Business Context and Reporting Period
This Form 8-K, filed on November 13, 2017, reports events occurring on November 9, 2017, involving Colony NorthStar, Inc. (the "Company") and its indirect subsidiary, CNI NRE Advisors, LLC (the "Asset Manager"). The filing details the entry into an Amended and Restated Asset Management Agreement with NorthStar Realty Europe Corp. ("NRE"), effective January 1, 2018. The document also discloses an ownership waiver granted by NRE to the Company.
Key Financial Metrics and Agreement Terms
The filing outlines the financial structure of the new management agreement rather than reporting historical financial performance metrics such as revenue or cash flow.
- Base Management Fee: Payable quarterly in arrears, calculated as 1.50% of NRE's EPRA NAV up to $2.0 billion, and 1.25% on amounts exceeding $2.0 billion.
- Incentive Fee: 20% of NRE's Total Stockholder Return exceeding a 10% cumulative annual hurdle rate, subject to a high watermark. Payment may be made in cash or stock.
- Internalized Service Costs: NRE reimburses the Asset Manager for specific personnel costs plus a 20% overhead charge, subject to quarterly caps based on Gross Asset Value (GAV):
- 0.0375% of GAV up to $2.5 billion.
- 0.0313% of GAV between $2.5 billion and $5.0 billion.
- 0.025% of GAV exceeding $5.0 billion.
- Termination Fee: If NRE elects not to renew after the initial term or undergoes a change of control, it must pay a fee equal to three times the base management fees earned over the preceding four quarters.
- Transaction Expenses: NRE agreed to pay up to $2.5 million for the Asset Manager's external financial advisor fees related to this agreement.
Material Changes and Ownership Waiver
The primary material change is the execution of the Amended Management Agreement, replacing prior arrangements effective January 1, 2018. Additionally, NRE issued a Waiver Letter allowing the Company and its subsidiaries to own up to 45% of NRE's common stock, exceeding standard ownership limitations.
- Voting Rights: If the Company owns more than 25% of NRE's stock, it must vote the "Excess Shares" in proportion to the votes of other shareholders.
- Post-Termination Limit: If the management agreement is terminated, the ownership threshold for the waiver reduces to 9.8% starting on the third anniversary of termination.
- Director Nomination: The Asset Manager gains the right to nominate one director to NRE's board beginning with the 2018 annual stockholders' meeting.
Outlook, Risks, and Contingencies
The agreement establishes a five-year initial term with automatic three-year renewals unless notice is provided six months prior to expiration. Termination is restricted to specific events such as fraud, gross negligence, bankruptcy, or failure to maintain REIT qualification.
- Assignment Risks: NRE must consider in good faith any assignment of the agreement, with consent anticipated for parties with over $10 billion in assets under management.
- Waiver Revocation: The ownership waiver automatically revokes upon breach of conditions. If the Company holds more than 9.8% at the time of breach, it has an 180-day extension period to dispose of shares to comply with the limit.
- Equity Compensation: NRE expects to make annual equity grants to the management team, subject to Compensation Committee approval.
Investor Verification Checklist
- Verify the exact terms of the "Amended and Restated Asset Management Agreement" in Exhibit 10.1.
- Review the "Waiver Letter" in Exhibit 99.1 for specific conditions regarding the 45% ownership limit and voting restrictions.
- Monitor NRE's EPRA NAV and Gross Asset Value to calculate potential future management fee obligations.
- Confirm the Company's current ownership percentage of NRE to assess voting rights and waiver applicability.
- Track the $2.5 million cap on transaction expenses paid by NRE.