Filing identity and reporting period
The supplied filing is Colony Capital, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018, filed November 9, 2018. This does not match the request metadata naming Digitalbridge Group, Inc.; Digital Bridge appears in the filing as a partner in a digital infrastructure investment vehicle. Colony Capital reported approximately $44 billion of assets under management and operated across healthcare, industrial, hospitality, credit, other real estate investments, and investment management. The company cautions that comparisons are not fully comparable because of the 2017 merger and the January 2018 Colony Credit combination.
Financial results and liquidity
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 |
|---|---|---|
| Total revenue | $674.8 million, down from $789.9 million | $2.031 billion, down from $2.076 billion |
| Net income (loss) | $(13.9) million, versus $72.6 million | $(82.1) million, versus $230.0 million |
| Net income (loss) attributable to common stockholders | $(70.0) million; $(0.15) per share | $(235.5) million; $(0.47) per share |
| Operating cash flow | Not presented for the quarter | $393.3 million, versus $406.1 million |
| Interest expense | $145.1 million, versus $152.1 million | $447.3 million, versus $418.6 million |
At September 30, cash and cash equivalents were $416.8 million and restricted cash was $413.8 million. Debt, net, was $9.868 billion, down from $10.828 billion at year-end 2017; disclosed debt principal was $10.084 billion. Total assets were $22.305 billion and total equity was $11.458 billion. The company reported $1.0 billion of capacity under its secured corporate revolver and compliance with its financial covenants. It stated that capital resources were sufficient for short- and long-term needs.
For the first nine months, investing activities provided $82.0 million and financing activities used $1.029 billion. Common dividends declared were $0.11 per share in each of the first three quarters; the fourth-quarter $0.11 dividend was declared after quarter-end. Preferred dividends remain a significant cash obligation.
Material changes versus the prior comparable period
- Nine-month revenue declined modestly, but consolidated net income turned to a loss. The largest reported expense change was impairment: $299.7 million in the first nine months, versus $45.4 million. This included write-offs of management-contract intangibles and the NorthStar trade name, as well as property impairments.
- Interest income fell $165.3 million for the nine-month period, largely following the transfer of $1.3 billion of loans to Colony Credit, securitization-trust sales or deconsolidations, and loan repayments and sales. Fee income fell $55.4 million, primarily reflecting the sale of Townsend and changes to NorthStar Healthcare’s advisory agreement.
- Other gain was $133.7 million for the nine months, versus a $7.3 million loss. A $108.6 million gain on a non-designated interest-rate swap was a major contributor; this is a fair-value item and not equivalent to recurring operating cash flow. Prior-year unconsolidated-investment earnings included a $191.2 million gain from selling the company’s Starwood Waypoint Homes interest.
- Portfolio changes included the Colony Credit combination, continued disposals of non-core assets, and growth in industrial real estate. Industrial NOI rose 18.0% for the nine-month comparison; hospitality EBITDA rose 2.4%. Hospitality results included a $61.9 million impairment in the third quarter after the company adopted a near-term sale strategy for certain hotels.
Outlook, commentary, and risks
No quantified earnings or revenue guidance is provided. Management described a strategy of monetizing non-strategic assets and redeploying capital to core segments and sponsored investment vehicles. The filing reported $5.2 billion of third-party capital commitments raised in the first nine months, including a co-sponsored digital infrastructure vehicle with approximately $4.0 billion of callable commitments as of November 6, 2018; Colony Capital’s aggregate commitment was capped at $250 million. The company reported $3.5 million of third-quarter income, primarily management fees, from its joint venture with Digital Bridge.
- Debt and refinancing: $527.6 million of healthcare and other real estate equity debt was in payment default or not in compliance with certain debt or lease covenants; the company was negotiating restructuring or refinancing. A $1.75 billion fixed-rate healthcare debt component was scheduled to mature in December 2019, and management warned that reassessing asset holding periods could lead to further impairment. The company repaid a separate $100.5 million floating-rate component on November 9, 2018.
- Commitments: unfunded industrial property purchases were $137.8 million; a French portfolio acquisition had $419.7 million of remaining commitments; and other disclosed lending, fund, and joint-venture commitments also require capital. Certain hotel franchise guarantees could entail liquidated damages up to $100 million.
- Market and asset risks include credit losses, tenant/operator performance, interest-rate and foreign-currency movements, refinancing access, and valuation uncertainty. A $2 billion forward-starting interest-rate swap was out of the money and could require margin or termination payments; its fair-value movements were recognized in earnings.
- Subsequent events: on November 7, the company announced a restructuring expected to reduce its global workforce by approximately 15%. The same day, it agreed to a potential $70 million payment to terminate the NRE management agreement, less incentive payments, upon specified sale or internalization events. On November 5, Thomas Barrack became CEO in addition to executive chairman; the CFO transition was scheduled for January 1, 2019.
- The company reported no material legal proceedings or material changes to its previously reported risk factors, and management concluded disclosure controls were effective as of September 30. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the issuer: this text is Colony Capital’s 10-Q, not a Digitalbridge Group filing.
- Review the status and terms of debt in default or covenant noncompliance, the December 2019 maturity, and available refinancing options.
- Assess the quality and recurrence of earnings, especially the large impairment charges and noncash derivative fair-value gains.
- Check Colony Credit’s performance and exposure to the New York hospitality loans, and the valuation of Colony Capital’s 36.6% interest.
- Track cash available after preferred and common distributions, share repurchases, and unfunded investment commitments.
- Verify the assumptions supporting hotel and other property sale plans, impairment valuations, the workforce restructuring, and the potential NRE termination payment.