Business context and reporting period
Filing identity: The source is Colony NorthStar, Inc.’s Form 10-Q for the quarter ended September 30, 2017, filed November 9, 2017—not a filing identified in the text as DigitalBridge Group, Inc. The company combined Colony, NorthStar Asset Management Group and NorthStar Realty Finance in a January 10, 2017 merger. Colony is the accounting predecessor; results of the other merger parties are included beginning January 11, 2017. Accordingly, comparisons with 2016 are not like-for-like and may not be meaningful.
Colony NorthStar operated across healthcare, industrial, hospitality, other equity and debt, and investment management. Management reported approximately $57 billion of assets under management, including $41.7 billion of third-party AUM at September 30, 2017.
Financial performance and position
| Metric | Q3 2017 | Nine months 2017 |
|---|---|---|
| Total revenue | $789.9 million | $2.076 billion |
| Net income | $72.6 million | $230.0 million |
| Net income attributable to Colony NorthStar | $33.9 million | $137.8 million |
| Net income attributable to common stockholders | $1.7 million; reported EPS $0.00 | $35.0 million; reported EPS $0.05 |
| Operating cash flow | Not separately provided for the quarter | $385.5 million |
| Investing cash flow | Not separately provided for the quarter | $607.7 million |
| Financing cash flow | Not separately provided for the quarter | $(478.4) million |
- Q3 2017 revenue included $613.7 million of property operating income, $106.5 million of interest income and $59.7 million of fee income. Total expenses were $810.5 million; gains on real estate sales and earnings from unconsolidated ventures contributed to net income.
- Nine-month revenue rose from $630.4 million in the 2016 comparison, while net income fell from $266.1 million to $230.0 million. The merger, acquisitions, portfolio changes and unusual items materially affect these comparisons.
- Q3 property-level results included healthcare NOI of $78.0 million, industrial NOI of $44.3 million and hospitality EBITDA of $78.9 million. These are non-GAAP segment measures, not consolidated profit margins.
- At September 30, cash and cash equivalents were $877.9 million and restricted cash was $394.1 million. Total assets were $26.0 billion; debt, net, was $10.8 billion, compared with $3.7 billion at December 31, 2016. Debt principal was $11.1 billion. Total equity was $13.0 billion.
- The $1.0 billion revolving corporate facility was undrawn at quarter-end, with borrowing capacity available up to the full commitment; management reported compliance with its covenants. The filing states management believed capital resources were sufficient for short- and long-term requirements.
- Common dividends declared were $0.27 per share quarterly; the company also had substantial preferred dividends. Management’s stated expected overall leverage target was approximately 50% or less.
Material changes, outlook and risks
- Portfolio and earnings changes: The merger added large healthcare, hotel and investment-management businesses. Nine-month results included $85.3 million of merger transaction costs and $110.2 million of merger-related compensation. Depreciation and amortization, interest expense and compensation also increased materially with the expanded business.
- Realizations and acquisitions: The company sold its SFR interest for approximately $501 million net proceeds and recognized a $191.2 million gain; sold a manufactured-housing portfolio for approximately $664 million net proceeds; and recorded a $68.1 million gain on Swiss property sales. It acquired control of CPI through loan restructuring and took control of a 148-hotel portfolio through foreclosure.
- Unusual and noncash items: Q3 included a $9.1 million impairment of Townsend goodwill, which was held for sale, and securities-related other-than-temporary impairment losses. The company reported a $14.3 million unfavorable fair-value change on an assumed $2.0 billion forward-starting interest-rate swap. Real-estate gains and the SFR investment gain also affected reported earnings.
- Debt and credit risks: Approximately $611.6 million of mortgage debt was in payment or maturity default or not in compliance with certain covenants; the company was negotiating with lenders and a seller. A $2.0 billion notional swap was out of the money, could trigger margin calls, and had an approximately $171.9 million termination value as of November 7, 2017. Management cited interest-rate, credit, foreign-currency, refinancing and property-market risks.
- Outlook and transactions: No specific earnings or revenue guidance is provided. The company expected to sell its 84% Townsend interest under a $475 million sale agreement, with estimated net proceeds of about $379 million, in Q4 2017 or Q1 2018. A proposed commercial real estate credit REIT combination was expected in Q1 2018, subject to stockholder approvals and a listing; completion was not assured and termination could entail fees or expenses. The company intended to elect REIT tax treatment beginning with 2017.
- Other: Hurricanes Harvey and Irma caused property damage and interruption; insurance recoveries were estimated, but the company cautioned they might not cover all losses. No material legal proceeding was reported. Management said disclosure controls were effective; integration of the merger’s systems and controls was ongoing.
Most important facts for investors to verify
- Confirm the filing entity and period: the source identifies Colony NorthStar, Inc., not DigitalBridge Group, Inc.
- Assess recurring earnings and cash generation separately from merger costs, property-sale gains, investment gains, impairments and fair-value movements.
- Track the status of the $611.6 million of defaulted or covenant-noncompliant mortgage debt, upcoming maturities and refinancing outcomes.
- Review the forward-starting swap’s fair value, collateral and potential termination exposure, and test liquidity under adverse rate movements.
- Verify completion and final proceeds of the Townsend sale and the proposed credit REIT combination, including approvals, listing conditions and any termination costs.
- Monitor dividend coverage, leverage, remaining commitments, and whether estimated hurricane insurance recoveries are realized.