NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Business and Organization
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Colony Credit Real Estate, Inc. (the “Company”) is a commercial real estate (“CRE”) credit real estate investment trust (“REIT”) focused on originating, acquiring, financing and managing a diversified portfolio consisting primarily of CRE senior mortgage loans, mezzanine loans, preferred equity, debt securities and net leased properties predominantly in the United States. CRE debt investments include senior mortgage loans, mezzanine loans, preferred equity, and participations in such loans and preferred equity interests. CRE debt securities consist of commercial mortgage-backed securities (“CMBS”) (including “B-pieces” of a CMBS securitization pool). Net leased properties consist of CRE properties with long-term leases to tenants on a net-lease basis, where such tenants generally will be responsible for property operating expenses such as insurance, utilities, maintenance capital expenditures and real estate taxes.
The Company was organized in the state of Maryland on August 23, 2017. On September 15, 2017, Colony Capital, Inc., formerly Colony NorthStar, Inc. (“Colony Capital”), a publicly traded REIT listed on the New York Stock Exchange (“NYSE”) under the ticker symbol “CLNY,” made an initial capital contribution of
$1,000
to the Company. On January 31, 2018, the Company completed the transactions contemplated by that certain Master Combination Agreement, dated as of August 25, 2017, as amended and restated on November 20, 2017 (the “Combination Agreement,” as further discussed below). The Company intends to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), beginning with its taxable year ending
December 31, 2018
. Effective
June 25, 2018
, the Company changed its name from Colony NorthStar Credit Real Estate, Inc. to Colony Credit Real Estate, Inc. Also on
June 25, 2018
, Colony NorthStar, Inc. changed its name to Colony Capital, Inc. The Company conducts all of its activities and holds substantially all of its assets and liabilities through its operating subsidiary, Credit RE Operating Company, LLC (the “Operating Partnership” or “OP”). At
September 30, 2018
, the Company owned
97.6%
of the OP, as its sole managing member. The remaining
2.4%
is owned by an affiliate of the Company as noncontrolling interests.
The Company is externally managed and has no employees. The Company is managed by CLNC Manager, LLC (the “Manager”), a Delaware limited liability company and a wholly-owned and indirect subsidiary of Colony Capital Operating Company, LLC (“CLNY OP”), a Delaware limited liability company and the operating company of Colony Capital. Colony Capital manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, non-traded and traded REITs and registered investment companies.
The Combination
Pursuant to the Combination Agreement, (i) CLNY OP contributed and conveyed to the Company a select portfolio of assets and liabilities (the “CLNY OP Contributed Portfolio”) of CLNY OP (the “CLNY OP Contribution”), (ii) NRF RED REIT Corp., a Maryland corporation and indirect subsidiary of CLNY OP (“RED REIT”) contributed and conveyed to the OP a select portfolio of assets and liabilities (the “RED REIT Contributed Portfolio” and, together with the CLNY OP Contributed Portfolio, the “CLNY Contributed Portfolio”) of RED REIT (the “RED REIT Contribution” and, together with the CLNY OP Contribution, the “CLNY Contributions”), (iii) NorthStar Real Estate Income Trust, Inc. (“NorthStar I”), a publicly registered non-traded REIT sponsored and managed by a subsidiary of Colony Capital, merged with and into the Company, with the Company surviving the merger (the “NorthStar I Merger”), (iv) NorthStar Real Estate Income II, Inc. (“NorthStar II”), a publicly registered non-traded REIT sponsored and managed by a subsidiary of Colony Capital, merged with and into the Company, with the Company surviving the merger (the “NorthStar II Merger” and, together with the NorthStar I Merger, the “Mergers”), and (v) immediately following the Mergers, the Company contributed and conveyed to the OP the CLNY OP Contributed Portfolio and the equity interests of each of NorthStar Real Estate Income Trust Operating Partnership, LP, a Delaware limited partnership and the operating partnership of NorthStar I, and NorthStar Real Estate Income Operating Partnership II, LP, a Delaware limited partnership and the operating partnership of NorthStar II, then-owned by the Company in exchange for units of membership interest in the OP (the “Company Contribution” and, collectively with the Mergers and the CLNY Contributions, the “Combination”).
On
January 18, 2018
, the Combination was approved by the stockholders of NorthStar I and NorthStar II. The Combination closed on
January 31, 2018
(the “Closing Date”) and the Company’s Class A common stock, par value
$0.01
per share (the “Class A common stock”), began trading on the NYSE on
February 1, 2018
under the symbol “CLNC.”
The Combination is accounted for under the acquisition method for business combinations pursuant to Accounting Standards Codification (“ASC”) Topic 805,
Business Combinations
, with the Company as the accounting acquirer.
Details of the Combination are described more fully in Note 3, “Business Combinations” and the accounting treatment thereof in Note 2, “Summary of Significant Accounting Policies.”
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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2.
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Summary of Significant Accounting Policies
|
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
, or for any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the ownership interests in certain investment entities contributed by CLNY (the “CLNY Investment Entities”), NorthStar I and NorthStar II and notes thereto included in, or presented as exhibits to, the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
.
The consolidated financial statements include the results of operations of Colony Credit Real Estate, Inc. and the consolidated CLNY Investment Entities for periods on or prior to the closing of the Combination on
January 31, 2018
and the combined operations of Colony Credit Real Estate, Inc., NorthStar I and NorthStar II beginning
February 1, 2018
, following the closing of the Combination.
The assets and liabilities contributed by CLNY to the Company consisted of its ownership interests in the CLNY Investment Entities, ranging from
38%
to
100%
. The remaining interests in the CLNY Investment Entities are owned by investment vehicles sponsored by Colony Capital or third parties and were not contributed to the Company.
The CLNY Contributions were accounted for as a reorganization of entities under common control, since both the Company and the CLNY Investment Entities were under common control of Colony Capital at the time the contributions were made. Accordingly, the contributed assets and liabilities were recorded at carryover basis and the Company’s financial statements for prior periods were recast to reflect the consolidation of the CLNY Investment Entities as if the contribution had occurred on the date of the earliest period presented. The assets, liabilities and noncontrolling interests of the CLNY Investment Entities in the consolidated financial statements for periods prior to the Combination were carved out of the books and records of Colony Capital at their historical carrying amounts. Accordingly, the historical consolidation financial statements were prepared giving consideration to the rules and regulations of the Securities and Exchange Commission (“SEC”) and related guidance provided by the SEC Staff with respect to carve-out financial statements and reflect allocations of certain corporate costs from Colony Capital. These charges were based on either specifically identifiable costs incurred on behalf of the CLNY Investment Entities or an allocation of costs estimated to be applicable to the CLNY Investment Entities, primarily based on the relative assets under management of the CLNY Investment Entities to Colony Capital’s total assets under management. Such costs do not necessarily reflect what the actual costs would have been if the Company had been operating as a separate stand-alone public entity for periods prior to the Combination.
Following the Combination, the Company reconsidered whether it was the primary beneficiary of certain variable interest entities (“VIEs”), which resulted in the deconsolidation of certain of the CLNY Investment Entities and the consolidation of certain securitization trusts in which NorthStar I or NorthStar II held an interest, as more fully described below. Accordingly, comparisons of financial information for periods prior to the Combination with subsequent periods may not be meaningful.
The Combination
The Combination is accounted for under the acquisition method for business combinations pursuant to ASC Topic 805,
Business Combinations
. In the Combination, the Company was considered to be the accounting acquirer so all of its assets and liabilities immediately prior to the closing of the Combination are reflected at their historical carrying values. The consideration transferred by the Company established a new accounting basis for the assets acquired, liabilities assumed and noncontrolling interests of NorthStar I and NorthStar II, which were measured at their respective fair values on the Closing Date.
Formation of Colony Capital
Colony Capital was formed through a tri-party merger (the “CLNY Merger”) among Colony Capital, NorthStar Asset Management Group Inc. and NorthStar Realty Finance Corp. (“NRF”), which closed on
January 10, 2017
(the “CLNY Merger Closing Date”). Colony Capital was determined to be the accounting acquirer in the CLNY Merger. Accordingly, the combined financial information of the CLNY Investment Entities included herein as of any date or for any periods on or prior to the CLNY Merger Closing Date represent the CLNY Investment Entities from Colony Capital. On the CLNY Merger Closing Date, the CLNY Investment Entities were reflected by Colony Capital at their pre-CLNY Merger carrying values, while the CLNY Investment Entities from NRF were
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
reflected by Colony Capital at their CLNY Merger fair values. The results of operations of the CLNY Investment Entities from NRF are included in these pre-Combination financial statements effective from
January 11, 2017
.
Principles of Consolidation
The accompanying combined financial statements include the accounts of the Company and its controlled subsidiaries and consolidated VIEs. The portions of the equity, net income and other comprehensive income of consolidated subsidiaries that are not attributable to the parent are presented separately as amounts attributable to noncontrolling interests in the consolidated financial statements.
The Company consolidates entities in which they have a controlling financial interest by first considering if an entity meets the definition of a VIE for which the Company is deemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of voting interest or through other arrangements.
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.
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 to the VIE; 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 evaluates its investments and financings, including investments in unconsolidated ventures and securitization financing transactions, if any, to determine whether each investment or financing is 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.
As of
September 30, 2018
, the Company has identified certain consolidated and unconsolidated VIEs. Assets of each of the VIEs, other than the OP, may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.
Consolidated VIEs
The Company’s operating subsidiary, the OP, is a limited liability company that has governing provisions that are the functional equivalent of a limited partnership. The Company holds the majority of membership interest in the OP, is the managing member of the OP and exercises full responsibility, discretion and control over the day-to-day management of the OP. The noncontrolling interests in the OP do not have substantive liquidation rights, or substantive kick-out rights without cause, or substantive participating rights that could be exercised by a simple majority of noncontrolling interest members (including by such a member unilaterally). The absence of such rights, which represent voting rights in a limited partnership equivalent structure, would render the OP to be a VIE. The Company, as managing member, has the power to direct the core activities of the OP that most significantly affect OP’s performance, and through its majority interest in the OP, has both the right to receive benefits from and the obligation to absorb losses of OP. Accordingly, the Company is the primary beneficiary of the OP and consolidates the OP. As the Company conducts its business and holds its assets and liabilities through the OP, the total assets and liabilities of the OP represent substantially all of the total consolidated assets and liabilities of the Company
.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other consolidated VIEs include the Investing VIEs (as defined and discussed below) and certain properties that have noncontrolling interests. These noncontrolling interests do not have substantive kick-out or participating rights.
Investing VIEs
The Company’s investments in securitization financing entities (“Investing VIEs”) include subordinate first-loss tranches of securitization trusts, which represent interests in such VIEs. Investing VIEs are structured as pass through entities that receive principal and interest payments from the underlying debt collateral assets and distribute those payments to the securitization trust’s certificate holders, including the most subordinate tranches of the securitization trust. Generally, a securitization trust designates the most junior subordinate tranche outstanding as the controlling class, which entitles the holder of the controlling class to unilaterally appoint and remove the special servicer for the trust, and as such may qualify as the primary beneficiary of the trust.
If it is determined that the Company is the primary beneficiary of an Investing VIE as a result of acquiring the subordinate first-loss tranches of the securitization trust, the Company would consolidate the assets, liabilities, income and expenses of the entire Investing VIE. The assets held by an Investing VIE are restricted and can only be used to fulfill its own obligations. The obligations of an Investing VIE have neither any recourse to the general credit of the Company as the consolidator of an Investing VIE, nor to any of the Company’s other consolidated entities.
As of
September 30, 2018
, the Company held subordinate tranches of securitization trusts in
three
Investing VIEs for which the Company has determined it is the primary beneficiary because it has the power to direct the activities that most significantly impact the economic performance of the securitization trusts. The Company’s subordinate tranches of the securitization trusts, which represent the retained interest and related interest income, are eliminated in consolidation. In accordance with the Financial Accounting Standards Board (“FASB”) ASC 810,
Consolidation
, all of the assets, liabilities (obligations to the certificate holders of the securitization trusts, less the Company’s retained interest from the subordinate tranches of the securitization trusts), income and expenses of the Investing VIEs are presented in the consolidated financial statements of the Company. As a result, although the Company legally owns the subordinate tranches of the securitization trusts only, U.S. GAAP requires the Company to present the assets, liabilities, income and expenses of the entire securitization trust on its consolidated financial statements. Regardless of the presentation, the Company’s consolidated financial statements of operations ultimately reflect the net income attributable to its retained interest in the subordinate tranches of the securitization trusts. Refer to Note 6, “Real Estate Securities, Available for Sale” for further discussion.
The Company elected the fair value option for the initial recognition of the assets and liabilities of its consolidated Investing VIEs. Interest income and interest expense associated with the Investing VIEs will be recorded separately on the consolidated statements of operations. The Company will separately present the assets and liabilities of its consolidated Investing VIEs as “Mortgage loans held in securitization trusts, at fair value” and “Mortgage obligations issued by securitization trusts, at fair value,” respectively, on its consolidated balance sheets. Refer to Note 15, “Fair Value” for further discussion.
The Company has adopted guidance issued by the FASB, allowing the Company to measure both the financial assets and liabilities of a qualifying collateralized financing entity (“CFE”), such as its Investing VIEs, using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. A CFE is a VIE that holds financial assets, issues beneficial interests in those assets and has no more than nominal equity, and the beneficial interests have contractual recourse only to the related assets of the CFE. As the liabilities of the Company’s Investing VIEs are marketable securities with observable trade data, their fair value is more observable and is referenced to determine the fair value for assets of its Investing VIEs. Refer to Note 15, “Fair Value” for further discussion.
Unconsolidated VIEs
As of
September 30, 2018
, the Company identified unconsolidated VIEs related to its securities investments, indirect interests in real estate through real estate private equity funds (“PE Investments”) and CRE debt investments. Assets of each of the VIEs may only be used to settle obligations of the respective VIE. Creditors of each of the VIEs have no recourse to the general credit of the Company.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the Company’s classification, carrying value and maximum exposure of unconsolidated VIEs as of
September 30, 2018
(dollars in thousands):
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Carrying Value
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Maximum Exposure to Loss
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Real estate securities, available for sale
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$
|
231,241
|
|
|
$
|
231,241
|
|
|
Investments in unconsolidated ventures
|
|
410,118
|
|
|
452,877
|
|
|
Loans and preferred equity held for investment, net
|
|
247,035
|
|
|
247,035
|
|
|
Total assets
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$
|
888,394
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$
|
931,153
|
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Based on management’s analysis, the Company determined that it is not the primary beneficiary of the above VIEs. Accordingly, the VIEs are not consolidated in the Company’s financial statements as of
September 30, 2018
. The Company did not provide financial support to the unconsolidated VIEs during the
nine months ended
September 30, 2018
. As of
September 30, 2018
, there were
no
explicit arrangements or implicit variable interests that could require the Company to provide financial support to the unconsolidated VIEs.
Deconsolidation of the CLNY Investment Entities
Certain CLNY Investment Entities were joint ventures between Colony Capital and private funds or other investment vehicles managed by Colony Capital (the “Co-Investment Funds”). Colony Capital consolidated such CLNY Investment Entities as it was deemed to have a controlling financial interest in these CLNY Investment Entities. After assuming Colony Capital’s ownership interests in these CLNY Investment Entities and upon the merger with NorthStar I and NorthStar II, the Company does not have a controlling financial interest in these CLNY Investment Entities. The Company does not have the ability to direct key decisions made by the directors of these entities nor is it the primary beneficiary of these entities as Colony Capital continues to be the investment manager of the Co-Investment Funds and the directors and officers of these entities continue to be employees of Colony Capital. The Company itself is managed by a subsidiary of Colony Capital and does not have any employees of its own. Therefore, upon closing of the Combination, the Company deconsolidated the CLNY Investment Entities that are joint ventures with Co-Investment Funds.
The deconsolidation of these CLNY Investment Entities did not result in any gain or loss to the Company. The following table presents the deconsolidation of the assets and liabilities of certain of the CLNY Investment Entities, and accounting for the Company’s interests in these CLNY Investment Entities as equity method investments as of the Closing Date (dollars in thousands):
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As of the Closing Date
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Assets
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|
Cash and cash equivalents
|
$
|
(11,408
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)
|
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Restricted cash
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(14,704
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)
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Loans and preferred equity held for investment, net
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(553,678
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)
|
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Investments in unconsolidated ventures
|
127,062
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Receivables, net
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(4,344
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)
|
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Other assets
|
(114
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)
|
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Total assets
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$
|
(457,186
|
)
|
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Liabilities
|
|
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Mortgage and other notes payable, net
|
$
|
(128,709
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)
|
|
Accrued and other liabilities
|
(640
|
)
|
|
Escrow deposits payable
|
(14,704
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)
|
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Total liabilities
|
(144,053
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)
|
|
|
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Stockholders’ equity
|
(313,133
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)
|
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Total liabilities and equity
|
$
|
(457,186
|
)
|
Voting Interest Entities
Unlike VIEs, voting interest entities have sufficient equity to finance their activities and equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company consolidates such entities when it has the power to control these entities through ownership of a majority of the entities’ voting interests or through other arrangements.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At each reporting period, the Company reassesses whether changes in facts and circumstances cause a change in the status of an entity as a VIE or voting interest entity, and/or a change in the Company’s consolidation assessment. Changes in consolidation status are applied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the assets, liabilities and noncontrolling interest in the entity are recorded at fair value upon initial consolidation. Any existing equity interest held by the Company in the entity prior to the Company obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, the Company’s existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. The Company may also deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any interests retained.
Noncontrolling Interests
Noncontrolling Interests in Investment Entities—
This represents interests in consolidated investment entities held by third party joint venture partners and prior to the closing of the Combination, such interests held by private funds managed by Colony Capital. Allocation of net income or loss is generally based upon relative ownership interests held by equity owners in each investment entity, or based upon contractual arrangements that may provide for disproportionate allocation of economic returns among equity interests, including using a hypothetical liquidation at book value basis, where applicable and substantive.
Noncontrolling Interests in the Operating Partnership—
This represents membership interests in the OP held by RED REIT. Noncontrolling interests in the OP are allocated a share of net income or loss in the OP based on their weighted average ownership interest in the OP during the period. Noncontrolling interests in the OP have the right to require the OP to redeem part or all of the membership units in the OP for cash based on the market value of an equivalent number of shares of Class A common stock at the time of redemption, or at the Company’s election as managing member of the OP, through the issuance of shares of Class A common stock on a
one
-for-one basis. Refer to Note 3, “Business Combinations,” for further discussion of OP membership units. At the end of each reporting period, noncontrolling interests in the OP is adjusted to reflect their ownership percentage in the OP at the end of the period, through a reallocation between controlling and noncontrolling interests in the OP, as applicable.
Reclassifications
Certain prior period amounts have been reclassified in the consolidated financial statements to conform to current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
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 other comprehensive income (“OCI”). The components of OCI include unrealized gain (loss) on CRE debt securities available for sale for which the fair value option was not elected, gain (loss) on derivative instruments used in the Company’s risk management activities used for economic hedging purposes (“non-designated hedges”), and gain (loss) on foreign currency translation.
Fair Value Measurement
Fair value is based on an exit price, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Where appropriate, the Company makes adjustments to estimated fair values to appropriately reflect counterparty credit risk as well as the Company’s own credit-worthiness.
The estimated fair value of financial assets and financial liabilities are categorized into a three-tier hierarchy, prioritized based on the level of transparency in inputs used in the valuation techniques, as follows:
Level 1—
Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in non-active markets, or valuation techniques utilizing inputs that are derived principally from or corroborated by observable data directly or indirectly for substantially the full term of the financial instrument.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Level 3—
At least one assumption or input is unobservable and it is significant to the fair value measurement, requiring significant management judgment or estimate.
Where the inputs used to measure the fair value of a financial instrument fall into different levels of the fair value hierarchy, the financial instrument is categorized within the hierarchy based on the lowest level of input that is significant to its fair value measurement.
Fair Value Option
The fair value option provides an option to elect fair value as an alternative measurement for selected financial instruments. Gains and losses on items for which the fair value option has been elected are reported in earnings. The fair value option may be elected only upon the occurrence of certain specified events, including when the Company enters into an eligible firm commitment, at initial recognition of the financial instrument, as well as upon a business combination or consolidation of a subsidiary. The election is irrevocable unless a new election event occurs.
The Company has elected the fair value option for PE Investments. The Company has also elected the fair value option to account for the eligible financial assets and liabilities of its consolidated Investing VIEs in order to mitigate potential accounting mismatches between the carrying value of the instruments and the related assets and liabilities to be consolidated. The Company has adopted guidance issued by the FASB allowing the Company to measure both the financial assets and liabilities of a qualifying CFE it consolidates using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable.
Business Combinations
The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. If substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, then the set of transferred assets and activities is not a business. If not, for an acquisition to be considered a business, it would have to include an input and a substantive process that together significantly contribute to the ability to create outputs (i.e., there is a continuation of revenue before and after the transaction). A substantive process is not ancillary or minor, cannot be replaced without significant cost, effort or delay or is otherwise considered unique or scarce. To qualify as a business without outputs, the acquired assets would require an organized workforce with the necessary skills, knowledge and experience that performs a substantive process.
