NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Formation and Organization
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NorthStar Realty Europe Corp. (“NorthStar Europe” or the “Company”) (NYSE: NRE), a publicly-traded real estate investment trust (“REIT”), is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France (the “Core Portfolio”). The Company’s objective is to provide its stockholders with stable and recurring cash flow supplemented by capital growth over time.
The Company is externally managed and advised by an affiliate of the Manager. References to “the Manager” refer to NorthStar Asset Management Group Inc. (“NSAM”) for the period prior to the Mergers (refer below) and Colony NorthStar, Inc. (“Colony NorthStar” or “CLNS”), for the period subsequent to the Mergers. As part of the Mergers, NSAM changed its name to Colony NorthStar, Inc.
Substantially all of the Company’s assets, directly or indirectly, are held by, and the Company conducts its operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the “Operating Partnership”). The Company has elected to be taxed, and will continue to conduct its operations so as to continue to qualify, as a REIT for U.S. federal income tax purposes.
All references herein to the Company refer to NorthStar Realty Europe Corp. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.
Merger Agreements among NSAM, NorthStar Realty and Colony Capital, Inc.
On January 10, 2017, the Company’s external manager, NSAM, completed a tri-party merger with NorthStar Realty Finance Corp. (“NorthStar Realty”) and Colony Capital, Inc. (“Colony”), pursuant to which the companies combined in an all-stock merger (“the Mergers”) of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar (NYSE: CLNS). Colony NorthStar is a leading global equity REIT with an embedded investment management platform.
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2.
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Summary of Significant Accounting Policies
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Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
, which was filed with the Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIE”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.
The Company will evaluate its investments to determine whether they are a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.
Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or through a simple majority vote.
The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.
Non-controlling Interests
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and other comprehensive income (loss) (“OCI”) attributable to non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.
Reclassifications
Certain prior period amounts have been reclassified in the consolidated financial statements to conform to current period presentation.
Comprehensive Income (Loss)
The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and OCI. The components of OCI principally include the foreign currency translation adjustment, net.
Restricted Cash
Restricted cash primarily consists of amounts related to operating real estate such as escrows for taxes, insurance, capital expenditures, tenant security deposits and payments required under certain lease agreements and amounts related to the Company’s borrowings.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Operating Real Estate
Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements which extend the life of the asset are capitalized and depreciated over their useful life. Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets.
The Company accounts for purchases of operating real estate that qualify as business combinations using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles, such as in-place leases, above/below-market leases and goodwill. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the consolidated statements of operations.
Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:
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Category:
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Term:
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Building
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40 years
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Building improvements
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Lesser of the useful life or remaining life of the building
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Building leasehold interests
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Lesser of 40 years or remaining term of the lease
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Tenant improvements
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Lesser of the useful life or remaining term of the lease
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Preferred Equity Investments
Preferred equity investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium, discount and unfunded commitments, if any. Preferred equity investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. Preferred equity investments where the Company does not have the intent to hold the investment for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or fair value.
Assets and Liabilities Held For Sale
Operating real estate which has met the criteria to be classified as held for sale is separately presented on the consolidated balance sheets. Such operating real estate is recorded at the lower of its carrying value or its estimated fair value less the cost to sell net of the intangible assets associated with the asset, with any write-down to fair value less cost to sell recorded as an impairment loss. Once a property is determined to be held for sale, depreciation is no longer recorded. The Company records a gain or loss on sale of real estate when title is conveyed to the buyer and the Company has no substantial economic involvement with the property. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain or loss recognition by applying the finance, leasing, profit sharing, deposit, installment or cost recovery method, as appropriate, until the sales criteria are met.
Deferred Costs
Deferred costs primarily include deferred financing costs and deferred lease costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. Costs related to revolving credit facilities are recorded in other assets and are amortized to interest expense using the straight-line basis over the term of the facility. Costs related to other borrowings are recorded net against the carrying value of such borrowings and are amortized into interest expense using the effective interest method or straight-line method depending on the type of financing. Unamortized deferred financing costs are expensed when the associated borrowing is repaid before maturity to realized gain (loss) on sales and other. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not occur. Deferred lease costs consist of fees incurred to initiate and renew operating leases, which are amortized on a straight-line basis over the remaining lease term and are recorded to depreciation and amortization in the consolidated statements of operations.
Intangible Assets and Intangible Liabilities
The Company records acquired identified intangibles, which includes intangible assets (such as value of the above-market leases, in-place leases, below-market ground leases, goodwill and other intangibles) and intangible liabilities (such as the value of below-market leases), based on estimated fair value. The value allocated to the above or below-market leases is amortized net to rental income, the value of below-market ground leases is amortized into properties - operating expense and in-place leases is amortized into depreciation and amortization expense, respectively, in the consolidated statements of operations on a straight-line basis over the respective remaining lease term.
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. The Company analyzes goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable. The Company first assesses
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit, related to such goodwill, is less than the carrying amount as a basis to determine whether the two-step impairment test is necessary. The first step in the impairment test compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds fair value, the second step is required to determine the amount of the impairment loss, if any, by comparing the implied fair value of the reporting unit goodwill with the carrying amount of such goodwill. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, allocating the reporting unit’s estimated fair value to its net assets and identifiable intangible assets. The residual amount represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment loss is recorded in the consolidated statements of operations.
The following table presents identified intangibles as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
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June 30, 2017
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December 31, 2016
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Gross Amount
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Accumulated Amortization
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Net
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Gross Amount
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Accumulated Amortization
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Net
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Intangible assets:
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In-place lease
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$
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89,838
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$
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(36,364
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)
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$
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53,474
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$
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84,743
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$
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(29,012
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)
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$
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55,731
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Above-market lease
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38,108
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(10,066
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)
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28,042
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36,704
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(8,198
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)
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28,506
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Below-market ground lease
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54,000
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(1,132
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)
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52,868
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51,218
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(832
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)
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50,386
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Goodwill
(1)
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14,968
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N/A
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14,968
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13,780
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N/A
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13,780
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Total
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$
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196,914
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$
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(47,562
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)
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$
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149,352
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$
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186,445
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$
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(38,042
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)
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$
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148,403
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Intangible liabilities:
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Below-market lease
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$
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36,517
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$
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(10,625
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)
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$
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25,892
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|
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$
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34,163
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$
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(8,104
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)
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$
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26,059
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Above-market ground lease
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5,258
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(140
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)
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5,118
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4,839
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(96
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)
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4,743
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Total
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$
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41,775
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$
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(10,765
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)
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$
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31,010
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$
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39,002
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|
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$
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(8,200
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)
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$
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30,802
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_______________________
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(1)
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Represents goodwill associated with certain share-deal acquisitions in exchange for shares in the underlying portfolios. The goodwill and a corresponding deferred tax liability was recorded at acquisition based on tax basis differences.
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Other Assets and Other Liabilities
The following tables present a summary of other assets and other liabilities as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
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June 30, 2017
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December 31, 2016
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Other assets:
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Prepaid expenses
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$
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3,521
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$
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1,951
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Deferred costs, net
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4,765
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3,029
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Deferred tax assets, net
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267
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—
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Straight-line rent, net
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12,613
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10,182
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Escrow receivable
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3,185
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6,168
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Other
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1,042
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|
|
310
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Total
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$
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25,393
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$
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21,640
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|
|
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|
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|
June 30, 2017
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December 31, 2016
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Other liabilities:
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Deferred tax liabilities
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$
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9,795
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$
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8,916
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Prepaid rent received and unearned revenue
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16,626
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13,585
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Tenant security deposits
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4,807
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4,322
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Prepaid escalation income
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1,907
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1,560
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Other
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214
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|
|
535
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Total
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$
|
33,349
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$
|
28,918
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Revenue Recognition
Operating Real Estate
Rental and escalation income from operating real estate is derived from leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for annual rentals, subject to indexation, and expense reimbursements to be paid in quarterly or monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in other assets, net on the consolidated balance sheets. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Escalation income represents revenue from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.
In a situation in which a lease or leases associated with a significant tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above and below market lease intangibles, in-place lease value and leasing commissions). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within depreciation and amortization in the consolidated statements of operations.
Preferred Equity Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such investment is reclassified to held for sale.
Impairment on Investments
Operating Real Estate
The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate expected future undiscounted cash flow to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers global macroeconomic factors, real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value of the property and recorded in impairment losses in the consolidated statements of operations. For the
three and six months ended
June 30, 2017
, the Company did not recognize any impairment losses. For the
three and six months ended
June 30, 2016, the Company recognized
$27.5 million
of impairment losses.
