Colony Capital, Inc. (formerly Colony NorthStar, Inc.) — Q2 2018 Form 10-Q
Entity note: The supplied filing is for Colony Capital, Inc. (NYSE ticker changed from CLNS to CLNY in June 2018), not Digitalbridge Group, Inc. Digital Bridge appears as a co-sponsor of an infrastructure investment vehicle. The reporting period ended June 30, 2018; the filing was signed August 9, 2018.
Business context and reporting period
Colony Capital reported as a global real estate investment manager with approximately $43 billion of assets under management, spanning healthcare, industrial, hospitality, commercial real estate credit and investment management. In January 2018, it contributed assets to Colony Credit Real Estate (CLNC) and received an approximately 36.6% fully diluted interest. It also combined its captive broker-dealer with S2K in April.
Comparisons with 2017 require caution: the 2017 financial statements reflect Colony as accounting acquirer before the January 2017 merger, while the 2018 results also reflect the January 2018 Colony Credit combination and contributed assets.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Total revenue | $689.6 million, up 1.5% year over year | $1.356 billion, up 5.4% |
| Net income (loss) | $(41.8) million | $(68.1) million |
| Net income (loss) attributable to common stockholders | $(92.8) million; $(0.19) per share | $(165.5) million; $(0.33) per share |
| Cash from operating activities | Not presented for the quarter | $211.4 million, versus $181.6 million in 2017 |
| Cash, cash equivalents and restricted cash | At June 30: $879.2 million on the balance sheet, plus $2.0 million held for sale | Cash-flow statement total: $881.3 million at period end |
For the quarter, property operating income rose $90.1 million, but expenses rose $117.2 million. Interest expense was $153.3 million and impairment expense $69.8 million. For the first half, impairment expense totaled $223.2 million, including write-offs of management contract intangibles and the NorthStar trade name; loan-loss provision was $19.3 million. Total comprehensive loss attributable to stockholders was $90.6 million for the quarter and $129.8 million for the half-year, including foreign-currency effects.
Reported property-level metrics were mixed: Q2 healthcare NOI was $73.9 million, down 6%; industrial NOI was $49.1 million, up 27.6%; and hospitality EBITDA was $86.0 million, up 5.2%. Hotel occupancy was 79.6% and RevPAR was $105, respectively up from 78.2% and $102 in Q2 2017. The filing does not present a single consolidated operating-margin measure.
At June 30, total assets were $22.82 billion, total liabilities $11.40 billion, and total equity $11.39 billion. Debt, net, was $9.99 billion; disclosed principal was $10.22 billion. The weighted-average interest rate on total debt principal was 4.8% (calculated from disclosed fixed- and variable-rate totals). Debt principal included $6.08 billion of variable-rate debt. The company reported $480.2 million cash and cash equivalents, in addition to restricted cash of $399.0 million.
Material changes versus prior comparable period
- Q2 common-stockholder loss swung to $92.8 million from income of $38.6 million in 2017; first-half common-stockholder loss was $165.5 million versus income of $33.3 million.
- Q2 fee income fell $14.4 million, chiefly reflecting the 2017 Townsend business sale and changes to non-traded REIT fee arrangements. Interest income declined $67.1 million, mainly following the contribution of $1.3 billion of loans to CLNC and securitization dispositions.
- First-half impairment expense increased by $202.0 million year over year. Investment earnings also declined substantially, partly because 2017 included a $191.2 million gain on the Starwood Waypoint Homes investment sale.
- Other gain was $104.1 million for the first half, including an $81.0 million gain on a non-designated interest-rate swap, a $10.9 million gain on CDO deconsolidation, and a $9.9 million gain related to the CLNC combination. These items do not represent recurring operating performance.
- Cash and restricted cash fell $512.7 million during the first half. Financing activities used $782.5 million, including $319.0 million for common-stock repurchases; investing activities provided $63.4 million and operating activities provided $211.4 million.
- Common dividends declared were $0.11 per share in Q2 2018, versus $0.27 in Q2 2017. The company repurchased 54.8 million shares for approximately $318.5 million during the first half.
Outlook, risks and unusual items
- The filing gives no quantified earnings or revenue guidance. Management said it believed capital resources were sufficient for short- and long-term needs. Its stated leverage target was approximately 50% or less.
- The $1.0 billion secured revolving credit facility was undrawn at August 6, 2018, with the borrowing base sufficient for the full commitment; the company reported compliance with its financial covenants at June 30.
- Refinancing and covenant risks are material. Mortgage debt of $485.7 million in healthcare and other real estate equity was in payment default or not in compliance with certain debt or lease covenants; the company was negotiating restructuring or refinancing. A $100.5 million floating-rate healthcare debt component was scheduled to mature in December 2018, and failure to extend or repay it could accelerate maturity of a related $1.75 billion fixed-rate component scheduled for December 2019.
- After quarter-end, the company reported refinancing $512.0 million of hospitality debt, extending maturities to 2020, and said remaining 2018 hotel maturities had met extension terms as of June 30. It also expected to fund any required prepayment to extend the healthcare floating-rate debt, but gave no assurance it would do so.
- Other exposures include hotel-franchise guarantee damages capped at $100 million, $105.2 million of unfunded industrial property purchase commitments, and $264.0 million of unfunded lending commitments ($94.3 million attributable to the company after noncontrolling interests). The THL Hotel Portfolio also had contingent consideration of up to $13 million.
- Management cited real estate market and operating conditions, credit losses, interest rates, foreign exchange, financing access, capital raising, integration and investment performance among principal risks. A $2 billion notional out-of-the-money interest-rate swap had an approximately $66.9 million termination value at August 6 and could generate margin calls.
- The company reported no material legal proceedings or material changes to its previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Confirm the issuer and security: this is Colony Capital’s 2018 filing, not a Digitalbridge Group filing.
- Review debt maturities, covenant/default status and the healthcare extension/prepayment requirements, including subsequent refinancing developments.
- Assess whether cash generation and available credit can support debt service, preferred dividends, common distributions, investment commitments and the remaining stock-repurchase authorization.
- Separate recurring operating trends from large impairment charges, swap fair-value gains, asset-sale gains and other transaction-related effects.
- Evaluate the sustainability of fee income and CLNC investment returns following the portfolio contribution and termination of NorthStar I/II management contracts.
- Consider the comparability limitations from the merger and portfolio changes when interpreting year-over-year results.