Net cash paid to acquire a business or assets is classified as investing activities on the accompanying statements of cash flows.
The Company accounts for business combinations by applying the acquisition method. Transaction costs related to the acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and noncontrolling interests in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and noncontrolling interests in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions.
For acquisitions that are not deemed to be businesses, the assets acquired are recognized based on their cost to the Company as the acquirer and no gain or loss is recognized unless the fair value of non-cash assets given as consideration differs from the carrying amount of the assets acquired. The cost of assets acquired in a group is allocated to individual assets within the group based on their relative fair values and does not give rise to goodwill. Transaction costs related to the acquisition of assets are included in the cost basis of the assets acquired.
Cash and Cash Equivalents
Short-term, highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The Company did not have any cash equivalents at
September 30, 2018
or
December 31, 2017
. The Company’s cash is held with major financial institutions and may at times exceed federally insured limits.
Restricted Cash
Restricted cash consists primarily of borrower escrow deposits, tenant escrow deposits and real estate capital expenditure reserves.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Loans and Preferred Equity Held for Investment
The Company originates and purchases loans and preferred equity held for investment. The accounting framework for loans and preferred equity held for investment depends on the Company’s strategy whether to hold or sell the loan, whether the loan was credit-impaired at the time of acquisition, or if the lending arrangement is an acquisition, development and construction loan.
Loans and Preferred Equity Held for Investment
Loans and preferred equity that the Company has the intent and ability to hold for the foreseeable future are classified as held for investment. Originated loans and preferred equity are recorded at amortized cost, or outstanding unpaid principal balance plus exit fees less net deferred loan fees. Net deferred loan fees include unamortized origination and other fees charged to the borrower less direct incremental loan origination costs incurred by the Company. Purchased loans and preferred equity are recorded at amortized cost, or unpaid principal balance plus purchase premium or less unamortized discount. Costs to purchase loans and preferred equity are expensed as incurred.
Interest Income—
Interest income is recognized based upon contractual interest rate and unpaid principal balance of the loans and preferred equity investments. Net deferred loan fees on originated loans and preferred equity investments are deferred and amortized as adjustments to interest income over the expected life of the loans and preferred equity investments using the effective yield method. Premium or discount on purchased loans and preferred equity investments are amortized as adjustments to interest income over the expected life of the loans and preferred equity investments using the effective yield method. When a loan or preferred equity investment is prepaid, prepayment fees and any excess of proceeds over the carrying amount of the loan or preferred equity investment is recognized as additional interest income.
Nonaccrual—
Accrual of interest income is suspended on nonaccrual loans and preferred equity investments. Loans and preferred equity investments that are past due 90 days or more as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual. Interest receivable is reversed against interest income when loans and preferred equity investments are placed on nonaccrual status. Interest collection on nonaccruing loans and preferred equity investments for which ultimate collectability of principal is uncertain is recognized using a cost recovery method by applying interest collected as a reduction to loan and preferred equity principal; otherwise, interest collected is recognized on a cash basis by crediting to income when received. Loans and preferred equity investments may be restored to accrual status when all principal and interest is current and full repayment of the remaining contractual principal and interest is reasonably assured.
Impairment and Allowance for Loan Losses—
On a periodic basis, the Company analyzes the extent and effect of any credit migration from underwriting and the initial investment review associated with the performance of a loan and preferred equity investment and/or value of its underlying collateral, financial and operating capability of the borrower or sponsor, as well as amount and status of any senior loan, where applicable. Specifically, operating results of collateral properties and any cash reserves are analyzed and used to assess whether cash from operations are sufficient to cover debt service requirements currently and into the future, ability of the borrower to refinance the loan or preferred equity investment, liquidation value of collateral properties, and financial wherewithal of any loan guarantors, as well as the borrower’s competency in managing and operating the collateral properties. Such analysis is performed at least quarterly, or more often as needed when impairment indicators are present. During the third quarter of 2018, the Company recorded a
$35.1 million
provision for loan loss. See Note 4, “Loans and Preferred Equity Held for Investment, net” for further detail.
Loans and preferred equity investments are considered to be impaired when it is probable that the Company will not be able to collect all amounts due in accordance with contractual terms of the loans and preferred equity investments, including consideration of underlying collateral value. Allowance for loan losses represents the estimated probable credit losses inherent in loans and preferred equity held for investment at balance sheet date. Changes in allowance for loan and preferred equity losses are recorded in the provision for loan losses on the statement of operations. Allowance for loan losses generally exclude interest receivable as accrued interest receivable is reversed when a loan or preferred equity investment is placed on nonaccrual status. Allowance for loan losses is generally measured as the difference between the carrying value of the loan or preferred equity investment and either the present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan or preferred equity investment or an observable market price for the loan or preferred equity investment. Subsequent changes in impairment are recorded as adjustments to the provision for loan losses. Loans and preferred equity investments are charged off against allowance for loan losses when all or a portion of the principal amount is determined to be uncollectible. A loan or preferred equity investment is considered to be collateral-dependent when repayment of the loan or preferred equity investment is expected to be provided solely by the underlying collateral. Impaired collateral-dependent loans and preferred equity investments are written down to the fair value of the collateral less disposal cost, first through a charge-off against allowance for loan losses, if any, then recorded as impairment loss.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Troubled Debt Restructuring (“TDR”)—
A loan with contractual terms modified in a manner that grants concession to the borrower who is experiencing financial difficulty is classified as a TDR. Concessions could include term extensions, payment deferrals, interest rate reductions, principal forgiveness, forbearance, or other actions designed to maximize the Company’s collection on the loan. As a TDR is generally considered to be an impaired loan, it is measured for impairment based on the Company’s allowance for loan losses methodology.
Loans Held for Sale
Loans that the Company intends to sell or liquidate in the foreseeable future are classified as held for sale. Loans held for sale are carried at the lower of amortized cost or fair value less disposal cost, with valuation changes recognized as impairment loss. Loans held for sale are not subject to allowance for loan losses. Net deferred loan origination fees and loan purchase premiums or discounts are deferred and capitalized as part of the carrying value of the held for sale loan until the loan is sold, therefore included in the periodic valuation adjustments based on lower of cost or fair value less disposal cost.
Acquisition, Development and Construction (“ADC”) Loan Arrangements
The Company provides loans to third party developers for the acquisition, development and construction of real estate. Under an ADC loan arrangement, the Company participates in the expected residual profits of the project through the sale, refinancing or other use of the property. The Company evaluates the characteristics of each ADC loan arrangement, including its risks and rewards, to determine whether they are more similar to those associated with a loan or an investment in real estate. ADC loan arrangements with characteristics implying loan classification are presented as loans held for investment and result in the recognition of interest income. ADC loan arrangements with characteristics implying real estate joint ventures are presented as investments in unconsolidated joint ventures and are accounted for using the equity method. The classification of each ADC loan arrangement as either loan receivable or real estate joint venture involves significant judgment and relies on various factors, including market conditions, amount and timing of expected residual profits, credit enhancements in the form of guaranties, estimated fair value of the collateral, and significance of borrower equity in the project, among others. The classification of ADC loan arrangements is performed at inception, and periodically reassessed when significant changes occur in the circumstances or conditions described above.
Operating Real Estate
Real Estate Acquisitions—
Real estate acquired in acquisitions that are deemed to be business combinations is recorded at the fair values of the acquired components at the time of acquisition, allocated among land, buildings, improvements, equipment and lease-related tangible and identifiable intangible assets and liabilities, including foregone leasing costs, in-place lease values and above- or below-market lease values. Real estate acquired in acquisitions that are deemed to be asset acquisitions is recorded at the total value of consideration transferred, including transaction costs, allocated to the acquired components based upon relative fair value. The estimated fair value of acquired land is derived from recent comparable sales of land and listings within the same local region based on available market data. The estimated fair value of acquired buildings and building improvements is derived from comparable sales, discounted cash flow analysis using market-based assumptions, or replacement cost, as appropriate.
The fair value of site and tenant improvements is estimated based upon current market replacement costs and other relevant market rate information.
Real Estate Held for Investment
Real estate held for investment is carried at cost less accumulated depreciation.
Costs Capitalized or Expensed—
Expenditures for ordinary repairs and maintenance are expensed as incurred, while expenditures for significant renovations that improve or extend the useful life of the asset are capitalized and depreciated over their estimated useful lives.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Depreciation—
Real estate held for investment, other than land, are depreciated on a straight-line basis over the estimated useful lives of the assets, as follows:
|
|
|
|
|
|
|
Real Estate Assets
|
|
Term
|
|
Building (fee interest)
|
|
19 to 48 years
|
|
Building leasehold interests
|
|
Lesser of remaining term of the lease or remaining life of the building
|
|
Building improvements
|
|
Lesser of the useful life or remaining life of the building
|
|
Land improvements
|
|
6 to 15 years
|
|
Tenant improvements
|
|
Lesser of the useful life or remaining term of the lease
|
|
Furniture, fixtures and equipment
|
|
2 to 8 years
|
Impairment—
The Company evaluates its real estate held for investment for impairment periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. The Company evaluates cash flows and determines impairments on an individual property basis. In making this determination, the Company reviews, among other things, current and estimated future cash flows associated with each property, market information for each sub-market, including, where applicable, competition levels, foreclosure levels, leasing trends, occupancy trends, lease or room rates, and the market prices of similar properties recently sold or currently being offered for sale, and other quantitative and qualitative factors. If an impairment indicator exists, the Company evaluates whether the expected future undiscounted cash flows is less than the carrying amount of the asset, and if the Company determines that the carrying value is not recoverable, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset. The carrying values of the Company’s investments represent their depreciated historical cost bases or, for investments that have been previously impaired, their fair values or net realizable values. Such amounts are based upon the Company’s current reasonable assumptions about the highest and best use of its investments and its intent and ability to hold them for a reasonable period that would allow for the recovery of its carrying values. If such assumptions change and the Company shorten the expected hold period, the Company may be required to record impairment losses to adjust its carrying values to fair value or fair value less cost to sell. During the third quarter of 2018, the Company recorded a
$29.4 million
impairment loss on its operating real estate portfolio. See Note 7, “Real Estate, net and Real Estate Held for Sale” and Note 15, “Fair Value,” for further detail.
Real Estate Held for Sale
Classification as Held for Sale—
Real estate is classified as held for sale in the period when (i) management approves a plan to sell the asset, (ii) the asset is available for immediate sale in its present condition, subject only to usual and customary terms, (iii) a program is initiated to locate a buyer and actively market the asset for sale at a reasonable price, and (iv) completion of the sale is probable within one year. Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal cost, with any write-down to fair value less disposal cost recorded as an impairment loss. For any increase in fair value less disposal cost subsequent to classification as held for sale, the impairment loss may be reversed, but only up to the amount of cumulative loss previously recognized. Depreciation is not recorded on assets classified as held for sale.
If circumstances arise that were previously considered unlikely and, as a result, the Company decides not to sell the real estate asset previously classified as held for sale, the real estate asset is reclassified as held for investment. Upon reclassification, the real estate asset is measured at the lower of (i) its carrying amount prior to classification as held for sale, adjusted for depreciation expense that would have been recognized had the real estate been continuously classified as held for investment, and (ii) its estimated fair value at the time the Company decides not to sell.
During the third quarter of 2018, the Company classified its multi-tenant office portfolio as held for sale. The sale was completed in October 2018. See Note 7, “Real Estate, net and Real Estate Held for Sale” and Note 19 “Subsequent Events” for further detail.
Real Estate Sales—
The Company evaluates if real estate sale transactions qualify for recognition under the full accrual method, considering whether, among other criteria, the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay, any receivable due to the Company is not subject to future subordination, the Company has transferred to the buyer the usual risks and rewards of ownership and the Company does not have a substantial continuing involvement with the sold real estate. At the time the sale is consummated, a gain or loss is recognized as the difference between the sale price less disposal cost and the carrying value of the real estate.
Foreclosed Properties
The Company receives foreclosed properties in full or partial settlement of loans held for investment by taking legal title or physical possession of the properties. Foreclosed properties are recognized, generally, at the time the real estate is received at foreclosure
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
sale or upon execution of a deed in lieu of foreclosure. Foreclosed properties are initially measured at fair value. Deficiencies compared to the carrying value of the loan, after reversing any previously recognized loss provision on the loan, are recorded as impairment loss. The Company periodically evaluates foreclosed properties for subsequent decrease in fair value, which is recorded as an additional impairment loss. Fair value of foreclosed properties is generally based on third party appraisals, broker price opinions, comparable sales or a combination thereof.
Real Estate Securities
The Company classifies its CRE securities investments as available for sale on the acquisition date, which are carried at fair value. Unrealized gains (losses) are recorded as a component of accumulated OCI in the consolidated statements of equity. However, the Company has elected the fair value option for certain of its available for sale securities, and as a result, any unrealized gains (losses) on such securities are recorded in unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net in the consolidated statements of operations. As of
September 30, 2018
, the Company held subordinate tranches of
three
securitization trusts, which represent the Company’s retained interest in the securitization trusts, which the Company consolidates under U.S. GAAP. Refer to Note 6, “Real Estate Securities, Available for Sale” for further discussion.
Impairment
CRE securities for which the fair value option is elected are not evaluated for other-than-temporary impairment (“OTTI”) as any change in fair value is recorded in the consolidated statements of operations. Realized losses on such securities are reclassified to realized loss on mortgage loans and obligations held in securitization trust, net as losses occur.
CRE securities for which the fair value option is not elected are evaluated for OTTI quarterly. Impairment of a security is considered to be other-than-temporary when: (i) the holder has the intent to sell the impaired security; (ii) it is more likely than not the holder will be required to sell the security; or (iii) the holder does not expect to recover the entire amortized cost of the security. When a CRE security has been deemed to be other-than-temporarily impaired due to (i) or (ii), the security is written down to its fair value and an OTTI is recognized in the consolidated statements of operations. In the case of (iii), the security is written down to its fair value and the amount of OTTI is then bifurcated into: (a) the amount related to expected credit losses; and (b) the amount related to fair value adjustments in excess of expected credit losses. The portion of OTTI related to expected credit losses is recognized in the consolidated statements of operations. The remaining OTTI related to the valuation adjustment is recognized as a component of accumulated OCI in the consolidated statements of equity. CRE securities which are not high-credit quality are considered to have an OTTI if the security has an unrealized loss and there has been an adverse change in expected cash flow. The amount of OTTI is then bifurcated as discussed above. As of
September 30, 2018
, the Company did
no
t have any OTTI recorded on its CRE securities.
Investments in Unconsolidated Ventures
A noncontrolling, unconsolidated ownership interest in an entity may be accounted for using the equity method, cost method or under the fair value option, if elected.
The Company accounts for investments under the equity method of accounting if they have the ability to exercise significant influence over the operating and financial policies of an entity, but do not have a controlling financial interest. The equity method investment is initially recorded at cost and adjusted each period for capital contributions, distributions and the Company’s share of the entity’s net income or loss as well as other comprehensive income or loss. The Company’s share of net income or loss may differ from the stated ownership percentage interest in an entity if the governing documents prescribe a substantive non-pro rata earnings allocation formula or a preferred return to certain investors. For certain equity method investments, the Company records its proportionate share of income on a one to three month lag. Distributions of operating profits from equity method investments are reported as operating activities, while distributions in excess of operating profits or those related to capital transactions, such as financing transactions or sales, are reported as investing activities in the statement of cash flows.
Investments that do not qualify for equity method accounting are accounted for under the cost method. The Company elected the fair value option for certain cost method investments, specifically limited partnership interests in PE Investments. The Company records the change in fair value for their share of the projected future cash flows of such investments in equity in earnings (losses) of unconsolidated ventures. Any change in fair value attributed to market related assumptions is recorded in other gain (loss), net, on the statement of operations.
At
September 30, 2018
, the Company’s investments in unconsolidated joint ventures consisted of investments in PE Investments, senior loans, mezzanine loans and preferred equity held in joint ventures, as well as ADC loan arrangements accounted for as
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
equity method investments. At
December 31, 2017
, the Company’s investments in unconsolidated ventures consisted of investments in PE Investments and ADC loan arrangements accounted for as equity method investments.
Impairment—
If indicators of impairment exist, the Company performs an evaluation of its equity method investments to assess whether the fair value of their investment is less than its carrying value. To the extent the decrease in value is considered to be other-than-temporary and an impairment has occurred, the investment is written down to its estimated fair value, recorded in earnings from investment in unconsolidated ventures.
Identifiable Intangibles
In a business combination or asset acquisition, the Company may recognize identifiable intangibles that meet either or both the contractual-legal criterion or the separability criterion. Indefinite-lived intangibles are not subject to amortization until such time that its useful life is determined to no longer be indefinite, at which point, it will be assessed for impairment and its adjusted carrying amount amortized over its remaining useful life. Finite-lived intangibles are amortized over their useful life in a manner that reflects the pattern in which the intangible is being consumed if readily determinable, such as based upon expected cash flows; otherwise they are amortized on a straight line basis. The useful life of all identified intangibles will be periodically reassessed and if useful life changes, the carrying amount of the intangible will be amortized prospectively over the revised useful life. Finite-lived intangibles are periodically reviewed for impairment and an impairment loss is recognized if the carrying amount of the intangible is not recoverable and exceeds its fair value. An impairment establishes a new basis for the identifiable intangibles and any impairment loss recognized is not subject to subsequent reversal.
Identifiable intangibles recognized in acquisitions of operating real estate properties generally include in-place leases, above- or below-market leases and deferred leasing costs. In-place leases generate value over and above the tangible real estate because a property that is occupied with leased space is typically worth more than a vacant building without an operating lease contract in place. The estimated fair value of acquired in-place leases is derived based on management’s assessment of costs avoided from having tenants in place, including lost rental income, rent concessions and tenant allowances or reimbursements, that hypothetically would be incurred to lease a vacant building to its actual existing occupancy level on the valuation date. The net amount recorded for acquired in-place leases is included in intangible assets and amortized on a straight-line basis as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If an in-place lease is terminated, the unamortized portion is charged to depreciation and amortization expense.
The estimated fair value of the above- or below-market component of acquired leases represents the present value of the difference between contractual rents of acquired leases and market rents at the time of the acquisition for the remaining lease term, discounted for tenant credit risks. Above- or below-market operating lease values are amortized on a straight-line basis as a decrease or increase to rental income, respectively, over the applicable lease terms. This includes fixed rate renewal options in acquired leases that are below-market, which is amortized to decrease rental income over the renewal period. Above- or below-market ground lease obligations are amortized on a straight-line basis as a decrease or increase to rent expense, respectively, over the applicable lease terms. If the above- or below-market operating lease values or above- or below-market ground lease obligations are terminated, the unamortized portion of the lease intangibles are recorded in rental income or rent expense, respectively.
Deferred leasing costs represent management’s estimation of the avoided leasing commissions and legal fees associated with an existing in-place lease. The net amount is included in intangible assets and amortized on a straight-line basis as an increase to depreciation and amortization expense over the remaining term of the applicable lease.
Transfers of Financial Assets
Sale accounting for transfers of financial assets requires the transfer of an entire financial asset, a group of financial assets in its entirety or if a component of the financial asset is transferred, that component meets the definition of a participating interest by having characteristics that mirror the original financial asset.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. If the Company has any continuing involvement, rights or obligations with the transferred financial asset (outside of standard representations and warranties), sale accounting would require that the transfer meets the following sale conditions: (1) the transferred asset has been legally isolated; (2) the transferee has the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred asset; and (3) the Company does not maintain effective control over the transferred asset through an agreement that provides for (a) both an entitlement and an obligation by the Company to repurchase or redeem the asset before its maturity, or (b) the unilateral ability by the Company to reclaim the asset and a more than trivial benefit attributable to that ability, or (c) the transferee requiring the Company to repurchase the asset at a price so favorable to the transferee that it is probable the repurchase will occur.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
If sale accounting is met, the transferred financial asset is removed from the balance sheet and a net gain or loss is recognized upon sale, taking into account any retained interests. Transfers of financial assets that do not meet the criteria for sale are accounted for as financing transactions, or secured borrowing.
Derivative Instruments and Hedging Activities
The Company uses derivative instruments to manage its foreign currency risk and interest rate risk. The Company does not use derivative instruments for speculative or trading purposes. All derivative instruments are recorded at fair value and included in other assets or other liabilities on a gross basis on the balance sheet. The accounting for changes in fair value of derivatives depends upon whether or not the Company has elected to designate the derivative in a hedging relationship and the derivative qualifies for hedge accounting. The Company has economic hedges that have not been designated for hedge accounting.
Changes in fair value of derivatives not designated as accounting hedges are recorded in the statement of operations in other gain (loss), net.