An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of a tenant to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.
Preferred Equity Investments
Preferred equity investments are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of investment loss reserves on a quarterly basis or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the investment as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the investment, an investment loss reserve is recorded with a corresponding charge to provision for investment losses. The investment loss reserve for each investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Income recognition is suspended for an investment at the earlier of the date at which payments become 90-days past due or when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the investment becomes contractually current and performance is demonstrated to be resumed. Interest accrued and not collected will be reversed against interest income. An investment is written off when it is no longer realizable and/or legally discharged. As of
June 30, 2017
, the Company did not have any impaired preferred equity investments.
Equity-Based Compensation
The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award. Awards may be based on a variety of measures such as time, performance, market or a combination thereof. For time-based awards, fair value is determined based on the stock price on the grant date. The Company recognizes compensation expense over the vesting period on a straight-line basis or the attribution method depending if the grant is to an employee or non-employee. For performance-based awards, fair value is determined based on the stock price at the date of grant and an estimate of the probable achievement of such measure. The Company recognizes compensation expense over the requisite service period, net of estimated forfeitures, using the accelerated attribution expense method. For market-based measures, fair value is determined using a Monte Carlo analysis under a risk-neutral premise using a risk-free interest rate. The Company recognizes compensation expense, over the requisite service period, net of estimated forfeitures, on a straight-line basis. For awards with a combination of performance or market measures, the Company estimates the fair value as if it were
two
separate awards. First, the Company estimates the probability of achieving the performance measure. If it is not probable the performance condition will be met, the Company records the compensation expense based on the fair value of the market measure, as described above. This expense is recorded even if the market-based measure is never met. If the performance-based measure is subsequently estimated to be achieved, the Company records compensation expense based on the performance-based measure. The Company would then record a cumulative catch-up adjustment for any additional compensation expense.
Equity-based compensation issued to non-employees is accounted for using the fair value of the award at the earlier of the performance commitment date or performance completion date. Time-based awards are remeasured every quarter based on the stock price as of the end of the reporting period until such awards vest, if any.
Derivatives
The Company seeks to use derivative instruments to manage exposure to interest rate risk and foreign currency exchange rate risk. The change in fair value for a derivative is recorded in unrealized gain (loss) on derivatives and other in the consolidated statements of operations.
The Company’s derivative instruments are recorded on the consolidated balance sheets at fair value and do not qualify as hedges under U.S. GAAP.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment (“CTA”), net, is recorded as a component of accumulated OCI in the consolidated statements of equity. For the
three months ended
June 30, 2017
and
2016
, the Company reclassified
$0.1 million
and
$0.3 million
, respectively, of CTA to realized gain (loss) on sales and other in the consolidated statements of operations due to the sale of certain real estate assets. For the
six months ended
June 30, 2017
and
2016
, the Company reclassified
$(0.3) million
and
$0.7 million
, respectively, of CTA to realized gain (loss) on sales and other in the consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3).
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in unrealized gain (loss) on derivatives and other in the consolidated statements of operations.
Earnings Per Share
The Company’s basic earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common stock outstanding. Diluted EPS includes restricted stock and the potential dilution
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
that could occur if outstanding restricted stock units (“RSUs”) or other contracts to issue common stock, assuming performance hurdles have been met, were converted to common stock (including limited partnership interests in the Operating Partnership owned by holders other than the Company (“Common Units”) and Common Units which are structured as profits interests (“LTIP Units” collectively referred to as Unit Holders) (refer to Note 7), where such exercise or conversion would result in a lower EPS. The dilutive effect of such RSUs and Unit Holders is calculated assuming all units are converted to common stock.
Income Taxes
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes and will continue to comply with the related provisions of the Internal Revenue Code of 1986, as amended, the (“Internal Revenue Code”). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least
90%
of its REIT taxable income to its stockholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company distributes to its stockholders
100%
of its taxable income and therefore no provision for U.S. federal income taxes has been included in the accompanying consolidated financial statements for the
three and six months ended
June 30, 2017
and
2016
. Dividends distributed for the
three and six months ended
June 30, 2017
and
2016
were characterized, for U.S. federal income tax purposes, as ordinary income.
The Company conducts its business through foreign subsidiaries which may be subject to local level income tax in the European jurisdictions it operates. The Company has also elected taxable REIT subsidiary (“TRS”) status for one of the Company’s foreign subsidiaries. This enables the Company to provide services that would otherwise be considered impermissible for REITs and participate in activities that do not qualify as “rents from real property.” The TRS is not resident in the U.S. and, as such, not subject to U.S. taxation but is subject to foreign income taxes only. In addition, the REIT will not generally be subject to any additional U.S. taxes on the repatriation of its earnings.
For the Company’s foreign subsidiaries, including the Company’s foreign TRS, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the foreign tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. The Company evaluates the realizability of its deferred tax assets (e.g. net operating loss) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Due to past and projected losses in certain local jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company recognized net cumulative valuation allowances against the Company’s deferred tax assets. The Company will continue to review its deferred tax assets in accordance with U.S. GAAP.
The Company recorded an income tax expense for the
three months ended
June 30, 2017
and
2016
of
$0.2 million
and
$0.5 million
, respectively. The Company recorded an income tax benefit for the
six months ended
June 30, 2017
and
2016
of an immaterial amount and
$0.1 million
, respectively.
Other
Refer to Note 2 of the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2016
for further disclosure of the Company’s significant accounting policies.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting update requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. The accounting standard update will replace most of the existing revenue recognition guidance currently promulgated by U.S. GAAP. In July 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The effective date of the new revenue standard for the Company will be January 1, 2018. The Company has commenced the process of adopting the new revenue standard; including forming a project team and compiling an inventory of the sources of revenue the Company expects will be impacted by the adoption of this standard. The new revenue standard specifically excludes revenue streams for which specific guidance is stipulated in other sections of the codification, therefore it will not impact rental income or interest income generated on financial instruments such as preferred equity investments. The Company’s escalation income includes lease-related executory cost payments (payments for maintenance activities, including common area maintenance, such as cleaning services) which are considered non-lease components and subject to the new standard on revenue recognition. The Company expects to apply the revenue recognition guidance related to its non-lease components within leases on January 1, 2019, upon its
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
adoption of the lease accounting update. The Company expects that the impact will be to the pattern of revenue recognition and not the total revenue recognized over time. The Company is still completing its assessment of the overall impact of adopting this update.
In February 2016, the FASB issued an accounting update that sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The update is expected to result in the recognition of a right-to-use asset and related liability to account for the Company’s future obligations under its ground lease arrangements for which it is the lessee. As of
June 30, 2017
, the Company has
three
ground lease agreements with annual payments of
$0.6 million
. Additionally, the new update will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under this guidance, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial direct costs and instead will be expensed as incurred. Lessors will continue to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
In March 2016, the FASB issued guidance clarifying that an assessment of whether an embedded contingent put or call option is clearly and closely related to a borrowing requires only an analysis of the four-step decision sequence. Additionally, entities are not required to separately assess whether the contingency itself is clearly and closely related. Entities are required to apply the guidance to existing instruments in scope using a modified retrospective transition method as of the period of adoption. The guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company has adopted this guidance and it did not have any material impact on its consolidated financial position, results of operations and financial statement disclosures.
In March 2016, the FASB issued guidance which amends several aspects of the accounting for equity-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. The guidance is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. The Company has adopted this guidance and it did not have a material impact on its consolidated financial position, results of operations and financial statement disclosures.
In June 2016, the FASB issued guidance that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
In August 2016, the FASB issued guidance that makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company does not expect the adoption of this standard to have a material impact on its consolidated statements of cash flows.
In November 2016, the FASB issued guidance which requires entities to show the changes in the total of cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. Entities will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for reporting periods beginning after December 15, 2017 and will be applied retrospectively to all periods presented. The Company does not expect the adoption of this standard to have a material impact on its consolidated statement of cash flows.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In January 2017, the FASB issued guidance to clarify the definition of a business under ASC 805. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The guidance is effective for fiscal years, and interim periods within those years, beginning December 15, 2017. The amendments in this update will be applied on a prospective basis. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets).
