Business context and reporting period
This is Colony Capital, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019—not a filing by DigitalBridge Group, Inc. Colony reported a global investment-management and real-estate business, with $43 billion of assets under management at June 30. It acquired Digital Bridge Holdings (DBH) in July 2019, after the reporting period; the filing’s MD&A cites $55 billion of AUM including DBH.
Colony’s segments included healthcare, industrial, hospitality, Colony Credit (CLNC), other equity and debt, and investment management. The planned sale of the industrial portfolio and related management platform was classified as held for sale and discontinued operations.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. The filing presents the industrial business separately as discontinued operations, and revises comparative periods to reflect that presentation.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $573.4 | $615.5 | $1,121.5 | $1,212.1 |
| Net loss | $(484.6) | $(42.9) | $(514.8) | $(70.1) |
| Net loss attributable to common stockholders | $(468.9) | $(92.8) | $(571.0) | $(165.5) |
| Loss per common share | $(0.98) | $(0.19) | $(1.19) | $(0.33) |
| Interest expense | $141.7 | $142.5 | $276.6 | $281.2 |
| Impairment expense | $84.7 | $69.7 | $110.3 | $223.1 |
For the first half, operating cash flow was $139.2 million, versus $211.4 million a year earlier. Investing activities used $858.2 million, compared with $63.4 million provided in the prior-year period; financing activities provided $579.7 million, compared with $782.5 million used. Cash and cash equivalents were $354.0 million at June 30; restricted cash was an additional $336.5 million.
At June 30, total assets were $22.66 billion, total liabilities $12.11 billion, and total equity $10.54 billion. Debt, net, was $8.74 billion excluding $2.00 billion of industrial debt presented within liabilities held for sale. The industrial debt was expected to be assumed by a buyer. The company reported $5.21 billion of assets and $2.17 billion of liabilities held for sale.
The April amendment reduced the corporate revolving facility commitment to $750 million. At August 6, $384 million was available to draw, subject to the borrowing base. The company said it was compliant with facility covenants at June 30. The common dividend declared was $0.11 per share quarterly; preferred dividends also remained payable.
Material changes versus prior comparable periods
- Q2 revenue fell $42.0 million year over year; first-half revenue fell $90.6 million. Lower property operating income, interest income and fee income contributed to the declines.
- Net losses widened sharply, primarily reflecting a $227.9 million impairment of Colony’s 36.4% investment in CLNC and large fair-value losses on a non-designated interest-rate swap. Q2 equity-method losses were $259.3 million, compared with $0.8 million in Q2 2018.
- Other gain (loss) was a loss of $89.5 million in Q2 2019, versus a gain of $28.8 million in Q2 2018. The filing attributes much of the deterioration to the assumed $2 billion interest-rate swap; the first-half loss in this line was $138.6 million, versus a $104.1 million gain in 2018.
- First-half debt refinancing and investment activity reshaped the balance sheet. Colony refinanced $1.935 billion of healthcare debt principal, extending maturities through 2024, and industrial borrowing rose to support acquisitions. Net debt carrying value excluding held-for-sale debt declined from $8.98 billion at year-end to $8.74 billion.
- Cost reductions lowered first-half cash and equity compensation by $25.7 million and administrative expense by $4.4 million year over year. Management said it had achieved about two-thirds of its targeted annual savings.
Outlook, commentary, risks and unusual items
- Management sought to complete a sale of the industrial portfolio, potentially including its management platform, by year-end 2019; it cautioned that timing and completion were not assured. Proceeds could be redeployed into digital infrastructure, emerging markets and energy, or used to reduce corporate leverage.
- In July 2019, Colony acquired DBH for $325 million in cash and OP units; the filing reported approximately $14 billion of DBH AUM. Colony also reported an agreement for the sale of NRE, expected to close in Q4 2019, with a $70 million management-agreement termination payment inclusive of incentive fees. These were post-quarter developments, not Q2 results.
- The $2 billion interest-rate swap was out of the money and due for mandatory cash settlement in December 2019. At August 6, its termination liability was approximately $344 million; a 100-basis-point move in the 10-year Treasury forward curve could materially change the settlement amount. The filing identifies possible margin calls as a liquidity need.
- Management cited healthcare and other real-estate debt or lease covenant defaults: $341.6 million of mortgage debt was in payment default or not in compliance with certain debt or lease covenants at June 30. The company said it was negotiating restructurings or refinancing; the healthcare refinancing cured prior defaults on two refinanced loans.
- Credit risks included $276.8 million of non-PCI loans 90 days or more past due and on nonaccrual at June 30, and a total loan-loss allowance of $50.9 million. The filing also notes $201.8 million of unfunded lending commitments, of which Colony’s share was $94.6 million.
- Other risks include healthcare operator and tenant credit, hospitality demand and costs, European asset-sale values and Brexit uncertainty, interest-rate and currency movements, and execution and integration risks for DBH. The company disclosed no material legal proceedings expected to adversely affect its financial position, results or liquidity, and reported effective disclosure controls.
- No company-wide earnings or financial guidance is provided in the supplied filing text. Management stated that capital resources were sufficient for short- and long-term requirements, while noting that REIT distribution requirements constrain cash retention.
Investor verification priorities
- Confirm the filing identity: this is Colony Capital’s 2019 Q2 10-Q, with the DBH acquisition occurring after quarter-end, not a DigitalBridge Group filing.
- Track the industrial sale process, expected proceeds, debt assumption, and whether a sale closes on the stated timetable.
- Assess liquidity around the December 2019 swap settlement, including collateral requirements, available revolver capacity and any sensitivity to market rates.
- Review the CLNC investment impairment and subsequent market value, as well as loan delinquencies, allowances and covenant or lease defaults.
- Verify progress toward the stated cost savings, the NRE sale and termination payment, and integration and performance of the DBH platform.