Digitalbridge Group, Inc. annual report, FY2019

Business context and reporting period

The supplied filing is Colony Capital, Inc.’s Form 10-K for the year ended December 31, 2019—not a filing under the name Digitalbridge Group, Inc. Colony was transitioning from a diversified real estate investment and management company toward digital infrastructure. At year-end it reported approximately $49 billion of AUM, including $36 billion managed for third parties, and $19.4 billion of fee-earning equity under management.

Its businesses included digital infrastructure, healthcare, hospitality, commercial real estate debt and equity, and investment management. The company acquired Digital Bridge Holdings (DBH) in July 2019 and a controlling 20.4% interest in data-center operator DataBank in December.

Financial performance and position

Metric	2019	2018
Total revenue	$2.326 billion	$2.367 billion
Loss from continuing operations	$1.651 billion	$534.8 million
Net loss	$148.9 million	$495.2 million
Net loss attributable to common stockholders	$1.152 billion; $2.41 per share	$632.7 million; $1.28 per share
Operating cash flow	$170.9 million	$507.0 million
Investing cash flow	$4.199 billion provided	$268.2 million used
Financing cash flow	$3.780 billion used	$788.4 million used
Total assets	$19.832 billion	$22.215 billion
Total debt, including debt presented with assets held for sale	$9.217 billion	$10.040 billion
Cash and cash equivalents	$1.205 billion	$461.9 million

Revenue declined 1.7% year over year. Fee income increased $79.5 million to $223.9 million, while property operating income fell $104.2 million and interest income fell $47.8 million.
Continuing-operations losses widened, including $1.146 billion of impairment losses: $788 million of goodwill impairment, $228 million on the CLNC investment, and impairments across real estate and other investments. A $239.3 million loss on a forward-starting interest-rate swap also weighed on results.
Net loss improved from 2018 largely because of discontinued operations: the industrial sale generated approximately $1.5 billion of real estate gain. The gain was substantially shared with outside investors; $989.4 million of discontinued-operations income was attributable to noncontrolling investment-entity interests.
Cash from investing included $6.108 billion of real estate sale proceeds, partly offset by $1.918 billion of acquisitions and additions. Cash and restricted cash totaled $1.425 billion at year-end.
Common dividends were $0.44 per share for 2019, paid at $0.11 quarterly. The company reported no established minimum distribution level. Preferred dividends remain senior to common distributions.
No consolidated operating margin is clearly provided. Property-level non-GAAP NOI was $301.2 million for healthcare and $274.8 million for hospitality; hospitality NOI excludes FF&E reserves.

Material changes versus the prior period

Colony sold its light industrial portfolio and related management platform in December for approximately $5.7 billion gross and $1.2 billion net proceeds after debt settlement and costs. The sale ended the industrial business’s status as a continuing reportable segment.
Net proceeds were directed toward digital expansion, the remaining DCP commitment, repayment of acquisition-related corporate borrowing, and redemption of $403 million of Series B and Series E preferred stock. The redemptions settled in January 2020 and were expected to reduce annual preferred dividends by about $34.5 million.
DBH added approximately $14 billion of AUM. DataBank was Colony’s first direct balance-sheet investment in digital real estate; its acquisition included approximately $539 million of debt.
Healthcare and hospitality property performance weakened: healthcare NOI declined 1.6% and hospitality NOI before FF&E reserves declined 3.7%. Hotel occupancy was 74.5%, versus 75.0% in 2018; RevPAR was $97, unchanged.
Goodwill impairment in other investment management totaled $788 million in 2019, following no goodwill impairment in 2018. Management cited lost industrial fees, lower CLNC fee base, and the strategic pivot away from legacy investment-management activities.

Outlook, risks and unusual items

Management set a 2020 asset-sale and monetization target of $300 million to $500 million for the other equity and debt portfolio, with the longer-term aim of monetizing the non-digital portfolio. It also said it would continue to pursue digital investments and explore options for legacy investment-management businesses and the CLNC management agreement; no transaction was assured.
Management said material near-term healthcare debt maturities had been addressed through refinancing, and did not expect the digital pivot alone to significantly shorten healthcare or hospitality holding periods. It continued to assess impairments using long-term cash-flow assumptions.
Year-end debt was approximately $9.2 billion including held-for-sale debt. Healthcare borrowings were about $2.95 billion and hospitality borrowings about $2.67 billion, predominantly variable rate. The company disclosed $205 million of non-recourse healthcare borrowings in default due to tenant/operator performance or covenant issues; elsewhere it reported $235.6 million of healthcare and other-real-estate debt in default or covenant noncompliance. These amounts and scopes should be reconciled.
The $750 million secured corporate revolving facility had no borrowings outstanding at December 31, 2019; the company said the full amount was available as of February 25, 2020. It matures in January 2021, with two six-month extension options. The filing states the company was in compliance with its financial covenants at year-end.
The industrial sale generated $81.2 million of carried interest, with approximately $35.2 million allocated as compensation. The company also paid $365.1 million to settle a $2 billion notional interest-rate swap.
Key risks include legacy healthcare and hotel operating and refinancing pressures; further impairments; floating-rate debt and LIBOR transition; reliance on asset sales, fundraising and third-party capital; execution and personnel risks in the digital pivot; conflicts involving DBH principals and managed investments; REIT and Investment Company Act compliance; and activist-stockholder activity. The filing also identifies the emerging coronavirus outbreak as a potential risk to hospitality, healthcare operations, financing and fundraising.
CEO succession was planned: DBH co-founder Marc Ganzi was expected to become CEO after the later of the DCP investment-period termination and December 31, 2020. The filing reports that the CEO and CFO considered disclosure controls effective; management’s internal-control assessment excluded DataBank, which represented 8.7% of assets and 0.3% of revenue. The auditor issued an unqualified opinion on the financial statements and internal controls, also excluding DataBank from its internal-control audit.

Important facts for investors to verify

Confirm the filing entity and ticker: this is Colony Capital, Inc. (NYSE: CLNY), not a Digitalbridge Group, Inc. filing.
Reconcile the reported default and covenant-noncompliance debt amounts, and review collateral, cure status, cash sweeps, and refinancing terms.
Assess the industrial-sale proceeds and gain after final closing adjustments, escrow release, taxes, and distributions to noncontrolling investors.
Track digital-platform execution, DataBank’s debt and operating contribution, DCP commitments and deployments, and whether AUM growth produces durable fee earnings and cash flow.
Review assumptions supporting the $788 million goodwill charge, real-estate valuations, and CLNC’s $725.4 million carrying value versus its $630.8 million year-end market value.
Verify the corporate facility’s extension or refinancing, debt maturities, variable-rate exposure, and the effect of the preferred-stock redemptions on cash and distributions.
Monitor the $300 million to $500 million 2020 monetization target, CLNC management-contract plans, leadership succession, and the integration of DataBank’s financial controls.