Filing summary
Entity and period: The supplied filing is Colony NorthStar, Inc.’s Form 10-Q for the quarter ended June 30, 2017, filed August 9, 2017—not a filing under the name DigitalBridge Group, Inc. It reports a combined business following the January 10, 2017 merger of Colony, NorthStar Asset Management Group (NSAM) and NorthStar Realty Finance (NRF). Colony is the accounting acquirer; NSAM and NRF results are included from January 11, 2017. Consequently, comparisons with 2016, which reflects Colony alone, are not directly comparable.
Financial results and position
- Second quarter: Revenue was $679.4 million, versus $217.5 million a year earlier. Net income was $105.2 million, versus $103.1 million; net income attributable to common stockholders was $38.6 million, versus $43.0 million. Basic and diluted EPS were each $0.07, compared with $0.26 and $0.24, respectively.
- First half: Revenue was $1.287 billion, versus $418.3 million. Net income was $157.4 million, versus $194.2 million; common-stockholder net income was $33.3 million, versus $61.1 million. Basic and diluted EPS were $0.05, versus $0.37 and $0.36. 2017 included $12.6 million of discontinued-operations income.
- Revenue mix and drivers: Second-quarter property operating income was $500.5 million, interest income $111.3 million, and fee income $54.3 million. The increase over the prior-year quarter primarily reflects businesses and assets added in the merger. Second-quarter earnings from unconsolidated ventures were $122.4 million, including gains from SFR share sales.
- Cash flow: For the six months, operating activities provided $184.9 million, investing activities provided $254.2 million, and financing activities used $213.8 million. Cash and cash equivalents were $599.9 million at quarter-end; restricted cash was $300.7 million.
- Balance sheet and debt: Total assets were $25.29 billion and debt, net, was $10.42 billion at June 30. Debt principal was $10.78 billion, of which $6.44 billion was variable-rate. The company reported a 4.28% weighted-average rate on convertible and exchangeable senior notes; debt rates vary by instrument and portfolio.
- Liquidity: The secured revolving credit facility had a $1.0 billion commitment, with $71 million drawn at June 30. The company reported covenant compliance; as of August 4, $965 million was available to draw. Management stated that capital resources were sufficient for short- and long-term requirements.
- Dividends and capital: Common dividends declared were $0.27 per share for the quarter. The company issued $333.5 million net of Series I preferred stock proceeds and used a portion to redeem Series A and Series F preferred stock. It repurchased about 12.9 million common shares for $168.0 million during the first half.
Material changes and unusual items
- The merger substantially expanded the business, adding healthcare, hospitality and investment-management operations, as well as significant assets, debt, goodwill and intangible assets. The company reported $56 billion of assets under management, including balance-sheet and third-party managed assets; third-party AUM was $40.3 billion at June 30.
- First-half merger-related transaction costs were $89.8 million in the income statement; total merger-related costs, including compensation and integration costs, were $168.3 million. These included $66.8 million of success-based investment-banking fees. Management said certain integration costs were not expected to recur.
- First-half earnings from unconsolidated ventures included a $191.2 million gain on the sale of the company’s SFR interest. The manufactured-housing portfolio sale generated approximately $664.4 million of net proceeds. These and other asset dispositions contributed materially to investing cash flows.
- A $2.0 billion notional forward-starting interest-rate swap assumed in the merger was out of the money, with a $153.2 million liability at June 30; its second-quarter fair-value loss contributed to the $23.9 million net loss in other gain (loss). The filing warned that early termination could require payment of the termination value.
- Approximately $580.3 million of debt principal was in payment default, including maturity default, or not in compliance with certain covenants at June 30, primarily involving CPI-related debt and healthcare and hospitality mortgage debt. The company said it was negotiating restructurings and refinancing CPI debt.
- On July 1, 2017, the company and investment vehicles took control, through consensual foreclosure after a maturity default, of a 148-asset limited-service hotel portfolio described as approximately $1.3 billion, relating to a remaining junior mezzanine loan of about $289 million. Asset and liability valuations were still being assessed.
Outlook, risks and contingencies
No quantified earnings or revenue guidance is provided. Management described a strategy to grow core real-estate segments using the investment-management platform, recycle capital from non-core investments, and target overall leverage of approximately 50% or less. It stated that merger synergies and operating efficiencies were expected but were not quantified. The company intended to elect REIT tax treatment beginning with its 2017 taxable year; qualification depends on meeting applicable requirements, including distribution obligations.
Key risks include integration and realization of merger benefits; real-estate and investment-management market conditions; refinancing and debt covenant risk; interest-rate and foreign-currency movements; borrower, tenant and operator credit; and access to financing and third-party capital. The company disclosed lending commitments of $111.9 million attributable to its share and investment commitments of $382.7 million, in addition to contractual debt, lease and other obligations. It reported no material legal proceedings and no material changes to the risk factors in its 2016 Form 10-K. Disclosure controls were assessed as effective, while integration of the predecessor companies’ systems and controls remained in progress.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Colony NorthStar, Inc.; the supplied DigitalBridge Group, Inc. metadata does not match the filing’s registrant.
- Assess comparability carefully: 2017 includes NSAM and NRF only after the merger closing, while 2016 is Colony’s historical financial information. Review the filing’s pro forma figures and merger accounting before interpreting year-over-year changes.
- Track resolution, refinancing terms and potential covenant consequences for the $580.3 million of defaulted or noncompliant debt, and the performance and valuation of the hotel portfolio taken over after quarter-end.
- Review the $153.2 million swap liability, potential termination or collateral requirements, and sensitivity to interest-rate movements.
- Separate recurring operating performance from SFR and other disposition gains, merger expenses, impairments, and other fair-value items; confirm the sustainability of cash available for common and preferred dividends.