In January 2017, the FASB issued guidance which removes Step 2 from the goodwill impairment test. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
In February 2017, the FASB issued an accounting update which clarifies the scope of recently established guidance on nonfinancial asset derecognition, which applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. In addition, the guidance clarifies the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets to align with the new revenue recognition standard to be more consistent with the accounting for sale of a business. Specifically, in a partial sale to a noncustomer, when a noncontrolling interest is received or retained, the latter is considered a noncash consideration and measured at fair value, which would result in full gain or loss recognized upon sale. This guidance has the same effective date as the new revenue guidance, which is January 1, 2018, with early adoption permitted beginning January 1, 2017. Both the revenue guidance and this update must be adopted concurrently. While the transition method is similar to the new revenue guidance, either full retrospective or modified retrospective, the transition approach need not be aligned between both updates. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
In May 2017, the FASB issued guidance clarifying when to account for a change to the terms or conditions of a share-based payment award as a modification. The guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
The following table presents operating real estate, net as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 (Unaudited)
|
|
December 31, 2016
|
Land
|
|
$
|
387,254
|
|
|
$
|
360,555
|
|
Buildings and improvements
|
|
1,057,562
|
|
|
980,053
|
|
Building, leasehold interests and improvements
|
|
227,054
|
|
|
212,864
|
|
Furniture, fixtures and equipment
|
|
1,384
|
|
|
1,214
|
|
Tenant improvements
|
|
65,354
|
|
|
59,746
|
|
Operating real estate, gross
|
|
1,738,608
|
|
|
1,614,432
|
|
Less: accumulated depreciation
|
|
(88,242
|
)
|
|
(63,585
|
)
|
Operating real estate, net
|
|
$
|
1,650,366
|
|
|
$
|
1,550,847
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Real Estate Held for Sale
The following table summarizes the Company’s operating real estate held for sale as of
June 30, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(1)
|
Location
|
|
Type
|
|
Properties
|
|
Operating Real Estate, Net
|
|
Intangible Assets, Net
|
|
Total
(2)
|
Spain
(3)
|
|
Office
|
|
1
|
|
$
|
6,373
|
|
|
$
|
958
|
|
|
$
|
7,331
|
|
Netherlands
|
|
Office
|
|
1
|
|
2,095
|
|
|
1
|
|
|
2,096
|
|
Total
|
|
|
|
2
|
|
$
|
8,468
|
|
|
$
|
959
|
|
|
$
|
9,427
|
|
___________________
|
|
(1)
|
The assets and liabilities classified as held for sale are expected to be sold on the open market as asset sales and share sales subject to standard industry terms and conditions. The assets contributed
$0.3 million
and
$0.4 million
of revenue and a loss before income tax benefit (expense) of
$0.3 million
and
$0.1 million
for the three months ended
June 30, 2017
and
2016
, respectively.
|
|
|
(2)
|
Represents operating real estate and intangible assets, net of accumulated depreciation and amortization of
$4.1 million
prior to being reclassified into held for sale.
|
|
|
(3)
|
Asset was subsequently sold in July 2017 for
$9.0 million
.
|
Real Estate Sales
For
three months ended
June 30, 2017
, the Company sold
two
non-core assets for
$12.3 million
. The Company received
$11.7 million
of proceeds, net of sales costs. In connection with the sales, for the
three months ended
June 30, 2017
, the Company recorded a
$1.4 million
realized gain in the Company’s consolidated statements of operations. As of June 30, 2017, there were
$2.1 million
in certain escrow accounts that were not held by the Company which the Company could potentially record as a realized gain.
For the
six months ended
June 30, 2017
, the Company sold
three
non-core assets for
$33.2 million
. The Company received
$31.8 million
of proceeds, net of sales costs. In connection with the sales, for the
six months ended
June 30, 2017
, the Company recorded a
$4.1 million
realized gain in the Company’s consolidated statements of operations. The Company also recorded an additional realized gain of
$1.9 million
for the
six months ended
June 30, 2017
related to the release of escrow accounts from prior disposals.
|
|
4.
|
Preferred Equity Investments
|
In May 2017, the Company partnered with a property developer in China to acquire 20 Gresham Street, a Class A office building in London, United Kingdom and the Company invested
$34.1 million
of preferred equity
,
which the Company accounts for as a debt investment.
The following table presents one preferred equity investment as of
June 30, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 (Unaudited)
|
|
|
|
|
Asset Type
|
|
Principal Amount
|
|
Carrying Value
|
|
Fixed Rate
|
|
Mandatory Redemption
|
Preferred equity investment
|
|
$
|
34,064
|
|
|
$
|
34,064
|
|
|
8.00
|
%
|
|
May 2020
|
Credit Quality Monitoring
The Company’s preferred equity investment is secured by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its preferred equity investment at least quarterly and determines the relative credit quality principally based on: (i) whether the borrower is currently paying debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a preferred equity investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality preferred equity investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality preferred equity investment that is not performing, which the Company defines as a loan in maturity default and/or past due at least
90
days on its contractual debt service payments, as a non-performing loan (“NPL”).
As of
June 30, 2017
, the Company’s preferred equity investment was performing in accordance with the contractual terms of its governing documents, in all material respects, and was categorized as a performing loan. For the
three and six months ended
June 30, 2017
, the preferred equity investment contributed all interest income recorded on the consolidated statement of operations.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents borrowings as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 (Unaudited)
|
|
December 31, 2016
|
|
|
Final
Maturity
|
|
Contractual
Interest Rate
(2)
|
|
Principal
Amount
|
|
Carrying
Value
|
|
Principal
Amount
|
|
Carrying
Value
|
Mortgage and other notes payable:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.K. Complex
|
|
Jan-20
|
|
GBP LIBOR + 1.75%
|
|
$
|
52,819
|
|
|
$
|
52,084
|
|
|
$
|
50,116
|
|
|
$
|
49,284
|
|
U.K. Complex - Mezzanine
|
|
Jan-20
|
|
8.325%
|
|
12,189
|
|
|
12,127
|
|
|
11,565
|
|
|
11,497
|
|
Trias Portfolio 1
(3)(5)(8)
|
|
Apr-20
|
|
EURIBOR + 2.70%
|
|
12,107
|
|
|
11,854
|
|
|
9,477
|
|
|
13,301
|
|
Trias Portfolio 2
(3)(5)
|
|
Dec-20
|
|
EURIBOR + 1.55%
|
|
81,615
|
|
|
81,429
|
|
|
78,952
|
|
|
78,708
|
|
Trias Portfolio 3
(3)(5)
|
|
Apr-20
|
|
EURIBOR + 1.65%
|
|
43,539
|
|
|
42,240
|
|
|
45,170
|
|
|
39,568
|
|
Trias Portfolio 4
(3)(5)
|
|
Apr-20
|
|
GBP LIBOR + 2.70%
|
|
16,697
|
|
|
16,314
|
|
|
15,843
|
|
|
15,446
|
|
SEB Portfolio 1
(5)
|
|
Apr-22
|
|
EURIBOR + 1.80%
|
|
302,590
|
|
|
298,769
|
|
|
278,539
|
|
|
274,614
|
|
SEB Portfolio 2
(5)
|
|
Apr-22
|
|
GBP LIBOR + 1.80%
|
|
241,724
|
|
|
238,613
|
|
|
229,353
|
|
|
226,078
|
|
SEB Portfolio - Preferred
(4)
|
|
Apr-60
|
|
2.30%
|
|
97,800
|
|
|
97,492
|
|
|
90,033
|
|
|
89,720
|
|
Trianon Tower
(5)
|
|
Jul-23
|
|
EURIBOR + 1.30%
|
|
376,949
|
|
|
375,356
|
|
|
347,012
|
|
|
345,422
|
|
Other - Preferred
(6)
|
|
Oct-45
|
|
1.00%
|
|
6,684
|
|
|
6,076
|
|
|
6,151
|
|
|
5,481
|
|
Total mortgage and other notes payable
|
|
|
|
|
|
1,244,713
|
|
|
1,232,354
|
|
|
1,162,211
|
|
|
1,149,119
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility
|
|
Apr-19
(7)
|
|
LIBOR + 2.75%
|
|
23,000
|
|
|
23,000
|
|
|
—
|
|
|
—
|
|
Grand Total
|
|
|
|
|
|
$
|
1,267,713
|
|
|
$
|
1,255,354
|
|
|
$
|
1,162,211
|
|
|
$
|
1,149,119
|
|
________________________
|
|
(1)
|
All mortgage notes and other notes payable are denominated in local currencies, as such, the principal amount generally increased due to the change in the Euro or U.K. Pound Sterling compared to the U.S. dollar. All borrowings are non-recourse and are interest-only through maturity, subject to compliance with covenants of the respective borrowing, and denominated in the same currency as the assets securing the borrowing.
