Digitalbridge Group, Inc. annual report, FY2018

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Filing summary

Entity and period: The supplied filing is Colony Capital, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. The request identifies DigitalBridge Group, Inc.; that name does not appear as the registrant in this filing. Colony Capital reported a co-sponsored digital infrastructure vehicle with Digital Bridge, a separate reference in the filing.

Business context and reporting period

Colony Capital was a global real estate investment manager with approximately $43 billion of assets under management. Its six segments were healthcare, industrial, hospitality, Colony Credit (CLNC), other equity and debt, and investment management. Colony elected REIT status beginning in 2017. Comparisons with 2017 are affected by the January 2017 merger and the January 2018 Colony Credit combination, so periods are not fully comparable.

Key financial metrics

  • Revenue: $2.665 billion in 2018, down $131.5 million (4.7%) from $2.797 billion in 2017. Property operating income rose $133.9 million, but interest income fell $201.3 million and fee income fell $69.0 million.
  • Profit and margins: Net loss was $495.2 million versus a $64.6 million loss in 2017. Loss attributable to common stockholders widened to $632.7 million from $333.1 million; diluted loss per share was $1.28 versus $0.64. The filing does not present a single consolidated operating-margin measure.
  • Impairments and credit costs: Impairment losses increased to $588.2 million from $420.4 million; provision for loan losses rose to $43.0 million from $19.7 million. Major 2018 impairments included $212.0 million on healthcare properties, $72.5 million on hospitality properties, and $217.9 million on investment-management intangibles and related assets.
  • Cash flow: Operating cash flow was $507.0 million, down from $582.5 million. Investing used $268.2 million, compared with $1.666 billion provided in 2017. Financing used $788.4 million. Cash and cash equivalents were $461.9 million at year-end; restricted cash was $366.8 million.
  • Debt and equity: Total debt was $10.040 billion, down from $10.828 billion; total assets were $22.215 billion and total stockholders’ equity was $7.006 billion. Debt includes substantial investment-level borrowing, and the filing reports some loans in default.
  • Liquidity: The $1.0 billion corporate revolving facility had no year-end borrowings; the borrowing base allowed the full commitment to be drawn as of February 25, 2019. Management said resources were sufficient for short- and long-term requirements, while noting REIT distributions limit cash accumulation.
  • Shareholder distributions: Common dividends were $0.44 per share for 2018, down from $1.08 in 2017. The company repurchased 61.4 million shares for approximately $350.1 million during 2018.

Material changes versus 2017

  • Fee income declined after the Townsend business sale, reduced non-traded REIT fees, and the wind-down of legacy funds; higher fees from Colony Credit and NRE partly offset the decline.
  • Contribution of assets to Colony Credit reduced reported loan and other investment balances and replaced some direct holdings with an equity-method investment. Colony’s share of CLNC’s 2018 loss was $65.4 million.
  • Industrial and hospitality property activity improved: hospitality RevPAR rose 2.1%, while industrial same-store property operating income increased 3.9%. Industrial average occupancy nevertheless fell to 94.3% from 95.2%.
  • The company recognized gains on real estate sales of $167.2 million, up from $137.4 million, but these gains did not offset higher impairments and weaker equity-method results.
  • The November 2018 restructuring targeted a 10%–20% global workforce reduction and lower annual compensation and administrative costs. Fourth-quarter restructuring costs were $19.3 million.

Outlook, risks, contingencies, and unusual items

  • Near-term debt refinancing is a major risk: Approximately $1.7 billion of fixed-rate U.S. healthcare debt was scheduled to mature in December 2019. The filing also cites approximately $2.0 billion of 2019 debt maturities and $482 million of healthcare borrowings in default due to tenant/operator performance or covenant issues. It warns of potential repayment demands, cash sweeps, foreclosure, or refinancing on less favorable terms.
  • A $2.0 billion notional interest-rate swap was out of the money and scheduled for mandatory settlement in December 2019. Its termination liability was approximately $132.3 million as of February 25, 2019; the filing gives substantial sensitivity to interest-rate changes.
  • Management’s strategy emphasized investment management, cost reduction, and monetizing non-core assets. The filing reported $5.5 billion of third-party capital commitments raised in 2018 and approximately $28.4 billion of AUM in its specified managed-company table; these measures use company-defined methodologies.
  • Subsequent to year-end, the company acquired 54 industrial buildings for $1.16 billion, financed in part with new debt. It also reported a February 2019 agreement concerning Abraaj’s Latin American private-equity platform, subject to approvals, and a strategic asset review committee formed after a cooperation agreement with Blackwells Capital.
  • Other significant exposures include healthcare reimbursement and regulation, hotel operating performance, interest-rate and foreign-currency risk, REIT qualification, and the Investment Company Act exemption. The filing describes shareholder litigation filed in 2018, but states no material legal proceedings were pending at December 31, 2018; outcomes remain uncertain.
  • No specific earnings or dividend guidance is provided. Management’s liquidity and cost-saving expectations are forward-looking and depend on refinancing, asset sales, fundraising, and successful restructuring.

Important facts for investors to verify

  • Confirm the issuer: this is Colony Capital, Inc. (ticker CLNY), not a filing naming DigitalBridge Group, Inc.; determine the intended company and historical entity relationship.
  • Track the refinancing or repayment of the $1.7 billion healthcare maturity, the status of defaulted borrowings, and any cash sweeps or collateral actions.
  • Assess cash available for corporate needs separately from restricted cash, property-level cash, and non-recourse financing; confirm the revolving facility’s borrowing-base availability and covenant compliance.
  • Review the assumptions behind the $588.2 million of impairments, particularly healthcare hold periods, hospitality sale values, and investment-management fee forecasts; assess whether further write-downs are possible.
  • Reconcile reported net loss with recurring operating performance and cash generation, including the impact of asset sales, impairments, CLNC losses, and restructuring costs.
  • Verify whether the workforce reductions and other cost measures produce durable savings, and how the acquisitions, commitments, and dividend level affect leverage and liquidity.