For designated accounting hedges, the relationships between hedging instruments and hedged items, risk management objectives and strategies for undertaking the accounting hedges as well as the methods to assess the effectiveness of the derivative prospectively and retrospectively, are formally documented at inception. Hedge effectiveness relates to the amount by which the gain or loss on the designated derivative instrument exactly offsets the change in the hedged item attributable to the hedged risk. If it is determined that a derivative is not expected to be or has ceased to be highly effective at hedging the designated exposure, hedge accounting is discontinued.
Cash Flow Hedges
-The Company uses interest rate caps and swaps to hedge its exposure to interest rate fluctuations in forecasted interest payments on floating rate debt. The effective portion of the change in fair value of the derivative is recorded in accumulated other comprehensive income, while hedge ineffectiveness is recorded in earnings. If the derivative in a cash flow hedge is terminated or the hedge designation is removed, related amounts in accumulated other comprehensive income (loss) are reclassified into earnings.
Net Investment Hedges
-The Company uses foreign currency hedges to protect the value of its net investments in foreign subsidiaries or equity method investees whose functional currencies are not U.S. dollars. Changes in the fair value of derivatives used as hedges of net investment in foreign operations, to the extent effective, are recorded in the cumulative translation adjustment account within accumulated other comprehensive income (loss).
At the end of each quarter, the Company reassesses the effectiveness of its net investment hedges and as appropriate, dedesignates the portion of the derivative notional amount that is in excess of the beginning balance of its net investments as nondesignated hedges.
Release of accumulated other comprehensive income related to net investment hedges occurs upon losing a controlling financial interest in an investment or obtaining control over an equity method investment. Upon sale, complete or substantially complete liquidation of an investment in a foreign subsidiary, or partial sale of an equity method investment, the gain or loss on the related net investment hedge is reclassified from accumulated other comprehensive income to earnings.
Financing Costs
Financing costs primarily include debt discounts and premiums as well as deferred financing 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 to interest expense using the effective interest method. Unamortized deferred financing costs are expensed to realized gain (loss) when the associated facility is repaid before maturity. 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.
Revenue Recognition
Property Operating Income
Property operating income includes the following:
Rental Income—
Rental income is recognized on a straight-line basis over the noncancelable term of the related lease which includes the effects of minimum rent increases and rent abatements under the lease. Rents received in advance are deferred.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
When it is determined that the Company is the owner of tenant improvements, the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants, is capitalized. For tenant improvements owned by the Company, the amount funded by or reimbursed by the tenants are recorded as deferred revenue, which is amortized on a straight-line basis as additional rental income over the term of the related lease. Rental income recognition commences when the leased space is substantially ready for its intended use and the tenant takes possession of the leased space.
When it is determined that the tenant is the owner of tenant improvements, the Company’s contribution towards those improvements is recorded as a lease incentive, included in deferred leasing costs and intangible assets on the balance sheet, and amortized as a reduction to rental income on a straight-line basis over the term of the lease. Rental income recognition commences when the tenant takes possession of the lease space.
Tenant Reimbursements—
In net lease arrangements, the tenant is generally responsible for operating expenses relating to the property, including real estate taxes, property insurance, maintenance, repairs and improvements. Costs reimbursable from tenants and other recoverable costs are recognized as revenue in the period the recoverable costs are incurred. When the Company is the primary obligor with respect to purchasing goods and services for property operations and has discretion in selecting the supplier and retains credit risk, tenant reimbursement revenue and property operating expenses are presented on a gross basis in the statements of operations. For certain triple net leases where the lessee self-manages the property, hires its own service providers and retains credit risk for routine maintenance contracts, no reimbursement revenue and expense are recognized.
Hotel Operating Income—
Hotel operating income includes room revenue, food and beverage sales and other ancillary services. Revenue is recognized upon occupancy of rooms, consummation of sales and provision of services.
Real Estate Securities
Interest income is recognized using the effective interest method with any premium or discount amortized or accreted through earnings based on expected cash flow through the expected maturity date of the security. Changes to expected cash flow may result in a change to the yield which is then applied retrospectively for high-credit quality securities that cannot be prepaid or otherwise settled in such a way that the holder would not recover substantially all of the investment or prospectively for all other securities to recognize interest income.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the exchange rate in effect at balance sheet date and the corresponding results of operations for such entities are translated using the average exchange rate in effect during the period. The resulting foreign currency translation adjustments are recorded as a component of accumulated other comprehensive income or loss in stockholders’ equity.
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the exchange rate in effect at balance sheet date and the corresponding results of operations for such entities are remeasured using the average exchange rate in effect during the period. The resulting foreign currency remeasurement adjustments are recorded in other gain (loss), net on the consolidated statements of operations.
Disclosures of non-U.S. dollar amounts to be recorded in the future are translated using exchange rates in effect at the balance sheet date.
Equity-Based Compensation
Equity-classified stock awards granted to executive officers and directors that have a service condition only are remeasured at fair value at the end of each reporting period until the award is fully vested. Fair value is determined based on the closing price of the Class A common stock at the end of each reporting period. The Company recognizes equity-based compensation expense on a straight-line basis over the requisite service period of the awards, with the amount of compensation expense recognized at the end of a reporting period at least equal to the fair value of the portion of the award that has vested through that date.
Equity-classified stock awards granted to independent directors are based on the closing price of the Class A common stock on the grant date and recognized on a straight-line basis over the requisite service period of the awards.
The compensation expense is adjusted for actual forfeitures upon occurrence. Equity-based compensation is classified within administrative expense in the consolidated statement of operations.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Earnings Per Share
The Company presents both basic and diluted earnings per share (“EPS”) using the two-class method. Basic EPS is calculated by dividing earnings allocated to common shareholders, as adjusted for unallocated earnings attributable to certain participating securities, if any, by the weighted-average number of common shares outstanding during the period. Diluted EPS is based on the weighted-average number of common shares and the effect of potentially dilutive common share equivalents outstanding during the period. The two-class method is an allocation formula that determines earnings per share for each share of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to common shares and participating securities based on their respective rights to receive dividends. The Company has certain share-based payment awards that contain nonforfeitable rights to dividends, which are considered participating securities for the purposes of computing EPS pursuant to the two-class method.
Income Taxes
The Company intends to elect to be taxed as a REIT and to comply with the related provisions of the Code beginning with its taxable year ending
December 31, 2018
. Accordingly, the Company will generally not be subject to U.S. federal income tax to the extent of its distributions to stockholders as long as certain asset, income, distribution and share ownership tests are met. The Company believes that all of the criteria to maintain the Company’s REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax and potential interest and penalties, which could have a material adverse impact on its results of operations and amounts available for distributions to its stockholders. The Company’s accounting policy with respect to interest and penalties is to classify these amounts as a component of income tax expense, where applicable.
The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, U.S. federal income and excise taxes may be due on its undistributed taxable income.
The Company made joint elections to treat certain subsidiaries as taxable REIT subsidiaries (“TRS”) which may be subject to U.S. federal, state and local income taxes. In general, a TRS of the Company may perform non-customary services for tenants, hold assets that the REIT cannot hold directly and may engage in most real estate or non-real estate-related business.
Certain subsidiaries of the Company are subject to taxation by U.S. federal, state and local authorities for the periods presented. Income taxes are accounted for by the asset/liability approach in accordance with U.S. GAAP. Deferred taxes, if any, represent the expected future tax consequences when the reported amounts of assets and liabilities are recovered or paid. Such amounts arise from differences between the financial reporting and tax bases of assets and liabilities and are adjusted for changes in tax laws and tax rates in the period which such changes are enacted. A provision for income tax represents the total of income taxes paid or payable for the current period, plus the change in deferred taxes. Current and deferred taxes are recorded on the portion of earnings (losses) recognized by the Company with respect to its interest in TRSs. Deferred income tax assets and liabilities are calculated based on temporary differences between the Company’s U.S. GAAP consolidated financial statements and the U.S. federal, state and local tax basis of assets and liabilities as of the consolidated balance sheet date. The Company evaluates the realizability of its deferred tax assets (e.g., net operating loss and capital loss carryforwards) 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. Changes in estimate of deferred tax asset realizability, if any, are included in income tax benefit (expense) in the consolidated statements of operations.
On
December 22, 2017
, the Tax Cuts and Jobs Act was enacted, which provides for a reduction in the U.S. federal corporate income tax rate from
35%
to
21%
effective
January 1, 2018
. At
December 31, 2017
, the Company recognized a provisional amount of approximately
$2.0 million
of income tax expense relating to the remeasurement of its deferred tax balances based on the rate at which they are expected to reverse in the future, which is generally
21%
. The Company is still analyzing certain aspects of the Tax Cuts and Jobs Act and refining its calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.
For the
three months ended
September 30, 2018
and
2017
, the Company recorded income tax benefit of
$2.5 million
and
$0.5 million
, respectively. For the
nine months ended
September 30, 2018
, the Company recorded income tax benefit of
$2.8 million
. For the
nine months ended
September 30, 2017
, the Company recorded income tax expense of
$0.1 million
.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Recent Accounting Pronouncements
Revenue Recognition—
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers,
which amends existing revenue recognition standards by establishing principles for a single comprehensive model for revenue measurement and recognition, along with enhanced disclosure requirements. Key provisions include, but are not limited to, determining which goods or services are capable of being distinct in a contract to be accounted for separately as a performance obligation and recognizing variable consideration only to the extent that it is probable a significant revenue reversal would not occur. The new revenue standard may be applied retrospectively to each prior period presented (full retrospective) or retrospectively to contracts not completed as of date of initial application with the cumulative effect recognized in retained earnings (modified retrospective). ASU No. 2014-09 was originally effective for fiscal years and interim periods beginning after December 15, 2016 for public companies that are not emerging growth companies (“EGCs”) and December 15, 2017 for private companies and public companies that are EGCs. In July 2015, the FASB deferred the effective date of the new standard by one year. Early adoption is permitted but not before the original effective date. The FASB has subsequently issued several amendments to the standard, including clarifying the guidance on assessing principal versus agent based on the notion of control, which affects recognition of revenue on a gross or net basis. These amendments have the same effective date and transition requirements as the new standard.
The Company will adopt the standard using the modified retrospective approach on January 1, 2019. The standard excludes from its scope the areas of accounting that most significantly affect revenue recognition for the core activities of the Company, including accounting for financial instruments and leases. Evaluation of the impact of this new guidance is ongoing.
Financial Instruments—
In January 2016, the FASB issued ASU No. 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which affects accounting for investments in equity securities, financial liabilities under the fair value option, as well as presentation and disclosures, but does not affect accounting for investments in debt securities and loans
.
Investments in equity securities, other than equity method investments, will be measured at fair value through earnings, except for equity securities without readily determinable fair values which may be measured at cost less impairment and adjusted for observable price changes under application of the measurement alternative, unless these equity securities qualify for the net asset value (“NAV”) practical expedient. This provision eliminates cost method accounting and recognition of unrealized holding gains or losses on equity investments in other comprehensive income. For financial liabilities under the fair value option, changes in fair value resulting from the Company’s own instrument-specific credit risk will be recorded separately in other comprehensive income. Fair value disclosures of financial instruments measured at amortized cost will be based on exit price and corresponding disclosures of valuation methodology and significant inputs will no longer be required. In February 2018, the FASB issued ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments, Recognition and Measurement of Financial Assets and Financial Liabilities,
which provided several clarifications and amendments to the standard. These include specifying that for equity instruments without readily determinable fair values for which the measurement alternative is applied: (i) adjustments made when an observable transaction occurs for a similar security are intended to reflect the fair value as of the observable transaction date, not as of current reporting date; (ii) the measurement alternative may be discontinued upon an irrevocable election to change to a fair value measurement approach under fair value guidance, which would apply to all identical and similar investments of the same issuer; and (iii) the prospective transition approach for equity securities without readily determinable fair values is applicable only when the measurement alternative is applied. ASU No. 2016-01 is effective for fiscal years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs. Early adoption is limited to specific provisions. ASU 2016-01 is to be applied retrospectively with cumulative effect as of the beginning of the first reporting period adopted recognized in retained earnings, except for provisions related to equity investments without readily determinable fair values for which the measurement alternative is applied and exit price fair value disclosures for financial instruments measured at amortized cost, which are to be applied prospectively.
As of
September 30, 2018
, all of the Company’s investments in unconsolidated ventures were equity method investments and the Company does not have any cost method investments nor has the Company elected fair value option on its financial liabilities which fall under the scope of this guidance.
The Company will adopt the new guidance on January 1, 2019. Evaluation of the impact of this new guidance is ongoing, but at this time the Company does not expect the adoption of this standard to have a material effect on its financial condition or results of operations.
Leases—
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which amends existing lease accounting standards, primarily requiring lessees to recognize most leases on balance sheet, as well as making targeted changes to lessor accounting. As lessee, a right-of-use asset and corresponding liability for future obligations under a leasing arrangement would be recognized on balance sheet. As lessor, gross leases will be subject to allocation between lease and non-lease service components, with the latter accounted for under the new revenue recognition standard. As the new lease standard requires congruous accounting treatment between lessor
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
and lessee in a sale-leaseback transaction, if the seller/lessee does not achieve sale accounting, it would be considered a financing transaction to the buyer/lessor. Additionally, under the new lease standard, only incremental initial direct costs incurred in the execution of a lease can be capitalized by the lessor and lessee.
ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs. Early adoption is permitted. The new leases standard requires adoption using a modified retrospective approach for all leases existing at, or entered into after, the date of initial application. Full retrospective application is prohibited. The FASB has subsequently issued and proposed several amendments to the standard, including approving an amendment to provide optional transitional relief to apply the effective date of the new lease standard as the date of initial application in transition instead of the earliest comparative period presented, as well as to provide certain practical expedients, which include not segregating non-lease components from the related lease components but to account for those components as a single lease component by class of underlying assets.
The Company intends to adopt the package of practical expedients under the guidance, which provides exemptions from having to reassess whether any expired or expiring contracts contain leases, revisit lease classification for any expired or expiring leases and reassess initial direct costs for any existing leases.
The Company expects to adopt the transition option, in which case, the cumulative effect adjustment to the opening balance of retained earnings will be recognized as of the effective date of adoption, including new disclosures, rather than as of the earliest period presented, and are not required for prior comparative periods. In addition, the Company expects to make an accounting policy election to treat lease and related non-lease components in a contract as a single performance obligation to the extent that the timing and pattern of revenue recognition are the same for the lease and non-lease components and the combined single lease component is classified as an operating lease. As of
September 30, 2018
, the Company had
six
ground lease arrangements with future contractual lease payment obligations of
$13.7 million
.
Evaluation of the impact of this new guidance to the Company is ongoing.
Credit Losses—
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments
-
Credit Losses
, which amends the credit impairment model for financial instruments. The existing incurred loss model will be replaced with a lifetime current expected credit loss (“CECL”) model for financial instruments carried at amortized cost and off-balance sheet credit exposures, such as loans, loan commitments, held-to-maturity (“HTM”) debt securities, financial guarantees, net investment in leases, reinsurance and trade receivables, which will generally result in earlier recognition of allowance for losses. For AFS debt securities, unrealized credit losses will be recognized as allowances rather than reductions in amortized cost basis and elimination of the OTTI concept will result in more frequent estimation of credit losses. The accounting model for purchased credit impaired loans and debt securities will be simplified, including elimination of some of the asymmetrical treatment between credit losses and credit recoveries, to be consistent with the CECL model for originated and purchased non-credit impaired assets. The existing model for beneficial interests that are not of high credit quality will be amended to conform to the new impairment models for HTM and AFS debt securities. Expanded disclosures on credit risk include credit quality indicators by vintage for financing receivables and net investment in leases. Transition will generally be on a modified retrospective basis, with prospective application for other-than-temporarily impaired debt securities and purchased credit impaired assets. ASU No. 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019 for public companies that are not EGCs and December 15, 2020 for private companies and public companies that are EGCs. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company expects that recognition of credit losses will generally be accelerated under the CECL model. Evaluation of the impact of this new guidance is ongoing.
Cash Flow Classifications—
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
, which is intended to reduce diversity in practice in certain classifications on the statement of cash flows. This guidance addresses eight types of cash flows, clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows, and requires an accounting policy election for classification of distributions received from equity method investees using either the cumulative earnings or nature of distributions approach, among others. Transition will generally be on a retrospective basis. ASU No. 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs. Early adoption is permitted, provided that all amendments within the guidance are adopted in the same period. The Company will adopt the new guidance on January 1, 2019. Upon adoption, the Company anticipates making an accounting policy election for classification of distributions from its equity method investees using the cumulative earnings approach.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Restricted Cash—
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash
, which requires that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents with restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, this ASU requires disclosure of a reconciliation between the totals in the statement of cash flows and the related captions in the balance sheet. The new guidance also requires disclosure of the nature of restricted cash and restricted cash equivalents, similar to existing requirements under Regulation S-X; however, it does not define restricted cash and restricted cash equivalents. ASU No. 2016-18 is effective for fiscal years and interim periods beginning after December 15, 2017 for public companies that are not EGCs and December 15, 2018 for private companies and public companies that are EGCs, to be applied retrospectively, with early adoption permitted. If early adopted in an interim period, adjustments are to be reflected as of the beginning of the fiscal year of adoption. As of
September 30, 2018
, the Company had
$116.0 million
of restricted cash that will be subject to changes in presentation on the statement of cash flows. The Company will adopt the new guidance on January 1, 2019.
Derecognition and Partial Sales of Nonfinancial Assets—
In February 2017, the FASB issued ASU 2017-05,
Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets
, which clarifies the scope and application of ASC 610-20,
Other Income
-
Gains and Losses from Derecognition of Nonfinancial Assets
, and defines in substance nonfinancial assets. ASC 610-20 applies to derecognition of all nonfinancial assets which are not contracts with customers or revenue transactions under ASC 606,
Revenue from Contracts with Customers
. Derecognition of a business is governed by ASC 810,
Consolidation
, while derecognition of financial assets, including equity method investments, even if the investee holds predominantly nonfinancial assets, is governed by ASC 860,
Transfers and Servicing
. The ASU also aligns the accounting for partial sales of nonfinancial assets to be more consistent with 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 in accordance with ASC 606, which would result in full gain or loss recognized upon sale. This ASU removes guidance on partial exchanges of nonfinancial assets in ASC 845,
Nonmonetary Transactions
, and eliminates the real estate sales guidance in ASC 360-20,
Property, Plant and Equipment
-
Real Estate Sales
. ASU 2017-05 has the same effective date as the new revenue guidance, which is January 1, 2018 for public companies that are not EGCs and January 1, 2019 for private companies and public companies that are EGCs, with early adoption permitted beginning January 1, 2017. Both ASC 606 and ASC 610-20 must be adopted concurrently. While the transition method is similar to the new revenue guidance, either full retrospective or modified retrospective, the transition approach applied need not be aligned between both standards.
The Company will adopt the new guidance on January 1, 2019 using the modified retrospective approach, consistent with the adoption of the new revenue standard. Under the new standard, if a partial interest in real estate is sold to noncustomers or contributed to unconsolidated ventures, and a noncontrolling interest in the asset is retained, such transactions could result in a larger gain on sale. The adoption of this standard could have a material impact to the results of operations in a period that a significant partial interest in real estate is sold. There were no such sales in the
nine months ended
September 30, 2018
.
Share-Based Payments—
In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
, which simplifies the accounting for share-based payments to nonemployees by generally aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance applies to nonemployee awards issued in exchange for goods or services used in an entity’s own operations and to awards granted by an investor to an equity method investee, but does not apply to equity instruments issued to a lender or investor in a financing transaction or equity instruments issued when selling goods or services to customers, which is under the revenue recognition model. Key changes in the guidance include measuring nonemployee awards based on fair value of the equity instrument issued, rather than fair value of goods or services received or equity instrument issued, whichever is more reliably measured. In terms of timing, equity-classified nonemployee awards that were previously remeasured through performance completion date will now have a fixed measurement on grant date, which will reduce volatility on the income statement. For nonemployee awards with performance conditions, compensation cost will be recognized when achievement of the performance condition is probable, rather than upon actual achievement of the performance condition. Similar to employee awards, forfeitures may be recognized as they occur or based on an estimate under an accounting policy election, but the guidance allows separate elections for employee and nonemployee awards. The accounting model for nonemployee awards, however, remains different for attribution of share-based payment costs over the vesting period, in which compensation cost for nonemployee awards continues to be recognized in the same period and in the same manner (i.e., capitalized or expensed) as if the grantor had paid cash for the goods or services. No changes to disclosure requirements were prescribed. Transition is on a modified retrospective basis, with a remeasurement at fair value as of the adoption date through a cumulative effect adjustment to opening retained earnings, applied to all equity-classified nonemployee awards where a measurement date has not been established by the adoption date and unsettled liability-classified nonemployee awards.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The transition provisions eliminate the need to retrospectively determine fair values at historical grant dates. ASU 2018-07 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted in an interim period for which financial statements have not been issued, with adjustments to be reflected as of the beginning of the fiscal year of adoption. The Company plans to adopt the new standard on its effective date. As of
September 30, 2018
, the Company had
978,946
shares of nonemployee awards outstanding.