|
|
|
(2)
|
All floating rate debt is subject to interest caps of
0.5%
for EURIBOR and
2.0%
for GBP LIBOR which are used to manage interest rate exposure.
|
|
|
(3)
|
Trias Portfolio represents the cross-collateralized borrowings among the IVG Portfolio, Internos Portfolio and Deka Portfolio. Such three portfolios were not under common control or management at the time of acquisition.
|
|
|
(4)
|
Represents preferred equity certificates with a contractual interest rate of
2.3%
through May 2019, which can be prepaid at that time without penalty in part or in full, which increases to EURIBOR plus
12.0%
through May 2022 and subsequently to EURIBOR plus
15.0%
through final maturity. Certain prepayments prior to May 2019 are subject to the payment of the unpaid coupon on outstanding principal amount through May 2019.
|
|
|
(5)
|
Prepayment provisions include a fee based on principal amount ranging from
0.25%
to
1.0%
through December 2019 for the Trias Portfolio borrowings and
0.5%
to
1.0%
through April 2019 for the SEB Portfolio borrowings and
0.80%
through June 30, 2017,
0.60%
through June 30, 2018 and
0.30%
through June 30, 2019 for Trianon Tower.
|
|
|
(6)
|
Represents preferred equity certificates each with a fixed contractual interest rate of
1.0%
per annum plus variable interest based on specified income levels associated with the German property companies of the Trias Portfolios which can be prepaid at any time without penalty through final maturity, which is
thirty
years from the issuance date.
|
|
|
(7)
|
Subject to a
one
year extension at the discretion of the Company.
|
|
|
(8)
|
In June 2017, the Company amended and restated the agreement to increase the loan amount by
$5.1 million
and reduce future minimum capital expenditure spending requirements.
|
The following table presents a reconciliation of principal amount to carrying value of the Company’s mortgage and other notes payable and Credit Facility as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017 (Unaudited)
|
|
December 31, 2016
|
Principal amount
|
|
$
|
1,267,713
|
|
|
$
|
1,162,211
|
|
Deferred financing costs, net
|
|
(12,359
|
)
|
|
(13,092
|
)
|
Carrying value
|
|
$
|
1,255,354
|
|
|
$
|
1,149,119
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents scheduled principal on borrowings, based on final maturity as of
June 30, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Mortgage
and Other Notes
Payable
|
|
Credit Facility
|
July 1 to December 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Years ending December 31:
|
|
|
|
|
|
|
|
2018
|
|
—
|
|
|
—
|
|
|
—
|
|
2019
|
|
23,000
|
|
|
—
|
|
|
23,000
|
|
2020
|
|
218,967
|
|
|
218,967
|
|
|
—
|
|
2021
|
|
—
|
|
|
—
|
|
|
—
|
|
2022 and thereafter
|
|
1,025,746
|
|
|
1,025,746
|
|
|
—
|
|
Total
|
|
$
|
1,267,713
|
|
|
$
|
1,244,713
|
|
|
$
|
23,000
|
|
As of
June 30, 2017
and
December 31, 2016
the Company was in compliance with all of its financial covenants.
Senior Notes
In July 2015, the Company issued
$340.0 million
principal amount of
4.625%
senior stock-settlable notes due December 2016 (the “Senior Notes”) for aggregate net proceeds of
$331.0 million
, after deducting the underwriters’ discount and other expenses. The Senior Notes were senior unsubordinated and unsecured obligations of the Company and NorthStar Realty and NorthStar Realty’s operating partnership guaranteed payments on the Senior Notes.
The proceeds from the issuance of the Senior Notes were distributed to subsidiaries of NorthStar Realty, which used such amounts for general corporate purposes, including, among other things, the funding of acquisitions, including the Trianon Tower and the repayment of NorthStar Realty’s borrowings. Such distribution to NorthStar Realty was recorded in equity in net transactions with NorthStar Realty. During 2016, the Company repurchased approximately
$272.3 million
of the Senior Notes, at a slight premium to par value, through privately negotiated transactions and settled the remaining Senior Notes in cash at maturity.
Credit Facility
In May 2016, the Company entered into a
$75.0 million
corporate revolving credit facility (the “Credit Facility”) with certain commercial bank lenders, with an initial
one
year term. The Credit Facility was secured by collateral relating to a borrowing base at that time and guarantees by certain subsidiaries of the Company. In October 2016, the Company permanently reduced the aggregate commitments under the Credit Facility to
$35.0 million
. In April 2017, the Company amended and restated the Credit Facility with aggregate commitments of
$35 million
and an initial
two
year term. The Credit Facility no longer contains a limitation on availability based on a borrowing base and the interest rate remains the same. The Credit Facility has an accordion feature, allowing the total facility to increase to
$70 million
. As of June 30, 2017,
$23.0 million
remained outstanding on the Credit Facility.
6. Related Party Arrangements
Colony NorthStar, Inc.
Management Agreement
The Company entered into a management agreement with an affiliate of the Manager in November 2015 for an initial term of
20
years, which automatically renews for additional
20
-year terms each anniversary thereafter unless earlier terminated. As asset manager, the Manager is responsible for the Company’s day-to-day operations, subject to supervision and management of the Company’s board of directors. Through its global network of subsidiaries and branch offices, the Manager performs services and engages in activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries. The management agreement with the Manager provides for a base management fee and incentive fee.
Base Management Fee
For the
three months ended
June 30, 2017
and
2016
, the Company incurred
$3.6 million
and
$3.5 million
, respectively, related to the base management fee. For the
six months ended
June 30, 2017
and
2016
, the Company incurred
$7.1 million
and
$7.0 million
, respectively, related to the base management fee. As of
June 30, 2017
,
$3.5 million
is recorded in due to related party on the consolidated balance sheets. The base management fee to the Manager could increase subsequent to
June 30, 2017
by an amount equal to
1.5%
per annum of the sum of:
|
|
•
|
any equity the Company issues in exchange or conversion of exchangeable or stock-settlable notes;
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
•
|
any other issuances by the Company of common equity, preferred equity or other forms of equity, including but not limited to LTIP Units in the Operating Partnership (excluding units issued to the Company and equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and
|
|
|
•
|
cumulative cash available for distribution (“CAD”), if any, of the Company in excess of cumulative distributions paid on common stock, LTIP Units or other equity awards which began with the Company’s fiscal quarter ended March 31, 2016.
|
Incentive Fee
For the
three and six months ended
June 30, 2017
and
2016
, the Company did not incur an incentive fee. The incentive fee is calculated and payable quarterly in arrears in cash, equal to:
|
|
•
|
the product of: (a)
15.0%
and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of
$0.30
per share and up to
$0.36
per share; plus
|
|
|
•
|
the product of: (a)
25.0%
and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of
$0.36
per share;
|
|
|
•
|
multiplied by the Company’s weighted average shares outstanding for the calendar quarter.
|
Weighted average shares represents the number of shares of the Company’s common stock, LTIP Units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee, all equity issuances are allocated on a daily weighted average basis during the fiscal quarter of issuance. With respect to the incentive fee, such amounts will be appropriately adjusted from time to time to take into account the effect of any stock split, reverse stock split, stock dividend, reclassification, recapitalization or other similar transaction.
Additional Management Agreement Terms
The Company’s management agreement with the Manager provides that in the event of a change of control of the Manager or other event that could be deemed an assignment of the management agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The management agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $
10 billion
of assets under management. The management agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or the Manager, directly or indirectly, the surviving entity will succeed to the terms of the management agreement.
