Digitalbridge Group, Inc. quarterly report, Q1 FY2018

Business context and reporting period

Filing identity: The supplied filing is Colony NorthStar, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2018—not a filing identified as DigitalBridge Group, Inc. The filing describes a global real estate and investment management business with healthcare, industrial, hospitality, credit, other equity and debt, and investment management operations.

Comparisons with Q1 2017 require caution: following a January 10, 2017 merger accounted for as a reverse acquisition, Q1 2017 includes NSAM and NRF results for only 80 post-merger days, while Q1 2018 covers a full quarter. The filing says period comparisons may not be meaningful.

Financial results and position

Amounts below are in millions of dollars except per-share data.

Revenue increased by $59.5 million, led by higher property operating income. Expenses rose by $139.7 million, including a $144.9 million increase in impairment losses, while earnings from unconsolidated ventures fell by $81.7 million. Q1 2018 included a $32.8 million income tax benefit; the comparable 2017 period had a $3.7 million tax expense.

Cash flow from investing was $(140.2) million and cash flow from financing was $(418.7) million. Financing outflows included $210.3 million of common stock repurchases and $179.5 million of dividends paid. The company reported $1.0 billion of cash, cash equivalents and restricted cash combined at quarter end; a substantial portion was restricted.

Debt principal at quarter end was $10.8 billion, including $6.6 billion of variable-rate debt and $4.1 billion of fixed-rate debt. The weighted-average interest rate on debt at amortized cost was 4.6%. The $1.0 billion secured revolving credit facility had $100 million drawn at quarter end; as of May 7, $820 million was available to draw. The company reported compliance with its credit facility covenants at March 31.

Common dividends declared were $0.11 per share for the quarter, versus $0.27 per share in Q1 2017. Preferred stock dividends were $31.4 million for the quarter. No consolidated net profit margin was reported; reported net loss and revenue are shown above.

Material changes versus the prior comparable period

• Property operating income rose to $554.7 million from $426.9 million, while interest income fell to $63.9 million from $115.5 million. The contribution of approximately $1.3 billion of loans to Colony NorthStar Credit reduced interest income, alongside loan repayments, sales and foreclosures.
• Fee income declined to $36.8 million from $53.3 million, mainly following the sale of Townsend and the end of management contracts with NorthStar Income I and II. Fees from the new publicly traded Colony NorthStar Credit partly replaced the latter contracts.
• Impairment expense reached $153.4 million, including $139.0 million to write off NorthStar Income I and II management-contract intangibles after the Combination closed, and $1.4 million related to the NorthStar/RXR NY Metro offering termination. Real estate impairments also affected results.
• The January 31 Combination created Colony NorthStar Credit (CLNC). The company contributed investment entities and received an approximately 37% interest, accounted for under the equity method. It reported a $9.9 million gain on remeasurement of its retained interest.
• Q1 2017 included $87.3 million of transaction costs, compared with $0.7 million in Q1 2018, and materially higher merger-related compensation. This partly offsets the significance of the 2018 impairment increase when comparing reported losses.

Outlook, management commentary, risks and unusual items

Management said it believed capital resources were sufficient for short- and long-term requirements. It targeted overall leverage of approximately 50% or less. The filing provides no specific earnings or revenue guidance. Management cited the goal of monetizing non-core assets and shifting exposure toward strategic investments and core real estate segments.

• The company closed a co-sponsored digital real estate infrastructure fund with Digital Bridge on February 28. Callable commitments were $1.95 billion at March 31, including the company’s $162 million commitment. Third-party AUM was $27.5 billion, up from $26.9 billion at year-end.
• The company repurchased 42.3 million shares for approximately $246 million at a weighted-average $5.82 per share under a $300 million program. After further repurchases through May 7, $20.6 million remained authorized.
• The captive broker-dealer combination with S2K closed on April 30, 2018. The company said the new business was expected to distribute its own, S2K’s and third-party products.
• Key risks include property-market conditions, credit and tenant/operator performance, refinancing and interest-rate exposure, foreign currency movements, access to financing and capital, execution of the CLNC and S2K strategies, REIT qualification, and the ability to maintain distributions. A $2 billion notional forward-starting interest-rate swap was out of the money and could require margin calls; its termination value was approximately $66.9 million as of May 7.
• Mortgage debt of $447.2 million was in payment default or not in compliance with certain debt or lease covenants; the company was negotiating restructuring or refinancing. The filing also describes hotel-franchise guarantees with potential liquidated damages capped at $100 million.
• Management reported no material litigation expected to adversely affect results, financial position or liquidity, and stated disclosure controls were effective at March 31.

Most important facts for investors to verify

• Confirm the filing issuer and corporate-period mapping: the supplied filing is for Colony NorthStar, not DigitalBridge Group.
• Assess whether operating cash generation and unrestricted cash are adequate for debt service, dividends, commitments and remaining investment needs; distinguish restricted cash from available liquidity.
• Review the status, collateral, covenant position and refinancing prospects of the $447.2 million of troubled mortgage debt, as well as near-term debt maturities and variable-rate exposure.
• Evaluate whether the $153.4 million impairment, particularly the management-contract write-offs, and the tax benefit are nonrecurring or signal further deterioration in asset or fee-income values.
• Track CLNC’s performance and the terms, liquidity and eventual conversion of the company’s Class B-3 shares, scheduled to convert to CLNC Class A shares in February 2019.
• Verify the sustainability of the $0.11 common dividend and the economics of the substantial share repurchases, alongside leverage and capital commitments.