Fair Value Disclosures—
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820):Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurements
. The ASU requires new disclosures of changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value of instruments held at balance sheet date, as well as the range and weighted average or other quantitative information, if more relevant, of significant unobservable inputs for recurring and nonrecurring Level 3 fair values. Certain disclosures are now eliminated, specifically around the valuation process required for Level 3 fair values, policy for timing of transfers between levels of the fair value hierarchy, as well as amounts and reason for transfers between Levels 1 and 2. ASU No. 2018-13 is effective for fiscal years and interim periods beginning after December 15, 2019. The adoption of this standard is not expected to have a material effect on the Company's existing disclosures.
The Combination
On the Closing Date, the Combination of the CLNY Contributed Portfolio, NorthStar I and NorthStar II was completed, creating CLNC.
In consideration for the contribution of the CLNY Contributed Portfolio, CLNY OP received approximately
44.4 million
shares of the Company’s Class B-3 common stock, par value
$0.01
per share (the “Class B-3 common stock”), and a subsidiary of CLNY OP received approximately
3.1 million
common membership units in the OP (“CLNC OP Units”). The Class B-3 common stock will automatically convert to Class A common stock of the Company on a
one
-for-one basis upon the close of trading on
February 1, 2019
. The CLNC OP Units are redeemable for cash, or, at the Company’s election, the Class A common stock on a
one
-for-one basis, in the sole discretion of the Company. Subject to certain limited exceptions, CLNY OP has agreed that it and its affiliates will not make any transfers of the CLNC OP Units to non-affiliates of CLNY OP until the one year anniversary of the closing of the Combination, unless such transfer is approved by a majority of the Company’s board of directors, including a majority of the independent directors. In connection with the merger of NorthStar I and NorthStar II into the Company, their respective stockholders received shares of the Class A common stock based on pre-determined exchange ratios. Following the foregoing transaction, the Company contributed the CLNY Contributed Portfolio and the operating partnerships of NorthStar I and NorthStar II to the OP in exchange for ownership interests in the OP. Upon the closing of the Combination, CLNY OP and its affiliates, NorthStar I stockholders and NorthStar II stockholders each owned approximately
37%
,
32%
and
31%
, respectively, of the Company on a fully diluted basis.
Prior to the closing of the Combination, a special dividend was declared by NorthStar I, which generated the lesser amount of cash leakage, in order to true up the agreed contribution values of NorthStar I and NorthStar II in relation to each other. In addition, following the CLNY Contributions, but prior to the effective time of the Combination, there was a cash settlement between the Company and Colony Capital for the difference between (i) the sum of (a) the loss in value of NorthStar I and NorthStar II as a result of the distributions made by NorthStar I and NorthStar II in excess of FFO (as such term is defined in the Combination Agreement) from
July 1, 2017
through the day immediately preceding the Closing Date (excluding the dividend payment made by each of NorthStar I and NorthStar II on
July 1, 2017
), (b) FFO for the CLNY Investment Entities from
July 1, 2017
through the day immediately preceding the Closing Date, (c) cash contributions or contributions of certain intercompany receivables made to the CLNY Investment Entities from
July 1, 2017
through the day immediately preceding the Closing Date, and (d) the expected present value of certain unreimbursed operating expenses of NorthStar I and NorthStar II paid on each company’s behalf by their respective advisors, and (ii) cash distributions made by the CLNY Investment Entities from
July 1, 2017
through the day immediately preceding the Closing Date, excluding that certain distribution made by the CLNY Investment Entities in
July 2017
relating to the partial repayment of a certain investment (collectively, “CLNY true-up adjustment”). The settlement of the CLNY true-up adjustment resulted in a payment of approximately
$55 million
from Colony Capital to the Company.
The Combination is accounted under the acquisition method for business combinations with the CLNY Investment Entities as the accounting acquirer for purposes of the financial information set forth herein. Refer to Note 2, “Summary of Significant Accounting Policies” for further discussion on the accounting treatment of the Combination.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Combination Consideration
Each share of NorthStar I and NorthStar II common stock issued and outstanding immediately prior to the effective time of the Combination was converted into the right to receive
0.3532
shares (the “NorthStar I Exchange Ratio”) and
0.3511
shares (the “NorthStar II Exchange Ratio”), respectively, of the Class A common stock, plus cash in lieu of fractional shares. Approximately
21,000
shares of NorthStar I restricted common stock and
25,000
shares of NorthStar II restricted common stock automatically vested in connection with the Combination and the holders thereof were entitled to receive the same equity exchange as the other holders of NorthStar I and NorthStar II common stock, respectively.
The Company acquired all of the common stock of NorthStar I and NorthStar II through the exchange of all such outstanding shares into shares of Class A common stock based on the pre-determined NorthStar I Exchange Ratio and NorthStar II Exchange Ratio, respectively. As the Combination was a stock-for-stock exchange (except for cash consideration for fractional shares), fair value of the consideration to be transferred was dependent upon the fair value of the Company at the Closing Date.
Fair value of the merger consideration was determined as follows (in thousands, except exchange ratio and price per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NorthStar I
|
|
NorthStar II
|
|
Total
|
|
Outstanding shares of common stock at January 31, 2018
(1)
|
|
119,333
|
|
|
114,943
|
|
|
|
|
Exchange ratio
(2)
|
|
0.3532
|
|
|
0.3511
|
|
|
|
|
Shares of Class A common stock issued in the mergers
(3)
|
|
42,149
|
|
|
40,356
|
|
|
82,505
|
|
|
Fair value consideration per share
(4)
|
|
$
|
24.50
|
|
|
$
|
24.50
|
|
|
$
|
24.50
|
|
|
Fair value of NorthStar I and NorthStar II consideration
|
|
$
|
1,032,651
|
|
|
$
|
988,722
|
|
|
$
|
2,021,373
|
|
_________________________________________
|
|
|
|
(1)
|
Includes
21,000
and
25,000
shares of common stock of NorthStar I and NorthStar II equity awards, respectively, that vested in connection with the consummation of the Combination.
|
|
|
|
|
(2)
|
Represents the pre-determined exchange ratio of
0.3532
NorthStar I shares and
0.3511
NorthStar II shares per one share of the Class A common stock.
|
|
|
|
|
(3)
|
Includes the issuance of fractional shares, aggregating to approximately
21,000
shares, for which holders received cash in lieu of the fractional shares.
|
|
|
|
|
(4)
|
Represents the estimated per share fair value of the Company at the Closing Date.
|
The following table presents a preliminary allocation of the Combination consideration to assets acquired, liabilities assumed and noncontrolling interests of NorthStar I and NorthStar II based on their respective estimated fair values as of the Closing Date.
The estimated fair values and allocation of the Combination consideration presented below are preliminary and based on information available as of the Closing Date as the Company continues to evaluate the underlying inputs and assumptions. Accordingly, these preliminary estimates may be subject to adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the Closing Date. Preliminary fair values assigned to the assets acquired, liabilities assumed and noncontrolling interests of NorthStar I and NorthStar II as of the Closing Date were as follows (dollars in thousands):
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2018
|
|
|
|
NorthStar I
|
|
NorthStar II
|
|
Total
|
|
Merger consideration
|
|
$
|
1,032,651
|
|
|
$
|
988,722
|
|
|
$
|
2,021,373
|
|
|
Allocation of merger consideration:
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
130,197
|
|
|
$
|
51,360
|
|
|
$
|
181,557
|
|
|
Restricted cash
|
|
30,564
|
|
|
61,313
|
|
|
91,877
|
|
|
Loans and preferred equity held for investment
|
|
521,462
|
|
|
728,271
|
|
|
1,249,733
|
|
|
Real estate securities, available for sale, at fair value
|
|
100,731
|
|
|
64,793
|
|
|
165,524
|
|
|
Real estate, net
|
|
790,996
|
|
|
492,317
|
|
|
1,283,313
|
|
|
Investments in unconsolidated ventures
|
|
67,899
|
|
|
375,694
|
|
|
443,593
|
|
|
Receivables, net
|
|
12,363
|
|
|
11,479
|
|
|
23,842
|
|
|
Deferred leasing costs and intangible assets, net
|
|
74,243
|
|
|
37,090
|
|
|
111,333
|
|
|
Other assets
|
|
16,407
|
|
|
21,668
|
|
|
38,075
|
|
|
Mortgage loans held in securitization trusts, at fair value
|
|
1,894,404
|
|
|
1,432,795
|
|
|
3,327,199
|
|
|
Total assets acquired
|
|
3,639,266
|
|
|
3,276,780
|
|
|
6,916,046
|
|
|
Liabilities assumed
|
|
|
|
|
|
|
|
Securitization bonds payable, net
|
|
—
|
|
|
80,825
|
|
|
80,825
|
|
|
Mortgage and other notes payable, net
|
|
399,131
|
|
|
382,485
|
|
|
781,616
|
|
|
Credit facilities
|
|
293,340
|
|
|
355,529
|
|
|
648,869
|
|
|
Due to related party
|
|
4,533
|
|
|
1,842
|
|
|
6,375
|
|
|
Accrued and other liabilities
|
|
21,640
|
|
|
18,219
|
|
|
39,859
|
|
|
Intangible liabilities, net
|
|
17,931
|
|
|
1,808
|
|
|
19,739
|
|
|
Escrow deposits payable
|
|
12,994
|
|
|
36,362
|
|
|
49,356
|
|
|
Mortgage obligations issued by securitization trusts, at fair value
|
|
1,784,223
|
|
|
1,401,491
|
|
|
3,185,714
|
|
|
Total liabilities assumed
|
|
2,533,792
|
|
|
2,278,561
|
|
|
4,812,353
|
|
|
Noncontrolling interests
|
|
72,823
|
|
|
9,497
|
|
|
82,320
|
|
|
Fair value of net assets acquired
|
|
$
|
1,032,651
|
|
|
$
|
988,722
|
|
|
$
|
2,021,373
|
|
Fair value of other assets acquired, liabilities assumed and noncontrolling interests were estimated as follows:
Real Estate and Related Intangibles
—Fair value is based on the income approach which includes a direct capitalization method with overall capitalization rates ranging between
6.5%
and
8.3%
. Real estate fair value was allocated to tangible assets such as land, building and leaseholds, tenant and land improvements as well as identified intangible assets and liabilities such as above- and below-market leases, and in-place lease value. Useful lives of the intangibles acquired range from
1
year to
10
years.
Loans and preferred equity held for investment
—Fair value is determined 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; or based on discounted cash flow projections of principal and interest expected to be collected, which include consideration of borrower or sponsor credit, as well as operating results of the underlying collateral. For certain loans and preferred equity held for investment, NorthStar II has a contractual right to equity-like participation or other ownership interests in the underlying collateral which was considered in calculating the fair value of the loans and preferred equity held for investment.
Investments in Unconsolidated Ventures
—Fair value is based on timing and amount of expected future cash flows for income as well as realization events of the underlying assets of the investees. Investments in unconsolidated ventures includes a preferred equity investment, as well as an investment in a joint venture which holds a mezzanine loan. The fair value for both investments was based on the outstanding principal value plus the undiscounted value of any applicable contractual exit fees associated with the investments. The preferred equity investment has an equity-like participation which was considered in its fair value. The capitalization rate used was
6.8%
.
Securities
—Fair value is based on quotations from brokers or financial institutions that act as underwriters of the debt securities, third-party pricing service or discounted cash flows depending on the type of debt securities.
Debt
—The fair value of debt was determined by either comparing the contractual interest rate to the interest rate for newly originated debt with similar credit risk or the market rate at which a third party might expect to assume such debt or based on discounted cash flow (“DCF”) projections of principal and interest expected to be collected, which include consideration of borrower or sponsor credit, as well as operating results of the underlying collateral. All of the debt was priced consistent with current interest
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
rates attainable for similarly situated investments, and therefore was attributed a value equal to each debt’s outstanding principal amount less any applicable premium or discount on the secured debt.
Noncontrolling Interests
—NorthStar I’s noncontrolling interests are attributable to the minority ownership interests of its operating partners in its CRE properties. The estimated value of NorthStar I’s noncontrolling interests represents the minority owner’s pro rata share of the estimated net book value of the CRE properties, as determined in accordance with the above description of the valuation process for real estate and related intangibles. NorthStar II’s noncontrolling interest is attributable to the minority ownership interest of its operating partner in its Bothell, Washington office portfolio. The estimated value of NorthStar II’s noncontrolling interest represents the operating partner’s pro rata share of the estimated net book value of the portfolio, as determined in accordance with the above description of the valuation process for real estate and related intangibles. The major classes of intangible assets and liabilities include leasing commissions, above- and below-market lease values and in-place lease values.
Results of NorthStar I and NorthStar II
For the
three months ended
and from February 1, 2018 (the Closing Date) through
September 30, 2018
, the Company’s results of operations included contributions from the acquired business of NorthStar I and NorthStar II as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
February 1, 2018 to September 30, 2018
|
|
|
|
NorthStar I
|
|
NorthStar II
|
|
Total
|
|
NorthStar I
|
|
NorthStar II
|
|
Total
|
|
Total revenues
|
|
$
|
55,665
|
|
|
$
|
45,640
|
|
|
$
|
101,305
|
|
|
$
|
144,999
|
|
|
$
|
136,426
|
|
|
$
|
281,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
(1)
|
|
(22,737
|
)
|
|
2,607
|
|
|
(20,130
|
)
|
|
(22,370
|
)
|
|
26,123
|
|
|
3,753
|
|
______________________________
|
|
|
|
(1)
|
Includes
$22.3 million
of impairment of operating real estate and
$12.3 million
provision for loan loss recorded for the
three months ended
September 30, 2018
and from the Closing Date through
September 30, 2018
.
|
Combination-Related Costs
Transaction costs of
$0.4 million
and
$32.9 million
were incurred in connection with the Combination in the
three and nine months ended
September 30, 2018
, respectively, consisting largely of professional fees for legal, financial advisory, accounting and consulting services. Approximately
$24.3 million
of the transaction costs for the
nine months ended
September 30, 2018
represent fees paid to investment bankers that were contingent upon consummation of the Combination.
Combination-related costs are expensed as incurred and such costs expensed by NorthStar I and NorthStar II prior to the Closing Date were excluded from the Company's results of operations.
Pro Forma Financial Information (Unaudited)
The following table presents pro forma financial information of the Company as if the Combination had been consummated on
January 1, 2017
. The pro forma financial information includes the pro forma impact of purchase accounting adjustments primarily related to fair value adjustments and depreciation and amortization, and excludes Combination-related transaction costs of
$0.4 million
and
$32.9 million
for the
three and nine months ended
September 30, 2018
, respectively. The pro forma financial information, however, does not reflect any potential benefits that may result from realization of future cost savings from operating efficiencies, or other incremental synergies expected to result from the Combination.
The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations of the Company had the Combination been completed on
January 1, 2017
, nor indicative of future results of operations of the Company (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Pro forma:
|
|
|
|
|
|
Total revenues
|
|
$
|
410,027
|
|
|
$
|
366,827
|
|
|
Net income (loss) attributable to Colony Credit Real Estate, Inc.
|
|
(2,416
|
)
|
|
101,954
|
|
|
Net income attributable to common stockholders
|
|
1,282
|
|
|
98,732
|
|
|
Earnings per common share:
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
0.76
|
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
0.76
|
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
4.
|
Loans and Preferred Equity Held for Investment, net
|
The following table provides a summary of the Company’s loans and preferred equity held for investment, net (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
|
Unpaid Principal Balance
|
|
Carrying
Value
|
|
Weighted Average Coupon
(1)
|
|
Weighted Average Maturity in Years
|
|
Unpaid Principal Balance
(2)
|
|
Carrying
Value
(2)
|
|
Weighted Average Coupon
|
|
Weighted Average Maturity in Years
|
|
Fixed rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
$
|
31,205
|
|
|
$
|
31,129
|
|
|
13.1
|
%
|
|
3.2
|
|
$
|
493,113
|
|
|
$
|
484,592
|
|
|
8.2
|
%
|
|
2.4
|
|
|
Mezzanine loans
|
|
115,678
|
|
|
115,678
|
|
|
13.1
|
%
|
|
4.7
|
|
141,931
|
|
|
141,828
|
|
|
13.2
|
%
|
|
3.2
|
|
|
Preferred equity interests
|
|
112,212
|
|
|
112,013
|
|
|
12.6
|
%
|
|
8.0
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
259,095
|
|
|
258,820
|
|
|
|
|
|
|
635,044
|
|
|
626,420
|
|
|
|
|
|
|
Variable rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior loans
|
|
1,260,339
|
|
|
1,262,486
|
|
|
6.2
|
%
|
|
3.9
|
|
260,366
|
|
|
260,932
|
|
|
8.1
|
%
|
|
2.3
|
|
|
Securitized loans
(3)
|
|
309,585
|
|
|
311,857
|
|
|
7.6
|
%
|
|
1.3
|
|
377,939
|
|
|
379,670
|
|
|
6.7
|
%
|
|
0.3
|
|
|
Mezzanine loans
|
|
120,582
|
|
|
121,018
|
|
|
11.1
|
%
|
|
1.5
|
|
34,391
|
|
|
34,279
|
|
|
9.8
|
%
|
|
1.3
|
|
|
|
|
1,690,506
|
|
|
1,695,361
|
|
|
|
|
|
|
672,696
|
|
|
674,881
|
|
|
|
|
|
|
|
|
1,949,601
|
|
|
1,954,181
|
|
|
|
|
|
|
1,307,740
|
|
|
1,301,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
NA
|
|
|
(35,059
|
)
|
|
|
|
|
|
NA
|
|
|
(517
|
)
|
|
|
|
|
|
Loans and preferred equity held for investment, net
|
|
$
|
1,949,601
|
|
|
$
|
1,919,122
|
|
|
|
|
|
|
$
|
1,307,740
|
|
|
$
|
1,300,784
|
|
|
|
|
|
_________________________________________
|
|
|
|
(1)
|
Calculated based on contractual interest rate.
|
|
|
|
|
(2)
|
Includes
four
purchased credit-impaired loans with combined unpaid principal balance of
$21.4 million
and carrying value of
$20.8 million
.
|
|
|
|
|
(3)
|
Represents loans transferred into securitization trusts that are consolidated by the Company.
|
As of
September 30, 2018
, the weighted average maturity, including extensions, of loans and preferred equity investments was
3.6
years.
Activity relating to the Company’s loans and preferred equity held for investment, net was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Balance at January 1, 2018
|
|
$
|
1,300,784
|
|
|
Loans and preferred equity held for investment acquired in the Combination (Note 3)
|
|
1,249,733
|
|
|
Deconsolidation of investment entities
(1)
|
|
(553,678
|
)
|
|
Acquisitions/originations/additional funding
|
|
524,230
|
|
|
Loan maturities/principal repayments
|
|
(404,378
|
)
|
|
Foreclosure of loans held for investment
|
|
(117,878
|
)
|
|
Combination adjustment
(2)
|
|
(50,314
|
)
|
|
Discount accretion/premium amortization
|
|
1,923
|
|
|
Capitalized interest
|
|
3,242
|
|
|
Change in allowance for loan loss
|
|
(34,542
|
)
|
|
Balance at September 30, 2018
|
|
$
|
1,919,122
|
|
_________________________________________
|
|
|
|
(1)
|
Represents loans and preferred equity held for investment, net which were deconsolidated as a result of the Combination. Refer to Note 2, “Summary of Significant Accounting Policies,” for further detail.
|
|
|
|
|
(2)
|
Represents a loan held for investment, net that was previously sold by the CLNY Investment Entities to NorthStar I and was treated as a secured financing by the CLNY Investment Entities. This loan was eliminated as a result of the Combination.
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Nonaccrual and Past Due Loans and Preferred Equity
Loans and preferred equity that are 90 days or more past due as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual status. At
September 30, 2018
, other than the NY hospitality loans discussed below, all other loans and preferred equity held for investment remain current on interest payments.
In
March 2018
, the borrower on the Company’s four NY hospitality loans with an unpaid principal balance of $
260.2 million
failed to make its interest payments. These four loans are secured by the same collateral. The Company placed the loans on non-accrual status and commenced discussions with the borrower to resolve the matter. Interest income is recognized on a cash basis. During the
three months ended
September 30, 2018
, the Company received and recognized
$1.5 million
in interest income on the loans.
During the third quarter of 2018, discussions with the borrower did not progress as anticipated which has led to the Company exploring additional options for resolution. The Company prepared a weighted average probability analysis of potential resolutions, which included a recapitalization and earlier than expected receipt and sale of collateral. Based on this analysis, the Company recorded a
$35.1 million
provision for loan loss on the four NY hospitality loans during the third quarter of 2018.