Payment of Costs and Expenses and Expense Allocation
The Company is responsible for all of its direct costs and expenses and reimburses the Manager for costs and expenses incurred by the Manager on the Company’s behalf. In addition, the Manager may allocate indirect costs to the Company related to employees, occupancy and other general and administrative costs and expenses in accordance with the terms of, and subject to the limitations contained in, the Company’s management agreement with the Manager (the “G&A Allocation”). The Company’s management agreement with the Manager provides that the amount of the G&A Allocation will not exceed the following: (i)
20%
of the total of: (a) the Company’s general and administrative expenses as reported in their consolidated financial statements excluding: (1) equity-based compensation expense, (2) non-recurring items, (3) fees payable to the Manager under the terms of the applicable management agreement and (4) any allocation of expenses to the Company’s (“NRE’s G&A”); and (b) the Manager’s general and administrative expenses as reported in its consolidated financial statements, excluding equity-based compensation expense and adding back any costs or expenses allocated to any managed company of the Manager; less (ii) NRE’s G&A. The G&A Allocation may include the Company’s allocable share of the Manager’s compensation and benefit costs associated with dedicated or partially dedicated personnel who spend all or a portion of their time managing the Company’s affairs, based upon the percentage of time devoted by such personnel to the Company’s affairs. The G&A Allocation may also include rental and occupancy, technology, office supplies, travel and entertainment and other general and administrative costs and expenses, which may be allocated based on various methodologies, such as weighted average employee count or the percentage of time devoted by personnel to such the Company affairs. In addition, the Company will pay directly or reimburse the Manager for an allocable portion of any severance paid pursuant to any employment, consulting or similar service agreements in effect between the Manager and any of its executives, employees or other service providers.
The Company’s obligation to reimburse the Manager for the G&A Allocation and any severance, at the Manager’s discretion, and the
20%
cap on the G&A Allocation, as described above, applies on an aggregate basis to the Company.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the three and
six months ended
June 30, 2017
and
three months ended
June 30, 2016
the Manager did not allocate any general and administrative expenses to the Company. For the
six months ended
June 30, 2016
, the Manager allocated
$0.1 million
to the Company. For the
three and six months ended
June 30, 2017
and
2016
, the Manager did not allocate any severance to the Company.
In addition, the management agreement provides that the Company and any company spun-off from the Company, shall pay directly or reimburse the Manager for up to
50%
of any long-term bonus or other compensation that the Manager’s compensation committee determines shall be paid and/or settled in the form of equity and/or equity-based compensation to executives, employees and service providers of the Managers’ during any year. Subject to this limitation and limitations contained in any applicable management agreement between the Manager and any company spun-off from the Company, the amount paid by the Company and any company spun-off from the Company will be determined by the Manager in its discretion. At the discretion of the Manager’s compensation committee, this compensation may be granted in shares of the Company’s restricted stock, restricted stock units, long-term incentive plan units or other forms of equity compensation or stock-based awards; provided that if at any time a sufficient number of shares of the Company’s common stock are not available for issuance under the Company’s equity compensation plan, such compensation shall be paid in the form of RSUs, LTIP Units or other securities that may be settled in cash.
The Company’s equity compensation for each year may be allocated on an individual-by-individual basis at the discretion of the Manager’s compensation committee and, as long as the aggregate amount of the equity compensation for such year does not exceed the limits set forth in the management agreement, the proportion of any particular individual’s equity compensation may be greater or less than
50%
.
The Company does not have employment agreements with its named executive officers, but the Company has generally agreed to pay directly or reimburse the Manager for the portion of any severance paid by the Manager or any of its affiliates to an individual pursuant to the terms of any employment, consulting or similar service agreement, including any employment agreements with Colony NorthStar or its subsidiaries and its named executive officers, that corresponds to or is attributable to: (i) the equity compensation that the Company is required to pay directly or reimburse the Manager pursuant to the management agreement; (ii) any cash and/or equity compensation paid directly by the Company to such individual as an employee or other service provider of the Company; and (iii) any amounts paid to such individual by the Manager or any of its affiliates that the Company is obligated to reimburse the Manager pursuant to the management agreement. With respect to Mahbod Nia only, in lieu of the foregoing severance payment or reimbursement, the Company has agreed to pay directly or reimburse the Manager for
50%
of any cash payments made by the Manager or any of its affiliates in connection with the termination of Mr. Nia’s employment either without cause or upon the non-renewal of Mr. Nia’s term of employment by the employer or by Mr. Nia for good reason; provided that the Company’s board of directors consented to the taking of such action (or, with respect to a termination for good reason, any action taken with the intent to create good reason). Because the Company’s obligation to pay these amounts is owed to the Manager and not directly to the Company’s named executive officers and the Company does not control the terms of the agreements between the Manager or its affiliates and the Company’s named executive officers, the discussion above does not include these amounts or a discussion of any arrangements that the Manager or its affiliates may have with the Company’s named executive officers pursuant to which our obligations to the Manager may arise.
Manager Ownership of Common Stock
As of June 30, 2017, Colony NorthStar and its subsidiaries owned
4,938,225
shares of the Company’s common stock, or approximately
9.0%
of the total outstanding common stock.
The following summarizes the equity-based compensation for the
three and six months ended
June 30, 2017
and
2016
:
For the
six months ended
June 30, 2017
and
2016
, the Company recorded
$17.3 million
and
$7.0 million
, respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statements of operations. For the three months ended
June 30, 2017
and
2016
, the Company recorded
$1.4 million
and
$3.8 million
, respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statements of operations. In connection with the change of control of NSAM as a result of the Mergers, substantially all outstanding equity awards of the Company that were subject to vesting based solely on continued employment or services and a portion of the outstanding equity awards of the Company that were subject to vesting based on the achievement of additional performance-based criteria vested. As of
June 30, 2017
, equity-based compensation expense to be recognized over the remaining vesting period through January 2020 is
$9.3 million
, provided there are
no
additional forfeitures.
2015 Omnibus Stock Incentive Plan
Pursuant to the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan (the “2015 Plan”), the Company may issue equity awards to directors, officers, employees, co-employees, consultants and advisors of the Company, the Manager or of any
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
parent or subsidiary who provides services to the Company. The number of shares that may be issued under the 2015 Plan equals
10 million
shares of common stock, plus on January 1, 2017 and each January 1 thereafter, an additional
2%
of the number of shares of common stock issued and outstanding on the immediately preceding December 31. In addition, shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise of a stock option or settlement of an award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2015 Plan. As of
June 30, 2017
, under the 2015 Plan, a total of
1.2 million
shares of common stock had been issued (net of forfeitures and shares held back for tax withholding),
1.7 million
shares were reserved for issuance pursuant to outstanding equity awards (including
0.1 million
reserved for issuance upon conversion of outstanding LTIP Units and
1.6 million
reserved for issuance pursuant to the outstanding Absolute RSUs and Relative RSUs) and
8.3 million
otherwise unreserved shares remained available for issuance.
All of the equity awards issued by the Company since the spin-off from NorthStar Realty on November 1, 2015 (the “Spin-off”) have been issued under the 2015 Plan. During the
six months ended
June 30, 2017
, the Company issued
500,642
restricted shares of common stock under the 2015 Plan to employees of the Manager or its subsidiaries in accordance with the terms of the management agreement described above in Note 6, of which
379,594
vested in connection with the Mergers.
In March 2016, as contemplated in connection with the Spin-off, the Company granted an aggregate of
995,698
restricted shares of common stock and
1,493,551
restricted stock units (“RSUs”) to employees of the Manager or one of its subsidiaries under the 2015 Plan. The restricted shares of common stock were subject to vesting over the approximately
four
year period ending December 31, 2019, subject to continued employment with the Manager or one of its subsidiaries and the RSUs were market-based awards subject to the achievement of performance-based vesting conditions and continued employment with the Manager or one of its subsidiaries. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return and continued employment with the Manager or one of its subsidiaries over the approximately
four
year period from the grant date through December 31, 2019 (the “Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index and continued employment with the Manager or one of its subsidiaries over the approximately
four
year period from the grant date through December 31, 2019 (the “Relative RSUs”). Award recipients may earn up to
100%
of the Absolute RSUs that were granted and up to
125%
of the Relative RSUs that were granted. Upon vesting pursuant to the terms of the Absolute RSUs and Relative RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted. In accordance with their terms, all of these restricted shares of common stock that remained outstanding vested in connection with the Mergers. The Absolute and Relative RSUs were not affected by the Mergers and remain outstanding, subject to forfeitures occurring in connection with termination of employment with the Manager or one of its subsidiaries.
