Digitalbridge Group, Inc. current report, 25 August 2017

Full document

Business Context and Reporting Period

This Form 8-K, filed by Colony NorthStar, Inc. on August 25, 2017, reports the entry into a Material Definitive Agreement. The filing details a proposed all-stock combination transaction between Colony NorthStar, Inc. (and its affiliates) and two separate entities: NorthStar Real Estate Income Trust, Inc. ("NorthStar I") and NorthStar Real Estate Income II, Inc. ("NorthStar II"). The combined entity will be named "Colony NorthStar Credit Real Estate, Inc."

Key Financial Metrics and Transaction Structure

The filing outlines the equity structure and consideration for the proposed combination rather than historical financial performance metrics such as revenue or cash flow.

  • Post-Transaction Ownership: Upon closing, Colony NorthStar and affiliates will own approximately 37%, NorthStar I stockholders approximately 32%, and NorthStar II stockholders approximately 31% of the combined company on a fully diluted basis.
  • Consideration for Colony NorthStar: Colony NorthStar Credit will issue approximately 44.4 million shares of Class A common stock (or Class B-3 if listed without an IPO) to CLNS OP and approximately 3.1 million membership units to RED REIT.
  • Exchange Ratios:
    • NorthStar I: 1 share converts to 0.3532 shares of Colony NorthStar Credit common stock (split into Class B-1, B-2, and B-3).
    • NorthStar II: 1 share converts to 0.3511 shares of Colony NorthStar Credit common stock (split into Class B-1, B-2, and B-3).
  • Asset Treatment: One asset of NorthStar I will not be acquired. If not sold to a third party for over $65 million prior to closing, Colony NorthStar has committed to purchase a senior interest in this asset for $65 million.
  • Management Fees: The new entity will pay a base management fee of 1.5% of Stockholders' Equity and an incentive fee of 20% of excess Core Earnings over a 7% hurdle rate.

Material Changes and Transaction Mechanics

The primary material change is the structural consolidation of three distinct operating entities into a single credit real estate platform. Key mechanics include:

  • Merger Structure: NorthStar I and NorthStar II will merge into Colony NorthStar Credit, with Colony NorthStar Credit surviving. Their respective operating partnerships will merge into Colony NorthStar Credit OP.
  • Class Conversion: The transaction involves the issuance of Class B-1, B-2, and B-3 common stock, which will convert to Class A common stock at staggered intervals (30 days, 180 days, and 1 year) following an IPO or listing.
  • Special Dividends: A special dividend may be declared by NorthStar I or NorthStar II to "true up" contributed values based on cash leakage (distributions exceeding funds from operations) during the measurement period from July 1, 2017, to the closing date.
  • Termination Fees:
    • NorthStar I may owe up to $43.4 million (or $21.7 million under specific "Go Shop" circumstances).
    • NorthStar II may owe up to $41.6 million (or $20.8 million under specific "Go Shop" circumstances).
    • Transaction expense reimbursement is capped at $10 million per party.

Guidance, Risks, and Contingencies

The filing contains no financial guidance or outlook for the combined entity. It focuses on the conditions and risks associated with consummating the transaction.

  • Closing Conditions: The transaction is contingent upon stockholder approval from NorthStar I and NorthStar II, listing approval on a national securities exchange, tax opinions confirming REIT status and tax-free treatment, and the absence of a material adverse effect.
  • Termination Rights: The agreement may be terminated if closing does not occur within nine months of stockholder approval, if requisite votes are not obtained by March 31, 2018, or if a superior proposal is received.
  • Forward-Looking Risks: Risks include failure to obtain regulatory or stockholder approvals, inability to list shares, operating cost increases, business disruption, and failure to realize anticipated efficiencies.
  • Management Continuity: Kevin P. Traenkle is expected to serve as CEO and Sujan Patel as CFO of the combined company.

Investor Verification Checklist

  • Verify the final exchange ratios and the specific class of stock (Class A vs. Class B) to be issued upon closing.
  • Confirm the outcome of the "Go Shop" period ending October 19, 2017, and whether any superior proposals were received.
  • Review the upcoming Form S-4 registration statement and joint proxy statement/prospectus for detailed financial data and risk factors.
  • Monitor the status of the $65 million asset commitment regarding NorthStar I's non-acquired asset.
  • Check for the declaration of any special dividends intended to adjust for cash leakage prior to closing.