The following table provides an aging summary of loans and preferred equity held for investment at carrying values before allowance for loan losses, if any (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current or Less Than 30 Days Past Due
|
|
30-59 Days Past Due
|
|
60-89 Days Past Due
|
|
90 Days or More Past Due
(1)
|
|
Total Loans
|
|
September 30, 2018 (Unaudited)
|
|
$
|
1,590,986
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
363,195
|
|
|
$
|
1,954,181
|
|
|
December 31, 2017
|
|
1,122,366
|
|
|
144,241
|
|
|
7,929
|
|
|
26,765
|
|
|
1,301,301
|
|
_________________________________________
|
|
|
|
(1)
|
At
September 30, 2018
, 90 days or more past due loans includes
four
loans to the same borrower and secured by the same collateral with combined carrying value before allowance for loan losses of $
261.1 million
on non-accrual status. All other loans in this table remain current on interest payments.
|
Troubled Debt Restructuring
At
September 30, 2018
and
December 31, 2017
, there was
one
mezzanine loan previously modified in a TDR with carrying value before allowance for loan losses of
$28.6 million
. The loan had been modified in 2015. The Company also has
three
other loans with a combined carrying value of
$108.5 million
that are cross-defaulted with the TDR loan to the same borrower.
Two
loans matured in November 2017 and were in default at both
September 30, 2018
and
December 31, 2017
, while the
third
loan remained current. Subsequent to
September 30, 2018
, the third loan went into default. All
four
loans are collateralized with
27
office, retail, multifamily and industrial properties with an estimated aggregate fair value of approximately
$137.1 million
. In
February 2018
, the borrower and the Company entered into a forbearance agreement to allow both parties to review the exit strategy. The forbearance agreement was terminated by the Company in August 2018 when it became clear that the borrower would not complete its exit strategy. At
September 30, 2018
and
December 31, 2017
,
no
provision for loan loss was recorded as the Company believes sufficient collateral value exists to cover the outstanding loan balances. The Company is working towards possible resolutions, the most likely of which includes the receipt of collateral in connection with the mezzanine loan. The Company has no additional commitments to lend to the borrower with the TDR loan.
There were
no
loans modified as TDRs during the
nine months ended
September 30, 2018
and
year ended December 31, 2017
.
Impaired Loans
Loans are identified as impaired when it is no longer probable that interest or principal will be collected according to the contractual terms of the original loan agreement. Impaired loans include predominantly loans under nonaccrual, performing and nonperforming TDRs. The following table presents impaired loans at the respective reporting dates (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Principal Balance
(1)
|
|
Gross Carrying Value
|
|
|
|
|
|
|
With Allowance for Loan Losses
|
|
Without Allowance for Loan Losses
|
|
Total
|
|
Allowance for Loan Losses
|
|
September 30, 2018 (Unaudited)
|
|
$
|
398,483
|
|
|
$
|
261,129
|
|
|
$
|
138,981
|
|
|
$
|
400,110
|
|
|
$
|
35,059
|
|
|
December 31, 2017
|
|
237,441
|
|
|
42,176
|
|
|
195,934
|
|
|
238,110
|
|
|
517
|
|
_________________________________________
|
|
|
|
(1)
|
At
September 30, 2018
, includes four loans to the same borrower and secured by the same collateral with combined unpaid principal balance of
$260.2 million
and gross carrying value of
$261.1 million
on non-accrual status. All other loans included in this table remain current on interest payments.
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The average carrying value and interest income recognized on impaired loans were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Average carrying value before allowance for loan losses
|
|
$
|
480,547
|
|
|
$
|
94,070
|
|
|
$
|
407,835
|
|
|
$
|
120,287
|
|
|
Interest income
|
|
5,886
|
|
|
3,517
|
|
|
16,541
|
|
|
7,959
|
|
Allowance for Loan Losses
As of
September 30, 2018
, the allowance for loan losses was
$35.1 million
related to
$261.1 million
in carrying value of loans. As of
December 31, 2017
the allowance for loan losses was
$0.5 million
related to
$42.2 million
in carrying value of loans.
Changes in allowance for loan losses on loans are presented below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
Allowance for loan losses at beginning of period
|
|
$
|
517
|
|
|
$
|
3,386
|
|
|
Provision for loan losses
|
|
35,059
|
|
|
—
|
|
|
Charge-off
|
|
—
|
|
|
(3,210
|
)
|
|
Recoveries
|
|
(517
|
)
|
|
—
|
|
|
Allowance for loan losses at end of period
|
|
$
|
35,059
|
|
|
$
|
176
|
|
Credit Quality Monitoring
Loan and preferred equity investments are typically loans secured by direct senior priority liens on real estate properties or 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 loan and preferred equity investments at least quarterly and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual 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.
As of
September 30, 2018
, there were
seven
loans held for investment to two borrowers with contractual payments past due. With the exception of the NY hospitality loans previously discussed, all other loans and preferred equity held for investment remain current on interest payments. The remaining loans and preferred equity investments were performing in accordance with the contractual terms of their governing documents and were categorized as performing loans. There were
seven
loans held for investment with contractual payments past due as of
December 31, 2017
. For the
nine months ended
September 30, 2018
,
no
debt investment contributed more than
10.0%
of interest income.
Lending Commitments
The Company has lending commitments to borrowers pursuant to certain loan agreements in which the borrower may submit a request for funding contingent on achieving certain criteria, which must be approved by the Company as lender, such as leasing, performance of capital expenditures and construction in progress with an approved budget. At
September 30, 2018
, assuming the terms to qualify for future fundings, if any, have been met, total unfunded lending commitments was $
119.8 million
for senior loans, $
18.3 million
for securitized loans and
$0.6 million
for mezzanine loans. Future funding commitments were $
19.2 million
for senior loans at
December 31, 2017
.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
5.
|
Investments in Unconsolidated Ventures
|
Summary
The Company’s investments in unconsolidated ventures represent noncontrolling equity interests in various entities, as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
Equity method investments
|
|
$
|
559,662
|
|
|
$
|
179,303
|
|
|
Investments under fair value option
|
|
210,440
|
|
|
24,417
|
|
|
Investments in Unconsolidated Ventures
|
|
$
|
770,102
|
|
|
$
|
203,720
|
|
Equity Method Investments
Investment Ventures
Certain of the Company’s equity method investments are structured as joint ventures with one or more private funds or other investment vehicles managed by the Colony Capital with third party joint venture partners. These investment entities are generally capitalized through equity contributions from the members, although certain investments are leveraged through various financing arrangements.
The assets of the equity method investment entities may only be used to settle the liabilities of these entities and there is no recourse to the general credit of the Company nor the other investors for the obligations of these investment entities. Neither the Company nor the other investors are required to provide financial or other support in excess of their capital commitments. The Company’s exposure to the investment entities is limited to its equity method investment balance as of
September 30, 2018
and
December 31, 2017
, respectively.
As discussed in Note 2, “Summary of Significant Accounting Policies,” certain of the CLNY Investment Entities were deconsolidated by the Company upon closing of the Combination and accounted for as investments in unconsolidated ventures.
The Company’s investments accounted for under the equity method are summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership Interest
(1)
at September 30, 2018
|
|
Carrying Value
|
|
Investments
|
|
Description
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
ADC investments
|
|
Interests in seven acquisition, development and construction loans in which the Company participates in residual profits from the projects, and the risk and rewards of the arrangements are more similar to those associated with investments in joint ventures
|
|
Various
(2)
|
|
$
|
169,846
|
|
|
$
|
179,303
|
|
|
Other investment ventures
|
|
Interests in twelve investments, each with less than $142.3 million carrying value at September 30, 2018
|
|
Various
|
|
389,816
|
|
|
—
|
|
_________________________________________
|
|
|
|
(1)
|
The Company’s ownership interest represents capital contributed to date and may not be reflective of the Company’s economic interest in the entity because of provisions in operating agreements governing various matters, such as classes of partner or member interests, allocations of profits and losses, preferential returns and guaranty of debt. Each equity method investment has been determined to be a VIE for which the Company was not deemed to be the primary beneficiary or a voting interest entity in which the Company does not have the power to control through a majority of voting interest or through other arrangements.
|
|
|
|
|
(2)
|
The Company owns varying levels of stated equity interests in certain ADC investments, as well as profit participation interests in real estate ventures without a stated ownership interest in other ADC investments.
|
Investments under Fair Value Option
Private Funds
The Company elected to account for its limited partnership interests, which range from
0.1%
to
30.3%
, in PE Investments under the fair value option. The Company records equity in earnings for these investments based on a change in fair value of its share of projected future cash flows.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
6.
|
Real Estate Securities, Available for Sale
|
Investments in CRE Securities
CRE securities are composed of CMBS backed by a pool of CRE loans which are typically well-diversified by type and geography. The following table presents CMBS investments as of
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Principal
Amount
(1)
|
|
Total Discount
|
|
Amortized
Cost
|
|
Cumulative Unrealized
on Investments
|
Fair
Value
|
|
Coupon
(2)
|
|
Unleveraged
Current
Yield
|
|
As of Date:
|
Count
|
|
Gain
|
|
(Loss)
|
|
|
|
|
September 30, 2018
|
43
|
|
$
|
292,284
|
|
|
$
|
(64,390
|
)
|
|
$
|
227,894
|
|
|
$
|
3,923
|
|
|
$
|
(576
|
)
|
|
$
|
231,241
|
|
|
3.19
|
%
|
|
7.10
|
%
|
_________________________________________
|
|
|
|
(1)
|
Certain CRE securities serve as collateral for financing transactions including carrying value of
$212.9 million
for the CMBS Credit Facilities (refer to Note 10). The remainder is unleveraged.
|
|
|
|
|
(2)
|
All CMBS are fixed rate.
|
The Company acquired the CRE Securities from NorthStar I and NorthStar II in the Combination. The Company held
no
CRE Securities as of
December 31, 2017
.
The Company recorded an unrealized gain in OCI for the
three and nine months ended
September 30, 2018
of
$6.2 million
and
$3.3 million
, respectively. As of
September 30, 2018
, the Company held
15
securities with an aggregate carrying value of
$87.2 million
with an unrealized loss of
$0.6 million
. Based on management’s quarterly evaluation,
no
OTTI was identified related to these securities. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell these securities prior to recovery of its amortized cost basis, which may be at expected maturity.
As of
September 30, 2018
, the weighted average contractual maturity of CRE securities was
31.5 years
with an expected maturity of
7.7 years
.
Investments in Investing VIEs
The Company is the directing certificate holder of
three
securitization trusts and has the ability to appoint and replace the special servicer on all mortgage loans. As such, U.S. GAAP requires the Company to consolidate the assets, liabilities, income and expenses of the securitization trusts as Investing VIEs. Refer to Note 2, “Summary of Significant Accounting Policies” for further discussion on Investing VIEs.
Other than the securities represented by the Company’s subordinate tranches of the securitization trusts, the Company does not have any claim to the assets or exposure to the liabilities of the securitization trusts. The original issuers, who are unrelated third parties, guarantee the interest and principal payments related to the investment grade securitization bonds in the securitization trusts, therefore these obligations do not have any recourse to the general credit of the Company as the consolidator of the securitization trusts. The Company’s maximum exposure to loss would not exceed the carrying value of its retained investments in the securitization trusts, or the subordinate tranches of the securitization trusts.
As of
September 30, 2018
, the mortgage loans and the related mortgage obligations held in the securitization trusts had an unpaid principal balance of
$3.1 billion
and
$2.9 billion
, respectively. As of
September 30, 2018
, across the three consolidated securitization trusts, the underlying collateral consisted of
159
underlying commercial mortgage loans, with a weighted average coupon of
4.9%
and a weighted average loan to value ratio of
57.7%
.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the assets and liabilities recorded on the consolidated balance sheets attributable to the securitization trust as of
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Assets
|
|
|
|
Mortgage loans held in a securitization trust, at fair value
|
|
$
|
3,124,226
|
|
|
Receivables, net
|
|
13,220
|
|
|
Total assets
|
|
$
|
3,137,446
|
|
|
Liabilities
|
|
|
|
Mortgage obligations issued by a securitization trust, at fair value
|
|
$
|
2,982,239
|
|
|
Accrued and other liabilities
|
|
12,333
|
|
|
Total liabilities
|
|
$
|
2,994,572
|
|
The Company elected the fair value option to measure the assets and liabilities of the securitization trusts, which requires that changes in valuations of the securitization trusts be reflected in the Company’s consolidated statements of operations.
The difference between the carrying values of the mortgage loans held in securitization trusts and the carrying value of the mortgage obligations issued by securitization trusts was
$142.0 million
as of
September 30, 2018
and approximates the fair value of the Company’s retained investments in the subordinate tranches of the securitization trusts, which are eliminated in consolidation. Refer to Note 15, “Fair Value” for a description of the valuation techniques used to measure fair value of assets and liabilities of the Investing VIEs.
The below table presents net income attributable to the Company’s common stockholders for the
three and nine months ended
September 30, 2018
generated from the Company’s investments in the subordinate tranches of the securitization trusts (dollars in thousands). No income was generated from the Company’s investments in the subordinate tranches for the three and nine months ended September 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2018
|
|
Nine Months Ended
September 30, 2018
|
|
Statement of Operations
|
|
|
|
|
|
Interest income on mortgage loans held in securitization trusts
|
|
$
|
39,261
|
|
|
$
|
104,622
|
|
|
Interest expense on mortgage obligations issued by securitization trusts
|
|
(36,294
|
)
|
|
(97,031
|
)
|
|
Net interest income
|
|
2,967
|
|
|
7,591
|
|
|
Administrative expenses
|
|
(383
|
)
|
|
(745
|
)
|
|
Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net
|
|
(939
|
)
|
|
3,254
|
|
|
Realized loss on mortgage loans and obligations held in securitization trusts, net
|
|
(549
|
)
|
|
(2,752
|
)
|
|
Net income attributable to Colony Credit Real Estate, Inc. common stockholders
|
|
$
|
1,096
|
|
|
$
|
7,348
|
|
|
|
|
|
7.
|
Real Estate, net and Real Estate Held for Sale
|
The following table presents the Company’s net lease portfolio, net, as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
Land and improvements
|
|
$
|
232,256
|
|
|
$
|
25,262
|
|
|
Buildings, building leaseholds, and improvements
|
|
1,021,728
|
|
|
178,109
|
|
|
Tenant improvements
|
|
23,524
|
|
|
2,316
|
|
|
Construction-in-progress
|
|
437
|
|
|
21
|
|
|
Subtotal
|
|
$
|
1,277,945
|
|
|
$
|
205,708
|
|
|
Less: Accumulated depreciation
|
|
(30,145
|
)
|
|
(5,516
|
)
|
|
Less: Impairment
(1)
|
|
(7,094
|
)
|
|
—
|
|
|
Net lease portfolio, net
|
|
$
|
1,240,706
|
|
|
$
|
200,192
|
|
______________________________
|
|
|
|
(1)
|
See Note 15, “Fair Value,” for discussion of impairment of real estate.
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the Company’s other portfolio, net, including foreclosed properties, as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
Land and improvements
|
|
$
|
112,417
|
|
|
$
|
667
|
|
|
Buildings, building leaseholds, and improvements
|
|
622,454
|
|
|
18,477
|
|
|
Tenant improvements
|
|
23,986
|
|
|
36
|
|
|
Furniture, fixtures and equipment
|
|
17,750
|
|
|
680
|
|
|
Construction-in-progress
|
|
1,101
|
|
|
—
|
|
|
Subtotal
|
|
$
|
777,708
|
|
|
$
|
19,860
|
|
|
Less: Accumulated depreciation
|
|
(15,950
|
)
|
|
(312
|
)
|
|
Less: Impairment
(1)
|
|
(22,284
|
)
|
|
—
|
|
|
Other portfolio, net
|
|
$
|
739,474
|
|
|
$
|
19,548
|
|
______________________________
|
|
|
|
(1)
|
See Note 15, “Fair Value,” for discussion of impairment of real estate.
|
For the
nine months ended
September 30, 2018
, the Company had
no
single property with rental and other income equal to or greater than
10.0%
of total revenue.
At
September 30, 2018
, the Company held foreclosed properties included in real estate, net with a carrying value of
$129.6 million
. At
December 31, 2017
, the Company held foreclosed properties with a carrying value of
$19.5 million
.
Minimum Future Rents
Minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The following table presents approximate future minimum rental income under non-cancellable operating leases to be received over the next five years and thereafter as of
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
Remainder of 2018
|
|
$
|
28,871
|
|
|
2019
|
|
113,390
|
|
|
2020
|
|
106,606
|
|
|
2021
|
|
96,768
|
|
|
2022
|
|
87,149
|
|
|
2023 and thereafter
|
|
867,121
|
|
|
Total
|
|
$
|
1,299,905
|
|
The rental properties owned at
September 30, 2018
are leased under non-cancellable operating leases with current expirations ranging from
2018
to
2038
, with certain tenant renewal rights. For certain properties, the tenants pay the Company, in addition to the contractual base rent, their pro rata share of real estate taxes and operating expenses. Certain lease agreements provide for periodic rental increases and others provide for increases based on the consumer price index.
Commitments and Contractual Obligations
Ground Lease Obligation
In connection with real estate acquisitions, the Company assumed certain noncancelable operating ground leases as lessee or sublessee with expiration dates through
2027
. Rents on certain ground leases are paid directly by the tenants. Ground rent expense for the
three and nine months ended
September 30,
2018 was approximately
$0.7 million
and
$2.1 million
, respectively. Ground rent expense for each of the
three and nine months ended
September 30,
2017
was
$0.4 million
and
$1.4 million
, respectively.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents future minimum rental payments, excluding contingent rents, on noncancelable ground leases on real estate as of
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
Remainder of 2018
|
|
$
|
705
|
|
|
2019
|
|
2,821
|
|
|
2020
|
|
2,812
|
|
|
2021
|
|
2,720
|
|
|
2022
|
|
1,798
|
|
|
2023 and thereafter
|
|
2,891
|
|
|
Total
|
|
$
|
13,747
|
|
Real Estate Asset Acquisitions
The following table summarizes the Company’s real estate asset acquisitions for
nine months ended
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation
|
|
Acquisition Date
|
Property Type and Location
|
Number of Buildings
|
|
Purchase Price
(1)
|
|
Land and Improvements
(2)
|
|
Building and Improvements
(2)
|
|
Furniture, Fixtures and Equipment
|
|
Lease Intangible Assets
(2)
|
|
Other Assets
|
|
Other Liabilities
|
|
July
|
Office - Norway
|
26
|
|
|
$
|
318,860
|
|
|
$
|
60,510
|
|
|
$
|
271,983
|
|
|
$
|
—
|
|
|
$
|
25,287
|
|
|
$
|
—
|
|
|
$
|
(38,920
|
)
|
|
August
|
Hotel - Dallas, TX
|
1
|
|
|
75,663
|
|
|
8,216
|
|
|
61,580
|
|
|
3,947
|
|
|
465
|
|
|
2,023
|
|
|
(568
|
)
|
|
August
|
Industrial - Various in U.S.
|
2
|
|
|
292,000
|
|
|
66,844
|
|
|
189,105
|
|
|
—
|
|
|
36,051
|
|
|
—
|
|
|
—
|
|
|
September
|
Hotel - Pittsburgh, PA
|
1
|
|
|
42,315
|
|
|
7,247
|
|
|
26,363
|
|
|
3,025
|
|
|
1,408
|
|
|
4,392
|
|
|
(120
|
)
|
|
|
|
|
|
$
|
728,838
|
|
|
$
|
142,817
|
|
|
$
|
549,031
|
|
|
$
|
6,972
|
|
|
$
|
63,211
|
|
|
$
|
6,415
|
|
|
$
|
(39,608
|
)
|
______________________________
|
|
|
|
(1)
|
Dollar amounts of purchase price and allocation to assets acquired and liabilities assumed are translated using foreign exchange rate as of the respective dates of acquisitions, where applicable.
|
|
|
|
|
(2)
|
Useful life of real estate acquired is
30
to
40
years for buildings,
8
to
15
years for site improvements,
15
to
20
years for tenant improvements,
2
to
3
years for furniture, fixtures and equipment, and
1.5
to
20
years for lease intangibles.
|
Real Estate Held for Sale
The following table summarizes the Company’s assets and related liabilities held for sale related to real estate (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Assets
|
|
|
|
Real estate, net
|
|
$
|
156,404
|
|
|
Deferred leasing costs and intangible assets, net
|
|
15,796
|
|
|
Total assets held for sale
|
|
$
|
172,200
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Intangible liabilities, net
|
|
$
|
324
|
|
|
Total liabilities related to assets held for sale
|
|
$
|
324
|
|
The real estate classified as real estate held for sale does not represent a strategic shift as the Company is not entirely exiting markets or property types and as such they have not been reflected as part of discontinued operations.