Pre-Spin-Off NorthStar Realty Equity Awards
In addition to equity awards issued under the 2015 Plan, the Company also had equity subject to outstanding equity-based awards granted by NorthStar Realty prior to the Spin-Off. In connection with the Spin-Off, holders of shares of common stock of NorthStar Realty and LTIP units of NorthStar Realty’s operating partnership subject to outstanding equity awards received one share of the Company’s common stock or one Common Unit in the Operating Partnership, respectively, for every six shares of common stock of NorthStar Realty or LTIP units of NorthStar Realty’s operating partnership held. Other equity and equity-based awards relating to NorthStar Realty’s common stock, such as RSUs, were adjusted to also relate to one-sixth of a share of the Company’s common stock, but otherwise generally remained subject to the same vesting and other terms that applied prior to the Spin-off. Performance-based vesting conditions based on total stockholder return of NorthStar Realty or NorthStar Realty and NSAM were adjusted to refer to combined total stockholder return of NorthStar Realty and the Company or NorthStar Realty, NSAM and the Company, respectively, with respect to periods after the Spin-Off and references to a change of control or similar term in outstanding awards, which referred to a change of control of either NorthStar Realty or NSAM, were adjusted, to the extent such awards relate to common stock of the Company or Common Units in the Operating Partnership, to refer to a change of control of either the Company or NSAM.
Following the Spin-off, NorthStar Realty and the compensation committee of its board of directors continued to administer all awards granted by NorthStar Realty prior to the Spin-Off, but the Company was obligated to issue shares of the Company’s common stock or other equity awards of its subsidiaries or make cash payments in lieu thereof or with respect to dividend or distribution equivalent obligations to the extent required by these awards. These awards continued to be governed by the NorthStar Realty equity plans, as applicable, and shares of the Company’s common stock issued pursuant to these awards were not be issued pursuant
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
to, and did not reduce availability under, the 2015 Plan. In connection with the Mergers, all of these outstanding equity-based awards (other than an RSU relating to
83,333
shares of the Company’s common stock) vested or were forfeited.
The following table presents activity related to the issuance, vesting, conversion and forfeitures of restricted stock and Common Units. The balance as of
June 30, 2017
represents vested Common Units and unvested market-based RSUs (grants in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Restricted Stock
(1)
|
|
Common Units
(3)
|
|
Restricted Stock Units
(4)
|
|
Performance RSUs
(5)
|
|
Total Grants
|
|
Weighted
Average
Grant Price
|
December 31, 2016
|
1,139
|
|
|
688
|
|
|
83
|
|
|
1,868
|
|
|
3,778
|
|
|
$
|
11.29
|
|
Granted
|
501
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
501
|
|
|
12.69
|
|
Converted
|
—
|
|
|
(236
|
)
|
|
—
|
|
|
—
|
|
|
(236
|
)
|
|
21.21
|
|
Vested
(2)
|
(1,519
|
)
|
|
—
|
|
|
—
|
|
|
(178
|
)
|
|
(1,697
|
)
|
|
10.22
|
|
Forfeited
(6)
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(334
|
)
|
|
(335
|
)
|
|
5.62
|
|
June 30, 2017
|
121
|
|
|
451
|
|
|
83
|
|
|
1,356
|
|
|
2,011
|
|
|
$
|
12.30
|
|
___________________
|
|
(1)
|
Represents restricted stock included in common stock.
|
|
|
(2)
|
Vested primarily includes the acceleration of substantially all outstanding equity awards of the Company in connection with the change of control of NSAM as a result of the Mergers.
|
|
|
(3)
|
Includes vested and unvested Common Units in the Operating Partnership issued in the Spin-Off with respect to equity-based awards granted by NorthStar Realty prior to the Spin-Off. As of
June 30, 2017
, all of these Common Units in the Operating Partnership were vested.
|
|
|
(4)
|
Relates to an equity-based award granted by NorthStar Realty prior to the Spin-Off and represents a non-employee grant subject to service-based vesting conditions, which is scheduled to vest on January 22, 2019, unless certain conditions are met. The RSUs are entitled to dividend equivalents prior to vesting and may be settled either in shares of the Company’s common stock or in cash at the option of the Manager.
|
|
|
(5)
|
As of
June 30, 2017
, represented outstanding Absolute and Relative RSUs.
|
|
|
(6)
|
Includes the forfeiture of performance based RSUs issued to NSAM executives as part of historical bonus plans in connection with the change of control of NSAM.
|
Share Repurchase
In November 2015, the Company’s board of directors authorized the repurchase of up to
$100 million
of its outstanding common stock. That authorization expired in November 2016 and at such time the Company’s board of directors authorized an additional repurchase of up to
$100 million
of its outstanding common stock. The authorization expires in November 2017, unless otherwise extended by the Company’s board of directors. For the
six months ended
June 30, 2017
, the Company did not repurchase any shares of its common stock. For the
six months ended
June 30, 2016
, the Company repurchased
0.6 million
shares of its common stock for approximately
$6.3 million
. From the original authorization in November 2015 through
June 30, 2017
, the Company repurchased
9.3 million
shares of its common stock for approximately
$100.0 million
.
Dividends
The following table presents dividends declared (on a per share basis) with respect to the
six months ended
June 30, 2017
and 2016:
|
|
|
|
|
|
Common Stock
|
Declaration Date
|
|
Dividend Per Share
|
2017
|
|
|
May 1
|
|
$
|
0.15
|
|
August 2
|
|
$
|
0.15
|
|
2016
|
|
|
May 10
|
|
$
|
0.15
|
|
August 3
|
|
$
|
0.15
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Earnings Per Share
The following table presents EPS for the
three and six months ended
June 30, 2017
and
2016
(dollars and shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Numerator:
|
|
|
|
|
|
|
|
Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
|
$
|
(10,447
|
)
|
|
$
|
(33,909
|
)
|
|
$
|
(25,797
|
)
|
|
$
|
(62,891
|
)
|
Net income (loss) attributable to Unit Holders non-controlling interest
|
(117
|
)
|
|
(349
|
)
|
|
(310
|
)
|
|
(700
|
)
|
Net income (loss) attributable to common stockholders and Unit Holders
(1)
|
$
|
(10,564
|
)
|
|
$
|
(34,258
|
)
|
|
$
|
(26,107
|
)
|
|
$
|
(63,591
|
)
|
Denominator:
(2)
|
|
|
|
|
|
|
|
Weighted average shares of common stock
|
55,024
|
|
|
59,116
|
|
|
54,928
|
|
|
59,267
|
|
Weighted average Unit Holders
(1)
|
564
|
|
|
690
|
|
|
619
|
|
|
691
|
|
Weighted average shares of common stock and Unit Holders
(2)
|
55,588
|
|
|
59,806
|
|
|
55,547
|
|
|
59,958
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.19
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(1.06
|
)
|
Diluted
|
$
|
(0.19
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(1.06
|
)
|
____________________________________________________________
|
|
(1)
|
The EPS calculation takes into account Unit Holders, which receive non-forfeitable dividends from the date of grant, share equally in the Company’s net income (loss) and convert on a
one
-for-one basis into common stock.
|
|
|
(2)
|
Excludes the effect of restricted stock and RSUs outstanding that were not dilutive as of
June 30, 2017
. These instruments could potentially impact diluted EPS in future periods, depending on changes in the Company’s stock price and other factors.
|
|
|
9.
|
Non-controlling Interests
|
Operating Partnership
Non-controlling interests include the aggregate Units Holders’ interest in the Operating Partnership. Net income (loss) attributable to the non-controlling interest is based on the weighted average Unit Holders’ ownership percentage of the Operating Partnership for the respective period. The issuance of additional common stock, Common Units or LTIP Units changes the percentage ownership of both the Unit Holders and the Company. Since a Common Unit or LTIP Unit is generally redeemable for cash or common stock at the option of the Company, it is deemed to be equivalent to common stock. Therefore, such transactions are treated as capital transactions and result in an allocation between stockholders’ equity and non-controlling interests on the accompanying consolidated balance sheets to account for the change in the ownership of the underlying equity in the Operating Partnership. On a quarterly basis, the carrying value of such non-controlling interest is allocated based on the number of Unit Holders in total in proportion to the number of Units Holders plus the number of shares of common stock outstanding. As of
June 30, 2017
,
450,861
Common Units and LTIP Units were outstanding, representing a
0.8%
ownership and non-controlling interest in the Operating Partnership. Net income (loss) attributable to the Operating Partnership non-controlling interest for the
three months ended
June 30, 2017
and
2016
was a net loss of
$0.1 million
and
$0.3 million
, respectively. Net income (loss) attributable to the Operating Partnership non-controlling interest for the
six months ended
June 30, 2017
and
2016
was a net loss of
$0.3 million
and $
0.7 million
, respectively.
