Business context and reporting period
This is Colony NorthStar, Inc.’s Form 10-K for the fiscal year ended December 31, 2016. The financial statements are for the historical NorthStar Asset Management Group, Inc. (NSAM), not the post-merger Colony NorthStar business. The supplied company metadata names Digitalbridge Group, Inc.; that does not match the registrant identified in this filing.
On January 10, 2017, NSAM, Colony Capital and NorthStar Realty completed an all-stock merger of equals. Colony NorthStar reported approximately $56 billion of assets under management after the merger; Colony was designated the accounting acquirer. Accordingly, 2016 results should not be read as results for the combined company.
Financial performance and liquidity
Unless otherwise stated, amounts below are for historical NSAM; dollar amounts are in millions.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $398.5 | $435.8 | Down 8.6% |
| Net income | $47.0 | $120.7 | Down 61.1% |
| Net income attributable to common stockholders | $42.3 | $119.8 | Down 64.7% |
| Diluted EPS | $0.21 | $0.61 | Down $0.40 |
| Cash from operating activities | $168.7 | $169.4 | Nearly flat |
| Cash and cash equivalents at year-end | $131.7 | $84.7 | Up $47.0 |
- Asset management and other fees rose 19.0% to $366.6 million, including $66.2 million from Townsend, acquired in January 2016. Selling commission and dealer-manager fees fell 82.0% to $22.8 million as capital raising slowed and offerings closed.
- Net margin was approximately 11.8% in 2016 versus 27.7% in 2015. The decline reflected higher transaction costs, compensation and interest expense, plus investment losses and lower earnings from unconsolidated ventures.
- Year-end total assets were $850.6 million, total liabilities $590.4 million, and total equity $185.7 million. Cash also included $22.5 million of restricted cash.
- Year-end borrowings were $468.4 million, comprising the term loan net of financing costs. The $500 million term loan was repaid in January 2017 in connection with the merger. Separately, the combined company’s operating partnership entered a $1 billion revolving facility maturing in January 2021, with two six-month extension options.
- 2016 investing cash outflow was $383.2 million, principally reflecting the Townsend acquisition. Financing cash inflow was $261.9 million, including the term-loan proceeds. The filing does not provide a combined-company historical cash-flow statement.
Material changes, outlook and notable items
- Townsend acquisition: NSAM acquired an approximately 84% interest for $383 million. The acquisition added $201.6 million of net intangible assets and $243.3 million of goodwill at year-end. Management reported that Townsend contributed $66.2 million of revenue and $24.4 million of net income from acquisition through year-end.
- Merger-related items: 2016 transaction costs were $47.4 million, including $37.7 million related to the mergers. NSAM also reported a $16.2 million realized investment loss, primarily from selling its Island Hospitality interest. Approximately $32.4 million of additional third-party merger costs were incurred in January 2017.
- NSAM declared a $228 million special dividend, approximately $1.16 per share, contingent on the merger; it was paid January 27, 2017. Historical regular common dividends were $0.10 per share in each of the first three quarters of 2016.
- In January 2017, the combined company sold an 18.7% interest in its healthcare portfolio for approximately $340 million net proceeds. The filing gives differing implied portfolio valuations of approximately $5.0 billion and $5.4 billion in separate passages; investors should verify the transaction valuation.
- No specific earnings or revenue guidance is provided. Management stated that capital resources were sufficient for short- and long-term requirements, and described an expected combined-company leverage target of approximately 50% or less. Management also intended to elect REIT status beginning with 2017.
- Key risks include merger integration, realization of synergies, capital raising and deployment, refinancing and interest-rate exposure, conflicts among managed vehicles, healthcare reimbursement and regulation, hospitality performance, and maintaining REIT and Investment Company Act exemptions. A tax protection agreement could constrain transactions; estimated indemnification exposure if covered assets were sold in a taxable transaction was approximately $410 million.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end; the auditor issued unqualified opinions on the historical financial statements and internal controls. Ordinary-course litigation was not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: this filing is for Colony NorthStar and historical NSAM, not Digitalbridge Group.
- Review the separate Colony and NorthStar Realty financial statements and the merger pro forma disclosures before estimating combined-company performance, leverage or liquidity.
- Verify the healthcare joint-venture valuation discrepancy and the realized loss and proceeds associated with the Island interest sale.
- Assess merger integration costs, potential synergies, the post-merger debt and preferred-stock obligations, and the terms and usage of the $1 billion revolver.
- Evaluate the $410 million estimated tax-protection exposure, the company’s ability to qualify as a REIT, and the restrictions that REIT and Investment Company Act compliance may place on capital allocation.