Subsequent to
September 30, 2018
, the Company completed the sale of the real estate held for sale for a sales price of
$177.0 million
.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
8.
|
Deferred Leasing Costs and Other Intangibles
|
The Company’s deferred leasing costs, other intangible assets and intangible liabilities at
September 30, 2018
and
December 31, 2017
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Deferred Leasing Costs and Intangible Assets
|
|
|
|
|
|
|
|
In-place lease values
|
|
$
|
117,377
|
|
|
$
|
(22,867
|
)
|
|
$
|
94,510
|
|
|
Deferred leasing costs
|
|
37,306
|
|
|
(5,118
|
)
|
|
32,188
|
|
|
Above-market lease values
|
|
16,201
|
|
|
(2,905
|
)
|
|
13,296
|
|
|
Other intangibles
|
|
1,559
|
|
|
(15
|
)
|
|
1,544
|
|
|
Below-market ground lease obligations
|
|
52
|
|
|
(14
|
)
|
|
38
|
|
|
|
|
$
|
172,495
|
|
|
$
|
(30,919
|
)
|
|
$
|
141,576
|
|
|
Intangible Liabilities
|
|
|
|
|
|
|
|
Below-market lease values
|
|
$
|
19,385
|
|
|
$
|
(3,117
|
)
|
|
$
|
16,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Deferred Leasing Costs and Intangible Assets
|
|
|
|
|
|
|
|
In-place lease values
|
|
$
|
9,214
|
|
|
$
|
(2,657
|
)
|
|
$
|
6,557
|
|
|
Deferred leasing costs
|
|
3,671
|
|
|
(657
|
)
|
|
3,014
|
|
|
Above-market lease values
|
|
1,682
|
|
|
(283
|
)
|
|
1,399
|
|
|
Below-market ground lease obligations
|
|
52
|
|
|
(8
|
)
|
|
44
|
|
|
|
|
$
|
14,619
|
|
|
$
|
(3,605
|
)
|
|
$
|
11,014
|
|
|
Intangible Liabilities
|
|
|
|
|
|
|
|
Below-market lease values
|
|
$
|
51
|
|
|
$
|
(15
|
)
|
|
$
|
36
|
|
The following table summarizes the amortization of deferred leasing costs, intangible assets and intangible liabilities for the
three and nine months ended
September 30, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Above-market lease values
|
|
$
|
(410
|
)
|
|
$
|
(73
|
)
|
|
$
|
(2,622
|
)
|
|
$
|
(211
|
)
|
|
Below-market lease values
|
|
1,116
|
|
|
4
|
|
|
3,102
|
|
|
11
|
|
|
Net increase (decrease) to property operating income
|
|
$
|
706
|
|
|
$
|
(69
|
)
|
|
$
|
480
|
|
|
$
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Below-market ground lease obligations
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
Increase to property operating expense
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease values
|
|
$
|
3,104
|
|
|
$
|
778
|
|
|
$
|
20,210
|
|
|
$
|
2,497
|
|
|
Deferred leasing costs
|
|
2,482
|
|
|
196
|
|
|
4,461
|
|
|
529
|
|
|
Other intangibles
|
|
15
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
Amortization expense
|
|
$
|
5,601
|
|
|
$
|
974
|
|
|
$
|
24,686
|
|
|
$
|
3,026
|
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the amortization of deferred leasing costs, intangible assets and intangible liabilities for each of the next five years and thereafter as of
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder of 2018
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023 and thereafter
|
|
Total
|
|
Above-market lease values
|
|
$
|
925
|
|
|
$
|
3,772
|
|
|
$
|
3,163
|
|
|
$
|
1,998
|
|
|
$
|
1,422
|
|
|
$
|
2,016
|
|
|
$
|
13,296
|
|
|
Below-market lease values
|
|
(1,163
|
)
|
|
(4,500
|
)
|
|
(4,055
|
)
|
|
(3,850
|
)
|
|
(2,417
|
)
|
|
(283
|
)
|
|
(16,268
|
)
|
|
Net increase (decrease) to property operating income
|
|
$
|
(238
|
)
|
|
$
|
(728
|
)
|
|
$
|
(892
|
)
|
|
$
|
(1,852
|
)
|
|
$
|
(995
|
)
|
|
$
|
1,733
|
|
|
$
|
(2,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below-market ground lease obligations
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
38
|
|
|
Increase to property operating expense
|
|
$
|
2
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In-place lease values
|
|
$
|
4,396
|
|
|
$
|
16,643
|
|
|
$
|
13,996
|
|
|
$
|
11,008
|
|
|
$
|
7,861
|
|
|
$
|
40,606
|
|
|
$
|
94,510
|
|
|
Deferred leasing costs
|
|
2,287
|
|
|
6,447
|
|
|
5,607
|
|
|
4,341
|
|
|
3,443
|
|
|
10,063
|
|
|
32,188
|
|
|
Other intangibles
|
|
215
|
|
|
860
|
|
|
469
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,544
|
|
|
Amortization expense
|
|
$
|
6,898
|
|
|
$
|
23,950
|
|
|
$
|
20,072
|
|
|
$
|
15,349
|
|
|
$
|
11,304
|
|
|
$
|
50,669
|
|
|
$
|
128,242
|
|
|
|
|
|
9.
|
Other Assets and Liabilities
|
The following table presents a summary of other assets as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
Other assets:
|
|
|
|
|
|
Prepaid taxes and deferred tax assets
|
|
$
|
73,935
|
|
|
$
|
1,050
|
|
|
Deposit on investments
|
|
12,967
|
|
|
—
|
|
|
Deferred financing costs, net - credit facilities
|
|
6,590
|
|
|
—
|
|
|
Prepaid expenses
|
|
5,811
|
|
|
360
|
|
|
Derivative asset
|
|
278
|
|
|
117
|
|
|
Total
|
|
$
|
99,581
|
|
|
$
|
1,527
|
|
The following table presents a summary of accrued and other liabilities as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
Accrued and other liabilities:
|
|
|
|
|
|
Current and deferred tax liability
|
|
$
|
36,796
|
|
|
$
|
120
|
|
|
Accounts payable, accrued expenses and other liabilities
|
|
25,633
|
|
|
3,532
|
|
|
Interest payable
|
|
20,291
|
|
|
924
|
|
|
Prepaid rent and unearned revenue
|
|
8,926
|
|
|
481
|
|
|
Trades pending settlement
|
|
6,098
|
|
|
—
|
|
|
Tenant security deposits
|
|
3,169
|
|
|
118
|
|
|
Derivative liability
|
|
671
|
|
|
—
|
|
|
Total
|
|
$
|
101,584
|
|
|
$
|
5,175
|
|
The following table presents debt as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
Capacity ($)
|
|
Recourse vs.
Non-Recourse
(1)
|
|
Final
Maturity
|
|
Contractual
Interest Rate
|
|
Principal
Amount
(2)
|
|
Carrying
Value
(2)
|
|
Principal
Amount
(2)
|
|
Carrying
Value
(2)
|
|
Securitization bonds payable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 FL1
(3)
|
|
|
|
Non-recourse
|
|
Apr-31
|
|
LIBOR + 3.28%
|
|
$
|
25,549
|
|
|
$
|
25,549
|
|
|
$
|
27,119
|
|
|
$
|
27,004
|
|
|
2014 FL2
(3)
|
|
|
|
Non-recourse
|
|
Nov-31
|
|
LIBOR + 4.25%
|
|
18,320
|
|
|
18,320
|
|
|
55,430
|
|
|
55,430
|
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
Capacity ($)
|
|
Recourse vs.
Non-Recourse
(1)
|
|
Final
Maturity
|
|
Contractual
Interest Rate
|
|
Principal
Amount
(2)
|
|
Carrying
Value
(2)
|
|
Principal
Amount
(2)
|
|
Carrying
Value
(2)
|
|
2015 FL3
(3)
|
|
|
|
Non-recourse
|
|
NA
|
|
NA
|
|
—
|
|
|
—
|
|
|
26,245
|
|
|
26,245
|
|
|
Securitization 2016-1
(3)
|
|
|
|
Non-recourse
|
|
Sep-31
|
|
LIBOR + 4.12%
|
|
37,503
|
|
|
37,503
|
|
|
—
|
|
|
—
|
|
|
Subtotal securitization bonds payable, net
|
|
|
|
|
|
|
|
|
81,372
|
|
|
81,372
|
|
|
108,794
|
|
|
108,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other notes payable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease 1
|
|
|
Non-recourse
|
|
Oct-27
|
|
4.45%
|
|
24,723
|
|
|
24,723
|
|
|
25,074
|
|
|
25,022
|
|
|
Net lease 2
|
|
|
Non-recourse
|
|
Nov-26
|
|
4.45%
|
|
3,499
|
|
|
3,390
|
|
|
3,544
|
|
|
3,425
|
|
|
Net lease 3
|
|
|
Non-recourse
|
|
Nov-26
|
|
4.45%
|
|
7,551
|
|
|
7,314
|
|
|
7,647
|
|
|
7,390
|
|
|
Net lease 4
|
|
|
Non-recourse
|
|
Jun-21
|
|
4.00%
|
|
12,867
|
|
|
12,715
|
|
|
13,133
|
|
|
12,939
|
|
|
Net lease 5
|
|
|
Non-recourse
|
|
Jul-23
|
|
LIBOR + 2.15%
|
|
2,182
|
|
|
2,125
|
|
|
2,482
|
|
|
2,416
|
|
|
Net lease 6
|
|
|
Non-recourse
|
|
Aug-26
|
|
4.08%
|
|
32,511
|
|
|
32,176
|
|
|
32,600
|
|
|
32,234
|
|
|
Net lease 7
(4)
|
|
|
Non-recourse
|
|
Nov-26
|
|
4.45%
|
|
18,998
|
|
|
18,405
|
|
|
19,241
|
|
|
18,593
|
|
|
Net lease 8
|
|
|
Non-recourse
|
|
Mar-28
|
|
4.38%
|
|
12,486
|
|
|
11,930
|
|
|
—
|
|
|
—
|
|
|
Net lease 9
|
|
|
Non-recourse
|
|
Apr-21
(5)
|
|
LIBOR+2.50%
|
|
73,702
|
|
|
73,691
|
|
|
—
|
|
|
—
|
|
|
Net lease 10
|
|
|
Non-recourse
|
|
Jul-25
|
|
4.31%
|
|
250,000
|
|
|
246,388
|
|
|
—
|
|
|
—
|
|
|
Net lease 11
(6)
|
|
|
Non-recourse
|
|
Jun-25
|
|
3.91%
|
|
196,416
|
|
|
199,257
|
|
|
—
|
|
|
—
|
|
|
Net lease 12
|
|
|
Non-recourse
|
|
Sep-33
|
|
4.77%
|
|
200,000
|
|
|
198,414
|
|
|
—
|
|
|
—
|
|
|
Multifamily 1
|
|
|
Non-recourse
|
|
Dec-23
|
|
4.84%
|
|
43,500
|
|
|
44,034
|
|
|
—
|
|
|
—
|
|
|
Multifamily 2
|
|
|
Non-recourse
|
|
Dec-23
|
|
4.94%
|
|
43,000
|
|
|
43,527
|
|
|
—
|
|
|
—
|
|
|
Multifamily 3
|
|
|
Non-recourse
|
|
Jan-24
|
|
5.15%
|
|
16,000
|
|
|
16,589
|
|
|
—
|
|
|
—
|
|
|
Multifamily 4
(7)
|
|
|
Non-recourse
|
|
Dec-20
|
|
5.27%
|
|
12,042
|
|
|
12,340
|
|
|
—
|
|
|
—
|
|
|
Multifamily 5
|
|
|
Non-recourse
|
|
Nov-26
|
|
3.98%
|
|
24,432
|
|
|
23,602
|
|
|
—
|
|
|
—
|
|
|
Office 1
|
|
|
Non-recourse
|
|
Oct-24
|
|
4.47%
|
|
108,850
|
|
|
109,827
|
|
|
—
|
|
|
—
|
|
|
Office 2
|
|
|
Non-recourse
|
|
Jan-25
|
|
4.30%
|
|
76,869
|
|
|
76,075
|
|
|
—
|
|
|
—
|
|
|
Office 3
|
|
|
Non-recourse
|
|
Apr-23
|
|
LIBOR + 4.00%
|
|
29,800
|
|
|
28,534
|
|
|
—
|
|
|
—
|
|
|
Multi-tenant office
(8)
|
|
|
Non-recourse
|
|
Aug-20
|
|
LIBOR + 1.90%
|
|
97,400
|
|
|
97,269
|
|
|
|
|
|
|
Hotel development loan
(9)
|
|
|
Non-recourse
|
|
NA
|
|
NA
|
|
—
|
|
|
—
|
|
|
130,000
|
|
|
128,649
|
|
|
Hotel A-Note
(10)
|
|
|
Non-recourse
|
|
NA
|
|
NA
|
|
—
|
|
|
—
|
|
|
50,314
|
|
|
50,314
|
|
|
Subtotal mortgage and other notes payable, net
|
|
|
|
|
|
|
|
|
1,286,828
|
|
|
1,282,325
|
|
|
284,035
|
|
|
280,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank credit facility
|
$
|
400,000
|
|
|
Recourse
|
|
Feb-23
(11)
|
|
LIBOR + 2.25%
|
|
90,000
|
|
|
90,000
|
|
|
—
|
|
|
—
|
|
|
Subtotal bank credit facility
|
|
|
|
|
|
|
|
|
90,000
|
|
|
90,000
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master repurchase facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank 1 facility 3
|
$
|
300,000
|
|
|
Limited Recourse
(12)
|
|
Apr-23
(13)
|
|
LIBOR + 2.00%
|
(14)
|
143,400
|
|
|
143,400
|
|
|
—
|
|
|
—
|
|
|
Bank 2 facility 2
|
200,000
|
|
|
Limited Recourse
(15)
|
|
Jul-19
|
|
LIBOR + 2.46%
|
(14)
|
49,492
|
|
|
49,492
|
|
|
—
|
|
|
—
|
|
|
Bank 3 facility 3
|
500,000
|
|
|
Limited Recourse
(12)
|
|
Apr-21
|
|
LIBOR + 2.36%
|
(14)
|
425,311
|
|
|
425,311
|
|
|
—
|
|
|
—
|
|
|
Bank 7 facility 1
|
500,000
|
|
|
Limited Recourse
(12)
|
|
Apr-22
(16)
|
|
LIBOR + 1.97%
|
(14)
|
90,855
|
|
|
90,855
|
|
|
—
|
|
|
—
|
|
|
Bank 8 facility 1
|
250,000
|
|
|
Limited Recourse
(12)
|
|
Jun-21
(17)
|
|
LIBOR + 2.00%
|
(14)
|
44,084
|
|
|
44,084
|
|
|
—
|
|
|
—
|
|
|
Subtotal master repurchase facilities
|
$
|
1,750,000
|
|
|
|
|
|
|
|
|
753,142
|
|
|
753,142
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CMBS credit facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank 1 facility 1
|
|
|
Recourse
|
|
(18)
|
|
LIBOR + 1.10%
|
(14)
|
18,389
|
|
|
18,389
|
|
|
—
|
|
|
—
|
|
|
Bank 1 facility 2
|
|
|
Recourse
|
|
(18)
|
|
LIBOR + 1.10%
|
(14)
|
17,151
|
|
|
17,151
|
|
|
—
|
|
|
—
|
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
Capacity ($)
|
|
Recourse vs.
Non-Recourse
(1)
|
|
Final
Maturity
|
|
Contractual
Interest Rate
|
|
Principal
Amount
(2)
|
|
Carrying
Value
(2)
|
|
Principal
Amount
(2)
|
|
Carrying
Value
(2)
|
|
Bank 3 facility
|
|
|
|
Recourse
|
|
(18)
|
|
NA
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Bank 4 facility
|
|
|
Recourse
|
|
(18)
|
|
NA
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Bank 5 facility 1
|
|
|
Recourse
|
|
(18)
|
|
NA
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Bank 5 facility 2
|
|
|
Recourse
|
|
(18)
|
|
NA
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Bank 6 facility 1
|
|
|
Recourse
|
|
(18)
|
|
LIBOR + 1.28%
|
(14)
|
81,124
|
|
|
81,124
|
|
|
—
|
|
|
—
|
|
|
Bank 6 facility 2
|
|
|
Recourse
|
|
(18)
|
|
LIBOR + 1.10%
|
(14)
|
62,512
|
|
|
62,512
|
|
|
—
|
|
|
—
|
|
|
Subtotal CMBS credit facilities
|
|
|
|
|
|
|
|
|
179,176
|
|
|
179,176
|
|
|
—
|
|
|
—
|
|
|
Subtotal credit facilities
|
|
|
|
|
|
|
|
|
1,022,318
|
|
|
1,022,318
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
2,390,518
|
|
|
$
|
2,386,015
|
|
|
$
|
392,829
|
|
|
$
|
389,661
|
|
_________________________________________
|
|
|
|
(1)
|
Subject to customary non-recourse carveouts.
|
|
|
|
|
(2)
|
Difference between principal amount and carrying value of securitization bonds payable, net and mortgage and other notes payable, net is attributable to deferred financing costs, net and premium/discount on mortgage notes payable.
|
|
|
|
|
(3)
|
The Company, through indirect Cayman subsidiaries, securitized commercial mortgage loans originated by the Company. Senior notes issued by the securitization trusts were generally sold to third parties and subordinated notes retained by the Company. These securitizations are accounted for as secured financing with the underlying mortgage loans pledged as collateral. Principal payments from underlying collateral loans must be applied to repay the notes until fully paid off, irrespective of the contractual maturities on the notes. Underlying collateral loans have initial terms of
two
to
three
years.
|
|
|
|
|
(4)
|
Payment terms are periodic payment of principal and interest for debt on
two
properties and periodic payment of interest only with principal at maturity (except for principal repayments to release collateral properties disposed) for debt on
one
property.
|
|
|
|
|
(5)
|
The current maturity of the mortgage payable is April 2019, with
two
one
-year extensions available at the Company’s option, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.
|
|
|
|
|
(6)
|
As of September 30, 2018, the outstanding principal of the mortgage payable was NOK
1.6 billion
, which translated to
$196.4 million
. The mortgage payable was assumed in July 2018.
|
|
|
|
|
(7)
|
Represents
two
separate senior mortgage notes with a weighted average maturity of December 1, 2020 and weighted average interest rate of
5.27%
.
|
|
|
|
|
(8)
|
The current maturity of the mortgage payable is November 2018, with two extension options available at the Company’s option, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents. Subsequent to
September 30, 2018
, the mortgage on the multi-tenant office was repaid in full in conjunction with the sale of the multi-tenant office portfolio.
|
|
|
|
|
(9)
|
A development loan originated by the Company was restructured into a senior and junior note, with the senior note assumed by a third party lender. The Company accounted for the transfer of the senior note as a financing transaction. The senior note bore interest at one-month London Interbank Offered Rate (“LIBOR”) plus
3.5%
, with a
4.0%
floor, and was subject to
two
one
-year extension options on its initial term, exercisable by the borrower. The investment entity that held the debt was deconsolidated upon closing of the Combination (refer to Note 2, “Summary of Significant Accounting Policies”).
|
|
|
|
|
(10)
|
Represents the Company’s senior participation interest in a first mortgage loan that was transferred at cost into a securitization trust with the transfer accounted for as a secured financing transaction. The Company did not retain any legal interest in the senior participation and retained the junior participation on an unleveraged basis.
|
|
|
|
|
(11)
|
The abilities to borrow additional amounts terminates on February 1, 2022 at which time the Company may, at its election, extend the termination date for
two
additional
six
-month terms.
|
|
|
|
|
(12)
|
Recourse solely with respect to
25.0%
of the financed amount.
|
|
|
|
|
(13)
|
The next maturity date is April 2021, with
two
one
-year extensions available at the option of the Company, which may be exercised upon the satisfaction of certain customary conditions set forth in the governing documents.
|
|
|
|
|
(14)
|
Represents the weighted average spread as of
September 30, 2018
. The contractual interest rate depends upon asset type and characteristics and ranges from
one
-month to
three
-month LIBOR plus
1.10%
to
2.63%
.
|
|
|
|
|
(15)
|
Recourse solely with respect to the greater of: (i)
25.0%
of the financed amount of stabilized loans plus the financed amount of transitional loans, as further defined in the governing documents; or (ii) the lesser of
$25.0 million
or the aggregate financed amount of all loans.
|
|
|
|
|
(16)
|
The next maturity date is April 2021, with a
one
-year extension available, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.
|
|
|
|
|
(17)
|
The next maturity date is June 2020, with a
one
-year extension available, which may be subject to the satisfaction of certain customary conditions set forth in the governing documents.
|
|
|
|
|
(18)
|
The maturity dates on the CMBS Credit Facilities are dependent upon asset type and will typically range from one to
three
months.