Redeemable Non-controlling Interest
In connection with the acquisition of the Trianon Tower in July 2015, the Company sold a
5.5%
non-controlling interest in certain subsidiaries that own the Trianon Tower for
$1.5 million
. In conjunction with the sale, the Company entered into a put option whereby the holder may redeem its interest for cash at the greater of fair market value of such non-controlling interest or
€2.1 million
beginning in November 2020 through January 2021. The Company recorded the non-controlling interest at its acquisition date fair value as temporary equity due to the redemption option. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in additional paid-in capital.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
10.
|
Risk Management and Derivative Activities
|
Derivatives
The Company uses derivative instruments primarily to manage interest rate and currency risk and such derivatives are not considered speculative. These derivative instruments are in the form of interest cap agreements where the primary objective is to minimize interest rate risks associated with investment and financing activities and foreign currency forward agreements where the primary objective is to minimize foreign currency exchange rate risks associated with operating activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations.
The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
Notional
Amount
|
|
Fair Value
Asset (Liability)
|
|
Range of
Fixed GBP LIBOR / EURIBOR
|
|
Range of Maturity
|
As of June 30, 2017:
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
4
|
|
|
$
|
1,193,235
|
|
|
$
|
8,674
|
|
|
(1)
|
|
January 2020 - July 2023
|
Foreign currency forwards, net
(2)
|
2
|
|
|
102,157
|
|
|
(2,501
|
)
|
|
N/A
|
|
August 2017 - November 2018
|
Total
|
6
|
|
|
$
|
1,295,392
|
|
|
$
|
6,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
4
|
|
|
$
|
1,107,400
|
|
|
$
|
8,659
|
|
|
(1)
|
|
January 2020 - July 2023
|
Foreign currency forwards
(2)
|
2
|
|
|
72,806
|
|
|
5,070
|
|
|
N/A
|
|
February 2017 - November 2017
|
Total
|
6
|
|
|
$
|
1,180,206
|
|
|
$
|
13,729
|
|
|
|
|
|
_____________________________
(1) Includes a range of interest rate caps of
0.5%
for EURIBOR and
2.0%
for GBP LIBOR.
(2) Includes Euro and U.K. Pounds Sterling currency forwards.
The following table presents the fair value of derivative instruments, as well as their classification on the consolidated balance sheets, as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
June 30,
2017
|
|
December 31,
2016
|
|
Location
|
|
|
Interest rate caps
|
Derivative assets
|
|
$
|
8,674
|
|
|
$
|
8,659
|
|
Foreign currency forwards
|
Derivative assets
|
|
$
|
1,165
|
|
|
$
|
5,070
|
|
Foreign currency forwards
|
Derivative liabilities
|
|
$
|
3,666
|
|
|
$
|
—
|
|
The following table presents the effect of derivative instruments in the consolidated statements of operations for the three and
six months ended
June 30, 2017
and
2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amount of gain (loss) recognized in earnings:
|
Statements of operations location:
|
|
|
|
|
|
|
|
|
Adjustment to fair value of interest rate caps
|
Unrealized gain (loss) on derivatives and other
(1)
|
|
$
|
(1,032
|
)
|
|
$
|
(3,391
|
)
|
|
$
|
(713
|
)
|
|
$
|
(14,175
|
)
|
Adjustment to fair value of foreign currency forwards
|
Unrealized gain (loss) on derivatives and other
(1)
|
|
(6,308
|
)
|
|
4,638
|
|
|
(7,572
|
)
|
|
207
|
|
Net cash receipt (payment) on derivatives
|
Realized gain (loss) on sales and other
|
|
639
|
|
|
(776
|
)
|
|
1,456
|
|
|
(1,194
|
)
|
_____________________________
(1) Excludes the unrealized gain (loss) relating to foreign currency remeasurement adjustments.
The Company’s counterparties held
no
cash margin as collateral against the Company’s derivative contracts as of
June 30, 2017
and
December 31, 2016
. The Company had
no
derivative financial instruments that were designated as hedges in qualifying hedging relationships as of
June 30, 2017
and
December 31, 2016
.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities are recorded at fair value on the consolidated balance sheets and are categorized based on the inputs to the valuation techniques as follows:
|
|
Level 1.
|
Quoted prices for identical assets or liabilities in an active market.
|
|
|
Level 2.
|
Financial assets and liabilities whose values are based on the following:
|
|
|
(a)
|
Quoted prices for similar assets or liabilities in active markets.
|
|
|
(b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets.
|
|
|
(c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
|
|
|
(d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
|
|
|
Level 3.
|
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of the valuation techniques used to measure fair value of assets and liabilities accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
Derivative Instruments
Derivative instruments are valued using a third-party pricing service. These quotations are not adjusted and are generally based on valuation models with observable inputs such as interest rates and contractual cash flow, and as such, are classified as Level 2 of the fair value hierarchy. Derivative instruments are also assessed for credit valuation adjustments due to the risk of non-performance by the Company and derivative counterparties.
Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Principal/Notional
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
|
Principal/Notional
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
Financial assets:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
1,198,630
|
|
|
$
|
9,839
|
|
|
$
|
9,839
|
|
|
$
|
1,180,206
|
|
|
$
|
13,729
|
|
|
$
|
13,729
|
|
Preferred equity investment
|
34,064
|
|
|
34,064
|
|
|
34,064
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Financial liabilities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other notes payable, net
|
$
|
1,244,713
|
|
|
$
|
1,232,354
|
|
|
$
|
1,228,918
|
|
|
$
|
1,162,211
|
|
|
$
|
1,149,119
|
|
|
$
|
1,146,134
|
|
Credit Facility
|
23,000
|
|
|
23,000
|
|
|
23,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Derivative liabilities
|
96,762
|
|
|
3,666
|
|
|
3,666
|
|
|
—
|
|
|
—
|
|
|
—
|
|
_____________________________
|
|
(1)
|
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
|
Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Mortgage and Other Notes Payable
For mortgage and other notes payable, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using rates as of the end of the reporting period or market credit spreads over the rate payable on fixed rate of like maturities. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Preferred Equity Investments
For preferred equity investments, fair value was computed by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment. Fair value was determined assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.
Credit Facility
As of the reporting date, the Company believes the carrying value of the Credit Facility approximates fair value. The fair value measurement is based on observable inputs, and as such, is classified as Level 2 of the fair value hierarchy.
|
|
12.
|
Commitments and Contingencies
|
The Company is involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, the current legal proceedings are not expected to have a material adverse effect on the Company’s financial position or results of operations.
The Company engages third-party service providers for its portfolio who are remunerated based on either a fixed fee or a percentage of rental income. The contract terms vary by party and are subject to termination options. These costs are recorded in properties - operating expense and other expenses in the consolidated statements of operations.
As part of the terms of agreements relating to certain assets the Company disposed, as is customary for such transactions in Europe, the Company agreed to provide certain warranties to the buyer.
Risk Management
Concentrations of credit risk arise when a number of tenants related to the Company’s investments are engaged in similar business activities or located in the same geographic region to be similarly affected by changes in economic conditions. The Company monitors its portfolios to identify potential concentrations of credit risks. For the three and
six months ended
June 30, 2017
,
one
tenant, DekaBank Deutsche Girozentrale, accounted for more than 10% of the Company’s total revenue. This tenant has
6.9 years
remaining on its lease. Otherwise, the Company has no other tenant that generates 10% or more of its total revenue. Additionally,
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
for the three and
six months ended
June 30, 2017
, Germany, France, the United Kingdom and the Netherlands each accounted for more than 10% of the Company’s total revenue. The Company believes the remainder of its portfolio is well diversified and does not contain any unusual concentrations of credit risks.
The Company currently conducts its business through the following
three
segments, based on how management reviews and manages its business:
|
|
•
|
Real Estate Equity-
Focused on European prime office properties located in key cities within Germany, the United Kingdom and France.
|
|
|
•
|
Preferred Equity
- Represents the Company’s preferred equity investment secured by interest in an European prime office property.
|
|
|
•
|
Corporate
- The corporate segment includes corporate level interest expense, management fee and general and administrative expenses.
