, real estate related intangible assets and fixed assets, and exclude financial instruments and assets held for sale.
|
25. Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
Cash paid for interest, net of capitalized interest of $429 and $0, respectively
|
|
$
|
121,934
|
|
|
$
|
88,029
|
|
Cash paid for income taxes (received for income tax refunds), net
|
|
(9,430
|
)
|
|
1,249
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
Dividends and distributions payable
|
|
$
|
90,791
|
|
|
$
|
175,498
|
|
Net assets of CLNS Investment Entities deconsolidated, net of cash and restricted cash contributed (Note 4)
|
|
936,547
|
|
|
—
|
|
Redemption of OP Units for common stock
|
|
24
|
|
|
638
|
|
Improvements in operating real estate in accrued and other liabilities
|
|
14,274
|
|
|
246
|
|
Change in contributions receivable from noncontrolling interests
|
|
13,501
|
|
|
—
|
|
Redemption of OP Units for cash in accrued and other liabilities
|
|
2,096
|
|
|
5,085
|
|
Share repurchase payable (Note 11)
|
|
36,166
|
|
|
10,177
|
|
Assets acquired in Merger, net of cash and restricted cash assumed (Note 3)
|
|
—
|
|
|
17,024,350
|
|
Liabilities assumed in Merger (Note 3)
|
|
—
|
|
|
11,416,937
|
|
Noncontrolling interests assumed in Merger (Note 3)
|
|
—
|
|
|
602,014
|
|
Common stock issued for acquisition of NSAM and NRF (Note 3)
|
|
—
|
|
|
5,718,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2018
|
|
2017
|
Preferred stock issued for acquisition of NRF (Note 3)
|
|
—
|
|
|
1,010,320
|
|
Debt assumed by buyer in sale of manufactured housing portfolio (Note 18)
|
|
—
|
|
|
1,258,558
|
|
Net assets acquired in CPI restructuring, net of cash and restricted cash assumed (Note 3)
|
|
—
|
|
|
219,278
|
|
Investment deposits applied to acquisition of loans receivable, real estate and CPI Group
|
|
—
|
|
|
66,020
|
|
Foreclosures on collateral assets of originated or acquired loans receivable
|
|
—
|
|
|
8,167
|
|
Proceeds from loan repayments and asset sales held in escrow
|
|
—
|
|
|
45,870
|
|
Costs associated with contributions from noncontrolling interests
|
|
—
|
|
|
2,444
|
|
26
. Subsequent Events
Common Stock Repurchase
Between April 1, 2018 and May 7, 2018, the Company repurchased
5,910,690
shares of its class A common stock at an aggregate cost of
$33.4 million
excluding commissions, or a weighted average price of
$5.65
per share. As of May 7, 2018,
$20.6 million
of the previously authorized
$300.0 million
was remaining in its stock repurchase program.
Retail Distribution Business
The Proposed Transaction which combines NorthStar Securities and S2K to create a new retail distribution business, Colony S2K, closed on April 30, 2018.
FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and we intend such statements to be covered by the safe harbor provisions contained therein. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
The forward-looking statements contained in this Quarterly Report reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
|
|
•
|
the market, economic and environmental conditions in the healthcare, hospitality and industrial real estate, other commercial real estate equity and debt, and investment management sectors;
|
|
|
•
|
any decrease in our net income and funds from operations as a result of the Merger or otherwise, or our other acquisition activity;
|
|
|
•
|
our ability to integrate and maintain consistent standards and controls following the Merger, including our ability to manage our acquisitions effectively and to realize the anticipated benefits of such acquisitions;
|
|
|
•
|
our ability to realize substantial efficiencies and synergies as well as anticipated strategic and financial benefits of the Merger;
|
|
|
•
|
our exposure to risks to which we have not historically been exposed, including liabilities with respect to the assets acquired through the Merger and our other acquisitions;
|
|
|
•
|
our business and investment strategy, including the ability of the businesses in which we have a significant investment (such as Colony NorthStar Credit Real Estate, Inc. (NYSE:CLNC)) to execute their business strategies;
|
|
|
•
|
performance of our investments relative to our expectations and the impact on our actual return on invested equity, as well as the cash provided by these investments and available for distribution;
|
|
|
•
|
our ability to grow our business by raising capital for the companies that we manage;
|
|
|
•
|
our ability to deploy capital into new investments consistent with our business strategies, including the earnings profile of such new investments;
|
|
|
•
|
the impact of adverse conditions affecting a specific asset class in which we have investments;
|
|
|
•
|
the availability of attractive investment opportunities;
|
|
|
•
|
our ability to achieve any of the anticipated benefits of the combination of our captive broker-dealer with S2K Financial Holdings, LLC;
|
|
|
•
|
our ability to satisfy and manage our capital requirements;
|
|
|
•
|
the general volatility of the securities markets in which we participate;
|
|
|
•
|
our ability to obtain and maintain financing arrangements, including securitizations;
|
|
|
•
|
changes in interest rates and the market value of our assets;
|
|
|
•
|
interest rate mismatches between our assets and any borrowings used to fund such assets;
|
|
|
•
|
effects of hedging instruments on our assets;
|
|
|
•
|
the impact of economic conditions on third parties on which we rely;
|
|
|
•
|
any litigation and contractual claims against us and our affiliates, including potential settlement and litigation of such claims;
|
|
|
•
|
adverse domestic or international economic conditions and the impact on the commercial real estate or real-estate related sectors;
|
|
|
•
|
the impact of legislative, regulatory and competitive changes;
|
|
|
•
|
actions, initiatives and policies of the U.S. and non-U.S. governments and changes to U.S. or non-U.S. government policies and the execution and impact of these actions, initiatives and policies;
|
|
|
•
|
our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes;
|
|
|
•
|
our ability to maintain our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”);
|
|
|
•
|
availability of qualified personnel;
|
|
|
•
|
our ability to make or maintain distributions to our stockholders; and
|
|
|
•
|
our understanding of our competition.
|
While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. Moreover, because we operate in a very competitive and rapidly changing environment, new risk factors are likely to emerge from time to time. We caution investors not to place undue reliance on these forward-looking statements and urge you to carefully review the disclosures we make concerning risks in sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”