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Future Minimum Principal Payments
The following table summarizes future scheduled minimum principal payments at
September 30, 2018
based on final contractual maturity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Securitization Bonds Payable, Net
|
|
Mortgage Notes Payable, Net
|
|
Credit
Facilities
|
|
Remainder of 2018
|
$
|
179,809
|
|
|
$
|
—
|
|
|
$
|
633
|
|
|
$
|
179,176
|
|
|
2019
|
52,039
|
|
|
—
|
|
|
2,547
|
|
|
49,492
|
|
|
2020
|
112,087
|
|
|
—
|
|
|
112,087
|
|
|
—
|
|
|
2021
|
557,623
|
|
|
—
|
|
|
88,228
|
|
|
469,395
|
|
|
2022
|
93,378
|
|
|
—
|
|
|
2,523
|
|
|
90,855
|
|
|
2023 and thereafter
|
1,395,582
|
|
|
81,372
|
|
|
1,080,810
|
|
|
233,400
|
|
|
Total
|
$
|
2,390,518
|
|
|
$
|
81,372
|
|
|
$
|
1,286,828
|
|
|
$
|
1,022,318
|
|
Bank Credit Facility
On
February 1, 2018
, the Company, through subsidiaries, entered into a credit agreement with several lenders to provide a revolving credit facility in the aggregate principal amount of up to
$400.0 million
(the “Bank Credit Facility”). The ability to borrow additional amounts under the Bank Credit Facility terminates on
February 1, 2022
, at which time the Company may, at its election, extend the termination date for
two
additional
six
-month terms.
The maximum amount available for borrowing at any time under the Bank Credit Facility is limited to a borrowing base valuation of certain investment assets, with the valuation of such investment assets generally determined according to a percentage of adjusted net book value. At
September 30, 2018
, the borrowing base valuation was sufficient to permit borrowings up to the entire
$400.0 million
commitment.
Advances under the Bank Credit Facility accrue interest at a per annum rate equal to, at the Company’s election, either a LIBOR rate plus a margin of
2.25%
, or a base rate determined according to a prime rate or federal funds rate plus a margin of
1.25%
. The Company pays a commitment fee of
0.25%
or
0.35%
per annum of the unused amount (
0.35%
at
September 30, 2018
), depending upon the amount of facility utilization.
Some of the Company’s subsidiaries guaranty the obligations of the Company under the Bank Credit Facility. As security for the advances under the Bank Credit Facility, the Company pledged substantially all equity interests it owns as well as a security interest in deposit accounts of the Company in which the proceeds of investment asset distributions are maintained.
The Bank Credit Facility contains various affirmative and negative covenants including financial covenants that require the Company to maintain minimum tangible net worth, liquidity levels and financial ratios, as defined in the Bank Credit Facility. At
September 30, 2018
, the Company was in compliance with all of the financial covenants.
Securitization Financing Transactions
Securitization bonds payable, net represent debt issued by securitization vehicles consolidated by the Company. Senior notes issued by these securitization trusts were generally sold to third parties and subordinated notes retained by the Company. Payments from underlying collateral loans must be applied to repay the notes until fully paid off, irrespective of the contractual maturities of the loans.
As of
September 30, 2018
, the Company had
$311.9 million
carrying value of CRE debt investments financed with
$81.4 million
of securitization bonds payable, net.
Master Repurchase Facilities
As of
September 30, 2018
, the Company, through subsidiaries, had entered into repurchase agreements with multiple global financial institutions to provide an aggregate principal amount of up to
$1.8 billion
to finance the origination of first mortgage loans and senior loan participations secured by CRE debt investments (“Master Repurchase Facilities”). The Company agreed to guarantee certain obligations under the Master Repurchase Facilities, which contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. The Master Repurchase Facilities act as revolving loan facilities that can be paid down as assets are repaid or sold and re-drawn upon for new
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
investments. As of
September 30, 2018
, the Company was in compliance with all of its financial covenants under the Master Repurchase Facilities.
As of
September 30, 2018
, the Company had
$1.0 billion
carrying value of CRE debt investments financed with
$753.1 million
under the term loan facilities.
On April 20, 2018, the Company, through subsidiaries, consolidated two prior master purchase agreements by entering into an Amended and Restated Master Repurchase and Securities Contract Agreement (“Bank 3 Facility 3”). The Repurchase Agreement provides up to
$500.0 million
to finance first mortgage loans, senior loan participations and other commercial mortgage loan debt instruments secured by commercial real estate.
On April 23, 2018, the Company, through subsidiaries, entered into a Master Repurchase Agreement (“Bank 1 Facility 3”). The Repurchase Agreement provides up to
$300.0 million
to finance first mortgage loans, senior loan participations and other commercial mortgage loan debt instruments secured by commercial real estate.
On April 26, 2018, the Company entered into a Master Repurchase Agreement with a major financial institution through a subsidiary (“Bank 7 Facility 1”). This agreement provides up to
$500.0 million
to finance the Company’s lending activities.
On June 19, 2018, the Company entered into a Master Repurchase Agreement with a major financial institution through a subsidiary (“Bank 8 Facility 1”). This agreement provides up to
$250.0 million
to finance the Company’s lending activities.
Subsequent to September 2018, on October 23, 2018, the Company, through subsidiaries, terminated Bank 2 Facility 2 and entered into a Master Repurchase Agreement with Bank 2 (“Bank 2 Facility 3”). This agreement provides up to
$200.0 million
to finance the Company’s lending activities and has a
one
-year term, with
three
one
-year extension options subject to the satisfaction of certain customary conditions. Refer to Note 19, “Subsequent Events” for further discussion.
Subsequent to September 2018, on November 2, 2018, the Company entered into a Master Repurchase and Securities Contract with a major financial institution through a subsidiary (“Bank 9 Facility 1”). This agreement provides up to
$300.0 million
to finance the Company’s lending activities. Refer to Note 19, “Subsequent Events” for further discussion.
CMBS Credit Facilities
As of
September 30, 2018
, the Company has entered into
eight
master repurchase agreements (collectively the “CMBS Credit Facilities”) to finance CMBS investments. The CMBS Credit Facilities are on a recourse basis and contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of this type. As of
September 30, 2018
, the Company had
$212.9 million
carrying value of CRE securities financed with
$153.0 million
under its CMBS Credit Facilities. As of
September 30, 2018
, the Company had
$49.1 million
carrying value of underlying investments in the subordinate tranches of the securitization trusts financed with
$26.2 million
under its CMBS Credit Facilities.
|
|
|
|
11.
|
Related Party Arrangements
|
Management Agreement
On
January 31, 2018
, the Company and the OP entered into a management agreement (the “Management Agreement”) with the Manager, pursuant to which the Manager manages the Company’s assets and its day-to-day operations. The Manager will be responsible for, among other matters, (1) the selection, origination, acquisition, management and sale of the Company’s portfolio investments, (2) the Company’s financing activities and (3) providing the Company with investment advisory services. The Manager is also responsible for the Company’s day-to-day operations and will perform (or will cause to be performed) such services and activities relating to the Company’s investments and business and affairs as may be appropriate. The Management Agreement requires the Manager to manage the Company’s business affairs in conformity with the investment guidelines and other policies that are approved and monitored by the board of directors. Each of the Company’s executive officers is also an employee of the Manager or its affiliates. The Manager’s role as Manager will be under the supervision and direction of the Company’s board of directors.
The initial term of the Management Agreement expires on the third anniversary of the Closing Date and will be automatically renewed for a one-year term each anniversary date thereafter unless earlier terminated as described below. The Company’s independent directors review the Manager’s performance and the fees that may be payable to the Manager annually and, following the initial term, the Management Agreement may be terminated if there has been an affirmative vote of at least two-thirds of the Company’s independent directors determining that (1) there has been unsatisfactory performance by the Manager that is materially detrimental to the Company or (2) the compensation payable to the Manager, in the form of base management fees and incentive
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
fees taken as a whole, or the amount thereof, is not fair to the Company, subject to the Manager’s right to prevent such termination due to unfair fees by accepting reduced compensation as agreed to by at least two-thirds of the Company’s independent directors. The Company must provide the Manager
180
days’ prior written notice of any such termination.
The Company may also terminate the Management Agreement for cause (as defined in the Management Agreement) at any time, including during the initial term, without the payment of any termination fee, with at least
30
days’ prior written notice from the Company’s board of directors. Unless terminated for cause, the Manager will be paid a termination fee as described below. The Manager may terminate the Management Agreement if the Company becomes required to register as an investment company under the Investment Company Act with such termination deemed to occur immediately before such event, in which case the Company would not be required to pay a termination fee. The Manager may decline to renew the Management Agreement by providing the Company with
180
days’ prior written notice, in which case the Company would not be required to pay a termination fee. The Manager may also terminate the Management Agreement with at least
60
days’ prior written notice if the Company breaches the Management Agreement in any material respect or otherwise is unable to perform its obligations thereunder and the breach continues for a period of
30
days after written notice to the Company, in which case the Manager will be paid a termination fee as described below.
Fees to Manager
Base Management Fee
The base management fee payable to the Manager is equal to
1.5%
of the Company’s stockholders’ equity (as defined in the Management Agreement), per annum (
0.375%
per quarter), payable quarterly in arrears in cash. For purposes of calculating the base management fee, the Company’s stockholders’ equity means: (a) the sum of (1) the net proceeds received by the Company (or, without duplication, the Company’s direct subsidiaries, such as the OP) from all issuances of the Company’s or such subsidiaries’ common and preferred equity securities since inception (allocated on a pro rata basis for such issuances during the calendar quarter of any such issuance), plus (2) the Company’s cumulative core earnings (as defined in the Management Agreement) from and after the Closing Date to the end of the most recently completed calendar quarter, less (b)(1) any distributions to the Company’s common stockholders (or owners of common equity of the Company’s direct subsidiaries, such as the OP, other than the Company or any of such subsidiaries), (2) any amount that the Company or any of the Company’s direct subsidiaries, such as the OP, have paid to (x) repurchase for cash the Company’s common stock or common equity securities of such subsidiaries or (y) repurchase or redeem for cash the Company’s preferred equity securities or preferred equity securities of such subsidiaries, in each case since the Closing Date and (3) any incentive fee (as described below) paid to the Manager since the Closing Date.
Incentive Fee
The incentive fee payable to the Manager is equal to the difference between (i) the product of (a)
20%
and (b) the difference between (1) core earnings (as defined in the Management Agreement) for the most recent 12-month period (or the Closing Date if it has been less than 12 months since the Closing Date), including the current quarter, and (2) the product of (A) common equity (as defined in the Management Agreement) in the most recent 12-month period (or the Closing Date if it has been less than 12 months since the Closing Date), and (B)
7%
per annum and (ii) the sum of any incentive fee paid to the Manager with respect to the first three calendar quarters of the most recent 12-month period (or the Closing Date if it has been less than 12 months since the Closing Date), provided, however, that no incentive fee is payable with respect to any calendar quarter unless core earnings (as defined in the Management Agreement) is greater than zero for the most recently completed 12 calendar quarters (or the Closing Date if it has been less than 12 calendar quarters since the Closing Date).
The Company did not incur any incentive fees during the
three and nine months ended
September 30, 2018
.
Reimbursements of Expenses
Reimbursement of expenses related to the Company incurred by the Manager, including legal, accounting, financial, due diligence and other services are paid on the Company’s behalf by the OP or its designee(s). The Company reimburses the Manager for the Company’s allocable share of the salaries and other compensation of the Company’s chief financial officer and certain of its affiliates’ non-investment personnel who spend all or a portion of their time managing the Company’s affairs, and the Company’s share of such costs are based upon the percentage of such time devoted by personnel of our Manager (or its affiliates) to the Company’s affairs. The Company may be required to pay the Company’s pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Manager and its affiliates required for the Company’s operations.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other Payables to Manager
Other payables to Manager include Combination related adjustments that consist of certain cash contributions from and distributions to Colony Capital or its subsidiaries on behalf of the CLNY Contributed Portfolio.
Manager Equity Plan
In March 2018, the Company granted
978,946
shares to its non-independent directors, officers and Manager and/or employees thereof under the 2018 Equity Incentive Plan (the “2018 Plan”). In connection with this grant, the Company recognized share-based compensation expense of
$1.8 million
and
$3.9 million
to its Manager within administrative expense in the consolidated statement of operations for the
three and nine months ended
September 30, 2018
, respectively. See Note 12, “Equity-Based Compensation” for further discussion of the 2018 Plan.
Summary of Fees and Reimbursements
The following table presents the fees and reimbursements incurred and payable to the Manager for the
nine months ended
September 30, 2018
and the amount due to related party as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Fee or Reimbursement
|
|
Financial Statement Location
|
|
Due to Related Party as of
December 31, 2017
|
|
Nine Months Ended
September 30, 2018
|
|
Due to Related Party as of
September 30, 2018 (Unaudited)
|
|
Combination Related Consideration
|
|
Incurred
|
|
Paid
|
|
|
Fees to Manager
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
Management fee expense
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,668
|
|
|
$
|
(19,787
|
)
|
|
$
|
11,881
|
|
|
Reimbursements to Manager
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
Administrative expense
|
|
—
|
|
|
—
|
|
|
6,910
|
|
|
(4,210
|
)
|
|
2,700
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Payables to Manager
|
|
Additional paid-in capital
|
|
—
|
|
|
2,934
|
|
|
—
|
|
|
(2,934
|
)
|
|
—
|
|
|
Liabilities assumed in the Combination
|
|
(1)
|
|
—
|
|
|
6,375
|
|
|
—
|
|
|
(6,375
|
)
|
|
—
|
|
|
Total
|
|
|
|
$
|
—
|
|
|
$
|
9,309
|
|
|
$
|
38,578
|
|
|
$
|
(33,306
|
)
|
|
$
|
14,581
|
|
_________________________________________
|
|
|
|
(1)
|
Represents due to related party balance assumed as a result of the Combination. Refer to Note 3, “Business Combinations,” for further detail.
|
Expense Allocations
For the
nine months ended
September 30, 2017
, the Company’s consolidated financial statements present the operations of the CLNY Investment Entities as carved out from the financial statements of Colony Capital. Certain general and administrative costs borne by Colony Capital, including, but not limited to, compensation and benefits, and corporate overhead, have been allocated to the CLNY Investment Entities using reasonable allocation methodologies. Such costs do not necessarily reflect what the actual general and administrative costs would have been if the CLNY Investment Entities had been operating as a separate stand-alone public company. For the
three and nine months ended
September 30, 2017
, a total of
$2.9 million
and
$9.7 million
, respectively, of allocated expenses are included as a component of administrative expenses in the Company’s consolidated statements of operations.
Investment Activity
All investment acquisitions are approved in accordance with the Company’s investment and related party guidelines, which may include approval by either the audit committee or disinterested members of the Company’s board of directors. No investment by the Company will require approval under the related party transaction policy solely because such investment constitutes a co-investment made by and between the Company and any of its subsidiaries, on the one hand, and one or more investment vehicles formed, sponsored, or managed by an affiliate of the Manager on the other hand.
In November 2016, NorthStar II entered into a
$284.2 million
securitization financing transaction (“Securitization 2016-1”). Securitization 2016-1 was collateralized by a pool of
10
CRE debt investments with a committed aggregate principal balance of
$254.7 million
primarily originated by NorthStar II and
three
senior participations with a committed aggregate principal balance
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of
$29.5 million
originated by NorthStar I. An affiliate of the Manager was appointed special servicer of Securitization 2016-1. The transaction was approved by the NorthStar II’s board of directors, including all of its independent directors. Securitization 2016-1 was assumed by the Company in connection with the Combination.
In July 2017, NorthStar II entered into a joint venture with an affiliate of the Manager to make a
$60.0 million
investment in a
$180.0 million
mezzanine loan which was originated by such affiliate of the Manager. The transaction was approved by NorthStar II’s board of directors, including all of its independent directors. The investment was purchased by the Company in connection with the Combination. In
June 2018
, the Company increased its commitment to
$101.8 million
in connection with the joint venture bifurcating the mezzanine loan into a mezzanine loan and a preferred equity investment. As of
September 30, 2018
, the Company had an unfunded commitment of
$28.9 million
remaining. The Company’s interest in the joint venture is
50.0%
and its interest in both the underlying mezzanine loan and preferred equity investment is
31.8%
. Both the underlying mezzanine loan and preferred equity investment carry a fixed
12.9%
interest rate. This investment is recorded in investments in unconsolidated ventures in the Company’s consolidated balance sheets.
In
May 2018
, the Company acquired an
$89.1 million
(at par) preferred equity investment in an investment vehicle that owns a seven-property office portfolio located in the New York metropolitan area from an affiliate of the Company’s Manager. The affiliate has a
27.2%
ownership interest in the borrower. The preferred equity investment carries a fixed
12.0%
interest rate. This investment is recorded in loans and preferred equity held for investment, net in the Company’s consolidated balance sheets.
In
July 2018
, the Company acquired a
$326.8 million
Class A office campus located in Norway from an affiliate of the Company’s Manager. In connection with the purchase, the Company assumed senior mortgage financing from a private bond issuance of
$197.7 million
. The bonds have a
seven
-year term remaining, and carry a fixed interest rate of
3.91%
.
In
July 2018
, the Company entered into a joint venture to invest in a development project for land and a Grade A office building in Ireland. The Company agreed to invest up to
$69.9 million
of the
$139.7 million
total commitment. The Company co-invested along with two affiliates of the Manager, with the Company owning
50.0%
of the joint venture and the affiliate entities owning the remaining
50.0%
. The joint venture invested in a senior mortgage loan of
$66.7 million
with a fixed interest rate of
12.5%
and a maturity date of
3.5 years
from origination and common equity.
Subsequent to
September 2018
, the Company entered into a joint venture to invest in a mixed-use development project in Ireland. The Company agreed to invest up to
$162.4 million
of the
$266.5 million
total commitment. The Company co-invested along with two affiliates of the Manager, with the Company owning
61.0%
of the joint venture and the affiliate entities owning the remaining
39.0%
. The joint venture will invest in a senior mortgage loan with a fixed interest rate of
15.0%
and a maturity date of
2.0
years from origination.
Subsequent to
September 2018
, the Company acquired a
$20.0 million
mezzanine loan from an affiliate of the Company’s Manager, secured by a pledge of an ownership interest in a luxury condominium development project located in New York, NY. The loan bears interest at
9.5%
plus LIBOR.
|
|
|
|
12.
|
Equity-Based Compensation
|
On
January 29, 2018
the Company’s board of directors adopted the 2018 Plan. The 2018 Plan permits the grant of awards with respect to
4.0 million
shares of the Class A common stock, subject to adjustment pursuant to the terms of the 2018 Plan. Awards may be granted under the 2018 Plan to (x) the Manager or any employee, officer, director, consultant or advisor (who is a natural person) providing services to the Company, the Manager or their affiliates and (y) any other individual whose participation in the 2018 Plan is determined to be in the best interests of the Company. The following types of awards may be made under the 2018 Plan, subject to the limitations set forth in the plan: (i) stock options (which may be either incentive stock options or non-qualified stock options); (ii) stock appreciation rights (“SARs”); (iii) restricted stock awards; (iii) stock units; (iv) unrestricted stock awards; (v) dividend equivalent rights; (vi) performance awards; (vii) annual cash incentive awards; (viii) long-term incentive units; and (ix) other equity-based awards.
Shares subject to an award granted under the 2018 Plan will be counted against the maximum number of shares of Class A common stock available for issuance thereunder as one share of Class A common stock for every one share of Class A common stock subject to such an award. Shares subject to an award granted under the 2018 Plan will again become available for issuance under the 2018 Plan if the award terminates by expiration, forfeiture, cancellation, or otherwise without the issuance of such shares (except as set forth in the following sentence). The number of shares of Class A common stock available for issuance under the 2018 Plan will not be increased by (i) any shares tendered or withheld in connection with the purchase of shares upon exercise of a stock option, (ii) any shares deducted or delivered in connection with the Company’s tax withholding obligations, or (iii) any shares purchased by the Company with proceeds from stock option exercises. The shares granted to the independent directors of the Company under
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the 2018 Plan vest in
May 2019
. Shares granted to non-independent directors, officers and the Manager under the 2018 Plan vest ratably in three annual installments beginning in
March 2018
.
The table below summarizes our awards granted or vested under the 2018 Plan during the
nine months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
Restricted Stock
|
|
Total
|
|
Weighted Average Grant Date Fair Value
|
|
Unvested Shares at December 31, 2017
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
1,003,818
|
|
|
1,003,818
|
|
|
19.39
|
|
|
Vested
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
Unvested shares at September 30, 2018
|
1,003,818
|
|
|
1,003,818
|
|
|
$
|
19.39
|
|
No
equity awards vested during the
nine months ended
September 30, 2018
. There was
no
equity-based compensation plan for the
nine months ended
September 30, 2017
. Fair value of vested awards is determined based on the closing price of the Class A common stock on the date of grant for employee awards, and remeasured each period end based on the closing price of the Class A common stock of such period end for nonemployee awards. Equity-based compensation is classified within administrative expense in the consolidated statement of operations.
At
September 30, 2018
, aggregate unrecognized compensation cost for all unvested equity awards was
$18.1 million
, which is expected to be recognized over a weighted-average period of
2.4
years.
Authorized Capital
As of
September 30, 2018
, the Company had the authority to issue up to
1.0 billion
shares of stock, at
$0.01
par value per share, consisting of
905.0 million
shares of Class A common stock,
45.0 million
shares of Class B-3 common stock, and
50.0 million
shares of preferred stock.