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables present segment reporting for the three and
six months ended
June 30, 2017
and
2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
Statement of Operations:
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
Rental income
|
$
|
26,025
|
|
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
26,025
|
|
Escalation income
|
5,558
|
|
(1)
|
—
|
|
|
—
|
|
|
5,558
|
|
Interest income
|
—
|
|
|
297
|
|
|
—
|
|
|
297
|
|
Interest expense
(2)
|
6,451
|
|
|
—
|
|
|
271
|
|
|
6,722
|
|
Management fee, related party
|
—
|
|
|
—
|
|
|
3,572
|
|
|
3,572
|
|
Transaction costs
|
—
|
|
|
546
|
|
|
427
|
|
|
973
|
|
Depreciation and amortization
|
12,520
|
|
|
—
|
|
|
—
|
|
|
12,520
|
|
Other expenses
|
9,804
|
|
(3)
|
—
|
|
|
8,590
|
|
(4)
|
18,394
|
|
Income (loss) before income tax benefit (expense)
|
2,808
|
|
|
(249
|
)
|
|
(12,860
|
)
|
|
(10,301
|
)
|
Income tax benefit (expense)
|
(237
|
)
|
|
—
|
|
|
—
|
|
|
(237
|
)
|
Net income (loss)
|
$
|
2,571
|
|
|
$
|
(249
|
)
|
|
$
|
(12,860
|
)
|
|
$
|
(10,538
|
)
|
___________________________________
|
|
(1)
|
Includes revenues primarily attributable to Germany, the United Kingdom, France and the Netherlands of
$13.1 million
,
$8.9 million
,
$5.5 million
and
$3.7 million
, respectively.
|
|
|
(2)
|
Includes
$0.7 million
and
$0.1 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(3)
|
Primarily relates to properties - operating expenses and unrealized loss on interest rate caps.
|
|
|
(4)
|
Primarily relates to general and administrative expense and unrealized loss on foreign currency forwards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
Statement of Operations:
(1)
|
Real Estate Equity
|
|
Corporate
|
|
Total
|
Rental income
|
$
|
33,990
|
|
(2)
|
$
|
—
|
|
|
$
|
33,990
|
|
Escalation income
|
5,908
|
|
(2)
|
—
|
|
|
5,908
|
|
Interest expense
(3)
|
8,691
|
|
|
2,950
|
|
|
11,641
|
|
Management fee, related party
|
—
|
|
|
3,500
|
|
|
3,500
|
|
Transaction costs
|
—
|
|
|
1,652
|
|
|
1,652
|
|
Depreciation and amortization
|
18,404
|
|
|
—
|
|
|
18,404
|
|
Other expenses
|
34,551
|
|
(4)
|
3,939
|
|
(5)
|
38,490
|
|
Income (loss) before income tax benefit (expense)
|
(21,748
|
)
|
|
(12,041
|
)
|
|
(33,789
|
)
|
Income tax benefit (expense)
|
(520
|
)
|
|
—
|
|
|
(520
|
)
|
Net income (loss)
|
$
|
(22,268
|
)
|
|
$
|
(12,041
|
)
|
|
$
|
(34,309
|
)
|
___________________________________
|
|
(1)
|
The Company did not have a preferred equity segment for the three months ended June 30, 2016.
|
|
|
(2)
|
Includes revenues primarily attributable to Germany, the United Kingdom, France and the Netherlands of
$14 million
,
$10.2 million
,
$5.1 million
and
$4.7 million
, respectively.
|
|
|
(3)
|
Includes
$0.8 million
and
$1.2 million
of amortization of deferred financing costs in the real estate equity and corporate segment, respectively.
|
|
|
(4)
|
Primarily relates to properties - operating expenses, unrealized loss on interest rate casps and impairment loss of
$27.5 million
.
|
|
|
(5)
|
Primarily relates to general and administrative expense, realized loss related to the write-off of the deferred financing costs associated with the repurchase of the Senior Notes and unrealized gain on foreign currency forwards.
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
Statement of Operations:
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
Rental income
|
$
|
51,561
|
|
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
51,561
|
|
Escalation income
|
10,719
|
|
(1)
|
—
|
|
|
—
|
|
|
10,719
|
|
Interest income
|
—
|
|
|
297
|
|
|
—
|
|
|
297
|
|
Interest expense
(2)
|
12,571
|
|
|
—
|
|
|
534
|
|
|
13,105
|
|
Management fee, related party
|
—
|
|
|
—
|
|
|
7,131
|
|
|
7,131
|
|
Transaction costs
|
—
|
|
|
546
|
|
|
687
|
|
|
1,233
|
|
Depreciation and amortization
|
25,083
|
|
|
—
|
|
|
—
|
|
|
25,083
|
|
Other expenses
|
14,774
|
|
(3)
|
—
|
|
|
27,351
|
|
(4)
|
42,125
|
|
Income (loss) before income tax benefit (expense)
|
9,852
|
|
|
(249
|
)
|
|
(35,703
|
)
|
|
(26,100
|
)
|
Income tax benefit (expense)
|
36
|
|
|
—
|
|
|
—
|
|
|
36
|
|
Net income (loss)
|
$
|
9,888
|
|
|
$
|
(249
|
)
|
|
$
|
(35,703
|
)
|
|
$
|
(26,064
|
)
|
___________________________________
|
|
(1)
|
Includes revenues primarily attributable to Germany, the United Kingdom, France and the Netherlands of
$25.8 million
,
$17.5 million
,
$10.8 million
and
$7.3 million
, respectively.
|
|
|
(2)
|
Includes
$1.5 million
and
$0.2 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(3)
|
Primarily relates to properties - operating expense offset by the realized gain on the sale of real estate.
|
|
|
(4)
|
Primarily relates to general and administrative expense and unrealized loss on foreign currency forwards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
Statement of Operations:
(1)
|
Real Estate Equity
|
|
Corporate
|
|
Total
|
Rental income
|
$
|
68,823
|
|
(2)
|
$
|
—
|
|
|
$
|
68,823
|
|
Escalation income
|
11,998
|
|
(2)
|
—
|
|
|
11,998
|
|
Interest expense
(3)
|
17,117
|
|
|
7,066
|
|
|
24,183
|
|
Management fee, related party
|
—
|
|
|
7,000
|
|
|
7,000
|
|
Transaction costs
|
—
|
|
|
2,483
|
|
|
2,483
|
|
Depreciation and amortization
|
37,275
|
|
|
—
|
|
|
37,275
|
|
Other expenses
|
57,973
|
|
(4)
|
15,680
|
|
(5)
|
73,653
|
|
Income (loss) before income tax benefit (expense)
|
(31,544
|
)
|
|
(32,229
|
)
|
|
(63,773
|
)
|
Income tax benefit (expense)
|
139
|
|
|
—
|
|
|
139
|
|
Net income (loss)
|
$
|
(31,405
|
)
|
|
$
|
(32,229
|
)
|
|
$
|
(63,634
|
)
|
___________________________________
|
|
(1)
|
The Company did not have a preferred equity segment for the six months ended June 30, 2016.
|
|
|
(2)
|
Includes revenues primarily attributable to Germany, the United Kingdom, France and the Netherlands of
$28.4 million
,
$20.0 million
,
$10.9 million
and
$9.8 million
, respectively.
|
|
|
(3)
|
Includes
$1.7 million
and
$2.1 million
of amortization of deferred financing costs in the real estate equity and corporate segment, respectively.
|
|
|
(4)
|
Primarily relates to properties - operating expense, unrealized loss on derivatives and impairment loss of
$27.5 million
offset by the realized gain on the sale of real estate.
|
|
|
(5)
|
Primarily relates to management fees, general and administrative expense, realized loss related to the write-off of the deferred financing costs associated with the repurchase of the Senior Notes and includes an allocation of general and administrative expenses from the Manager of
$0.1 million
.
|
The following table presents total assets by segment as of
June 30, 2017
and
December 31, 2016
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
June 30, 2017
|
$
|
1,925,692
|
|
|
$
|
34,662
|
|
|
$
|
4,879
|
|
|
$
|
1,965,233
|
|
December 31, 2016
|
1,835,531
|
|
|
—
|
|
|
9,861
|
|
|
1,845,392
|
|
Dividends
On
August 2, 2017
, the Company declared a dividend of
$0.15
per share of common stock. The common stock dividend is expected be paid on
August 18, 2017
to stockholders of record as of the close of business on
August 14, 2017
.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Sales
Subsequent to
June 30, 2017
, the Company sold
one
non-core asset with a carrying value of
$7.3 million
for
$9.0 million
, which was recorded in assets held for sale in the consolidated balance sheet as of
June 30, 2017
.