The Company had
no
shares of preferred stock issued and outstanding as of
September 30, 2018
.
Dividends
During the
nine months ended
September 30, 2018
, the Company declared the following dividends on its common stock:
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payment Date
|
|
Per Share
|
|
February 26, 2018
|
|
March 8, 2018
|
|
March 16, 2018
|
|
$0.145
|
|
March 15, 2018
|
|
March 29, 2018
|
|
April 10, 2018
|
|
$0.145
|
|
April 16, 2018
|
|
April 30, 2018
|
|
May 10, 2018
|
|
$0.145
|
|
May 7, 2018
|
|
May 31, 2018
|
|
June 11, 2018
|
|
$0.145
|
|
June 14, 2018
|
|
June 29, 2018
|
|
July 10, 2018
|
|
$0.145
|
|
July 16, 2018
|
|
July 31, 2018
|
|
August 10, 2018
|
|
$0.145
|
|
August 1, 2018
|
|
August 31, 2018
|
|
September 10, 2018
|
|
$0.145
|
|
September 17, 2018
|
|
September 28, 2018
|
|
October 10, 2018
|
|
$0.145
|
Stock Repurchase Program
The Company’s board of directors authorized a stock repurchase program (the “Stock Repurchase Program”), under which the Company may repurchase up to
$300.0 million
of its outstanding Class A common stock until
March 31, 2019
. Under the Stock Repurchase Program, the Company may repurchase shares in open market purchases, through tender offers or otherwise in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended.
As of
September 30, 2018
, the Company had not repurchased any shares under the Stock Repurchase Program.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Accumulated Other Comprehensive Income (Loss)
The following tables present the changes in each component of Accumulated Other Comprehensive Income (“AOCI”) attributable to stockholders and noncontrolling interests in the OP, net of immaterial tax effect. There was no AOCI component in 2017.
Changes in Components of AOCI - Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Unrealized gain on real estate securities, available for sale
|
|
Unrealized (loss) on net investment hedges
|
|
Foreign currency translation (loss)
|
|
Total
|
|
AOCI at December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other comprehensive income (loss)
|
3,268
|
|
|
(407
|
)
|
|
(392
|
)
|
|
2,469
|
|
|
AOCI at September 30, 2018
|
$
|
3,268
|
|
|
$
|
(407
|
)
|
|
$
|
(392
|
)
|
|
$
|
2,469
|
|
Changes in Components of AOCI - Noncontrolling Interests in the OP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Unrealized gain on real estate securities, available for sale
|
|
Unrealized (loss) on net investment hedges
|
|
Foreign currency translation (loss)
|
|
Total
|
|
AOCI at December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other comprehensive income (loss)
|
79
|
|
|
(9
|
)
|
|
(10
|
)
|
|
60
|
|
|
AOCI at September 30, 2018
|
$
|
79
|
|
|
$
|
(9
|
)
|
|
$
|
(10
|
)
|
|
$
|
60
|
|
|
|
|
|
14.
|
Noncontrolling Interests
|
Operating Partnership
Noncontrolling interests include the aggregate limited partnership interests in the OP held by RED REIT. Net loss attributable to the noncontrolling interests is based on the limited partners’ ownership percentage of the OP and was
$1.3 million
and
$1.0 million
for the
three and nine months ended
September 30, 2018
, respectively.
Investment Entities
Noncontrolling interests in investment entities represent third-party equity interests in ventures that are consolidated with the Company’s financial statements. Net loss attributable to noncontrolling interests in the investment entities for the
three and nine months ended
September 30, 2018
was
$4.7 million
and
$2.8 million
. Net income attributable to noncontrolling interests in the investment entities for the
three and nine months ended
September 30, 2017
was
$10.2 million
and
$28.7 million
, respectively.
Determination of Fair Value
The following is a description of the valuation techniques used to measure fair value of assets accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
PE Investments
The Company accounts for PE Investments at fair value which is determined based on a valuation model using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying assets in the funds and discount rate. This fair value measurement is generally based on unobservable inputs and, as such, is classified as Level 3 of the fair value hierarchy. The Company considers cash flow and NAV information provided by general partners of private funds and the implied yields of those funds in valuing its PE Investments. However, the Company has not elected the practical expedient to measure the fair value of its PE Investments using the NAV of the underlying funds.
Real Estate Securities
CRE securities are generally valued using a third-party pricing service or broker quotations. These quotations are not adjusted and are based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy. Certain CRE securities may be valued based on a single broker quote or an internal price which may have less observable pricing, and as such,
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
would be classified as Level 3 of the fair value hierarchy. Management determines the prices are representative of fair value through a review of available data, including observable inputs, recent transactions as well as its knowledge of and experience in the market.
Investing VIEs
As discussed in Note 6, “Real Estate Securities, Available for Sale,” the Company has elected the fair value option for the financial assets and liabilities of the consolidated Investing VIEs. The Investing VIEs are “static,” that is no reinvestment is permitted and there is very limited active management of the underlying assets. The Company is required to determine whether the fair value of the financial assets or the fair value of the financial liabilities of the Investing VIEs are more observable, but in either case, the methodology results in the fair value of the assets of the securitization trusts being equal to the fair value of their liabilities. The Company has determined that the fair value of the liabilities of the securitization trusts are more observable, since market prices for the liabilities are available from a third-party pricing service or are based on quoted prices provided by dealers who make markets in similar financial instruments. The financial assets of the securitization trusts are not readily marketable and their fair value measurement requires information that may be limited in availability.
In determining the fair value of the trusts’ financial liabilities, the dealers will consider contractual cash payments and yields expected by market participants. Dealers also incorporate common market pricing methods, including a spread measurement to the treasury curve or interest rate swap curve as well as underlying characteristics of the particular security including coupon, periodic and life caps, collateral type, rate reset period and seasoning or age of the security. The Company’s collateralized mortgage obligations are classified as Level 2 of the fair value hierarchy, where a third-party pricing service or broker quotations are available, and as Level 3 of the fair value hierarchy, where internal price is utilized which may have less observable pricing. In accordance with ASC 810,
Consolidation
, the assets of the securitization trusts are an aggregate value derived from the fair value of the trust’s liabilities, and the Company has determined that the valuation of the trust’s assets in their entirety including its retained interests from the securitizations (eliminated in consolidation in accordance with U.S. GAAP) should be classified as Level 3 of the fair value hierarchy.
Fair Value Hierarchy
Financial assets recorded at fair value on a recurring basis are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table presents financial assets that were accounted for at fair value on a recurring basis as of
September 30, 2018
and
December 31, 2017
by level within the fair value hierarchy (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated ventures
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
210,440
|
|
|
$
|
210,440
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,417
|
|
|
$
|
24,417
|
|
|
Real estate securities, available for sale
|
—
|
|
|
231,241
|
|
|
—
|
|
|
231,241
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Mortgage loans held in securitization trusts, at fair value
|
—
|
|
|
—
|
|
|
3,124,226
|
|
|
3,124,226
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage obligations issued by securitization trusts, at fair value
|
$
|
—
|
|
|
$
|
2,982,239
|
|
|
$
|
—
|
|
|
$
|
2,982,239
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
______________________________________
|
|
|
|
(1)
|
Represents PE Investments for which the Company elected the fair value option.
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the changes in fair value of financial assets which are measured at fair value on a recurring basis using Level 3 inputs to determine fair value for the
nine months ended
September 30, 2018
and year ended
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2018 (Unaudited)
|
|
Year Ended December 31, 2017
|
|
|
PE Investments
|
|
Mortgage loans held in securitization trusts
(1)
|
|
PE Investments
|
|
Beginning balance
|
$
|
24,417
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Contributions
(2)
/purchases/accretion
|
247,668
|
|
|
3,327,199
|
|
|
72,325
|
|
|
Distributions/paydowns
|
(62,928
|
)
|
|
(135,245
|
)
|
|
(49,344
|
)
|
|
Equity in earnings
|
21,709
|
|
|
—
|
|
|
6,829
|
|
|
Unrealized loss in earnings
|
(20,426
|
)
|
|
(64,976
|
)
|
|
(5,393
|
)
|
|
Unrealized gain in other comprehensive income
|
—
|
|
|
—
|
|
|
|
|
Realized loss in earnings
|
—
|
|
|
(2,752
|
)
|
|
—
|
|
|
Ending balance
|
$
|
210,440
|
|
|
$
|
3,124,226
|
|
|
$
|
24,417
|
|
_________________________________________
|
|
|
|
(1)
|
For the
nine months ended
September 30, 2018
, unrealized loss of
$65.0 million
related to mortgage loans held in securitization trusts, at fair value was offset by unrealized gain of
$68.3 million
related to mortgage obligations issued by securitization trusts, at fair value.
|
|
|
|
|
(2)
|
Includes initial investments, before distribution and contribution closing statement adjustments, and subsequent contributions, including deferred purchase price fundings.
|
For the
nine months ended
September 30, 2018
and the year ended
December 31, 2017
, the Company used a discounted cash flow model to quantify Level 3 fair value measurements on a recurring basis. For the
nine months ended
September 30, 2018
and the year ended
December 31, 2017
, the key unobservable inputs used in the analysis of PE Investments included discount rates with a range of
11.0%
to
15.0%
and
11.1%
to
12.4%
, respectively, and timing and amount of expected future cash flow. For the
nine months ended
September 30, 2018
, the key unobservable inputs used in the valuation of mortgage obligations issued by securitization trusts included yields ranging from
13.9%
to
21.9%
and a weighted average life of
5.6
years. Significant increases or decreases in any one of the inputs described above in isolation may result in significantly different fair value of the financial assets and liabilities using such Level 3 inputs.
For the
three and nine months ended
September 30, 2018
, the Company recorded an unrealized loss on PE Investments of
$13.7 million
and
$20.4 million
, respectively. These amounts, when incurred, are recorded as equity in earnings of unconsolidated ventures in the consolidated statements of operations.
For the
three and nine months ended
September 30, 2018
, the Company recorded a net unrealized loss of
$0.9 million
and a net unrealized gain of
$3.3 million
, respectively, related to mortgage loans held in and mortgage obligations issued by securitization trusts, at fair value, respectively. These amounts, when incurred, are recorded as unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net in the consolidated statements of operations.
For the
three and nine months ended
September 30, 2018
, the Company recorded a realized loss of
$0.5 million
and
$2.8 million
, respectively, on mortgage loans held in securitization trusts, at fair value. The loss was due to lower than expected future cash flows on a subordinate tranche of a securitization trust. This amount is recorded as realized loss on mortgage loans and obligations held in securitization trusts, net in the consolidated statements of operations.
Fair Value Option
The Company may elect to apply the fair value option of accounting for certain of its financial assets or liabilities due to the nature of the instrument at the time of the initial recognition of the investment. The Company elected the fair value option for PE Investments and eligible financial assets and liabilities of its consolidated Investing VIEs because management believes it is a more useful presentation for such investments. The Company determined recording the PE Investments based on the change in fair value of projected future cash flow from one period to another better represents the underlying economics of the respective investment. As of
September 30, 2018
and
December 31, 2017
, the Company has elected not to apply the fair value option for any other eligible financial assets or liabilities.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
Principal Amount
|
|
Carrying Value
|
|
Fair Value
|
|
Principal Amount
|
|
Carrying Value
|
|
Fair Value
|
|
Financial assets:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and preferred equity held for investment, net
|
$
|
1,949,601
|
|
(2)
|
$
|
1,919,122
|
|
|
$
|
1,920,754
|
|
|
$
|
1,307,740
|
|
(2)
|
$
|
1,300,784
|
|
|
$
|
1,311,783
|
|
|
Financial liabilities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization bonds payable, net
|
$
|
81,372
|
|
|
$
|
81,372
|
|
|
$
|
81,372
|
|
|
$
|
108,794
|
|
|
$
|
108,679
|
|
|
$
|
108,974
|
|
|
Mortgage notes payable, net
|
1,286,828
|
|
|
1,282,325
|
|
|
1,288,048
|
|
|
284,035
|
|
|
280,982
|
|
|
282,333
|
|
|
Master repurchase facilities
|
1,022,318
|
|
|
1,022,318
|
|
|
1,022,318
|
|
|
—
|
|
|
—
|
|
|
—
|
|
_________________________________________
|
|
|
|
(1)
|
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
|
|
|
|
|
(2)
|
Excludes future funding commitments of
$138.7 million
and
$19.2 million
as of
September 30, 2018
and
December 31, 2017
, respectively.
|
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.
Loans and Preferred Equity Held for Investment, Net
For loans and preferred equity held for investment, net, fair values were determined: (i) 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; or (ii) based on discounted cash flow projections of principal and interest expected to be collected, which includes consideration of the financial standing of the borrower or sponsor as well as operating results of the underlying collateral. These fair value measurements of CRE debt are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy. Carrying values of loans and preferred equity held for investment are presented net of allowance for loan losses, where applicable.
Securitization Bonds Payable, Net
Securitization bonds payable, net are valued using quotations from nationally recognized financial institutions that generally acted as underwriter for the transactions. These quotations are not adjusted and are generally based on observable inputs that can be validated, and as such, are classified as Level 2 of the fair value hierarchy.
Mortgage and Other Notes Payable, Net
For mortgage and other notes payable, net, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using comparable U.S. Treasury rates as of the end of the reporting period. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Master Repurchase Facilities
The Company has amounts outstanding under Master Repurchase Facilities. The Master Repurchase Facilities bear floating rates of interest. As of the reporting date, the Company believes the carrying value approximates fair value. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other
The carrying values of cash and cash equivalents, receivables, and accrued and other liabilities approximate fair value due to their short term nature and credit risk, if any, are negligible.
Nonrecurring Fair Values
The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Adjustments to fair value generally result from the application of lower of amortized cost or fair value accounting for assets held for sale or write-down of asset values due to impairment.
The following table summarizes assets carried at fair value on a nonrecurring basis, measured at the time of impairment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Real estate, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78,616
|
|
|
$
|
78,616
|
|
There were no assets carried at fair value on a nonrecurring basis at
December 31, 2017
.
The following table summarizes the fair value write-downs to assets carried at nonrecurring fair values during the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
Impairment of operating real estate
|
$
|
29,378
|
|
|
$
|
29,378
|
|
There was no impairment loss recorded for the
three and nine months ended
September 30, 2017
.
Real Estate, net—Impaired real estate held for investment consisted of
three
properties in the Company's net lease and other segments, resulting from one or more changes including the reduction in the estimated holding period of these properties, tenant vacancy, rent reductions as well as exposure to the retail and student housing markets. Fair value of the impaired properties were determined using a future cash flow analysis that included an eventual sale of the properties, with expected sale price generally based on broker price opinions, and applying terminal capitalization rates ranging from
6.0%
to
12.0%
and discount rates ranging from
8.0%
to
12.0%
.
Impairment is discussed in further detail in Note 7, “Real Estate, net and Real Estate Held for Sale.”
The Company uses derivative instruments to manage the risk of changes in interest rates and foreign exchange rates, arising from both its business operations and economic conditions. Specifically, the Company enters into derivative instruments to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and cash payments, the values of which are driven by interest rates, principally relating to the Company’s investments. Additionally, the Company’s foreign operations expose the Company to fluctuations in foreign exchange rates. The Company enters into derivative instruments to protect the value or fix certain of these foreign denominated amounts in terms of its functional currency, the U.S. dollar. Derivative instruments used in the Company’s risk management activities may be designated as qualifying hedge accounting relationships (“designated hedges”) or non-designated hedges.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At
September 30, 2018
, fair value of derivative assets and derivative liabilities were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated Hedges
|
|
Non-Designated Hedges
|
|
Total
|
|
Derivative Assets
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
127
|
|
|
$
|
107
|
|
|
$
|
234
|
|
|
Interest rate contracts
|
|
—
|
|
|
44
|
|
|
44
|
|
|
Included in other assets
|
|
127
|
|
|
151
|
|
|
278
|
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
(543
|
)
|
|
—
|
|
|
(543
|
)
|
|
Interest rate contracts
|
|
—
|
|
|
(128
|
)
|
|
(128
|
)
|
|
Included in accrued and other liabilities
|
|
$
|
(543
|
)
|
|
$
|
(128
|
)
|
|
$
|
(671
|
)
|
No collateral was held by counterparties for the derivative contracts as of
September 30, 2018
.
The following table summarizes the foreign exchange and interest rate contracts as of
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Derivatives
|
|
Notional Currency
|
|
Notional Amount (in thousands)
|
|
Range of Maturity Dates
|
|
Designated
|
|
Non-Designated
|
|
FX Forward
|
|
EUR
|
|
€
|
58,700
|
|
|
€
|
—
|
|
|
December 2019 - December 2022
|
|
FX Forward
|
|
NOK
|
|
NOK 585,600
|
|
|
NOK 363,500
|
|
|
January 2019 - July 2023
|
|
Interest Rate Swap
|
|
USD
|
|
$
|
—
|
|
|
$
|
259,167
|
|
|
July 2023 - August 2028
|
The table below represents the effect of the derivative financial instruments on the consolidated statements of operations and of comprehensive income (loss) for the
three and nine months ended
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
|
Other gain (loss), net
|
|
|
|
|
|
Non-designated foreign exchange contracts
|
|
$
|
107
|
|
|
$
|
107
|
|
|
Non-designated interest rate contracts
|
|
(122
|
)
|
|
(87
|
)
|
|
|
|
$
|
(15
|
)
|
|
$
|
20
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
|
|
|
Designated foreign exchange contracts
|
|
$
|
(416
|
)
|
|
$
|
(416
|
)
|
|
Interest Income
|
|
|
|
|
|
Non-designated interest rate contracts
|
|
$
|
1,497
|
|
|
$
|
2,176
|
|
At the end of each quarter, the Company reassesses the effectiveness of its net investment hedges and as appropriate, dedesignates the portion of the derivative notional that is in excess of the beginning balance of its net investments as non-designated hedges. Any unrealized gain or loss on the dedesignated portion of net investment hedges is transferred into earnings, recorded in other gain (loss), net. During the
three and nine months ended
September 30, 2018
, no gain (loss) was transferred from accumulated other comprehensive income (loss).
Offsetting Assets and Liabilities
The Company enters into agreements subject to enforceable netting arrangements with its derivative counterparties that allow the Company to offset the settlement of derivative assets and liabilities in the same currency by derivative instrument type or, in the event of default by the counterparty, to offset all derivative assets and liabilities with the same counterparty. The Company has elected not to net derivative asset and liability positions, notwithstanding the conditions for right of offset may have been met. The Company presents derivative assets and liabilities with the same counterparty on a gross basis on the consolidated balance sheets.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table sets forth derivative positions where the Company has a right of offset under netting arrangements with the same counterparty as of
September 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts of Assets (Liabilities) Included on Consolidated Balance Sheets
|
|
Gross Amounts Not Offset on Consolidated Balance Sheets
|
|
Net Amounts of Assets (Liabilities)
|
|
|
|
|
(Assets) Liabilities
|
|
Cash Collateral Received (Pledged)
|
|
|
Derivative Assets
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
$
|
234
|
|
|
$
|
(234
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest rate contracts
|
|
44
|
|
|
—
|
|
|
—
|
|
|
44
|
|
|
|
|
278
|
|
|
(234
|
)
|
|
—
|
|
|
44
|
|
|
Derivative Liabilities
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
(543
|
)
|
|
234
|
|
|
—
|
|
|
(309
|
)
|
|
Interest rate contracts
|
|
(128
|
)
|
|
—
|
|
|
—
|
|
|
(128
|
)
|
|
|
|
$
|
(671
|
)
|
|
$
|
234
|
|
|
$
|
—
|
|
|
$
|
(437
|
)
|
The Company currently conducts its business through the following
five
segments, which are based on how management reviews and manages its business:
|
|
|
|
•
|
Loan Portfolio—
Focused on originating, acquiring and asset managing CRE debt investments including first mortgage loans, mezzanine loans, and preferred equity interests as well as participations in such loans. The CRE Debt segment also includes ADC loan arrangements accounted for as equity method investments.
|
|
|
|
|
•
|
CRE Debt Securities—
Focused on investing in CMBS (including “B-pieces” of a CMBS securitization pool) or CRE CLOs (collateralized by pools of CRE debt instruments).
|
|
|
|
|
•
|
Net Leased Real Estate—
Focused on direct investments in commercial real estate with long-term leases to tenants on a net lease basis, where such tenants generally will be responsible for property operating expenses such as insurance, utilities, maintenance capital expenditures and real estate taxes.
|
|
|
|
|
•
|
Other—
The other segment includes direct investments in non-core operating real estate such as multi-tenant office and multifamily residential assets as well as PE Investments. The other segment also includes real estate acquired in settlement of loans.
|
|
|
|
|
•
|
Corporate—
The corporate segment includes corporate level asset management and other fees, related party and general and administrative expenses.
|
The Company may also own investments indirectly through a joint venture.
Following the Combination, the following changes were made to the Company’s operating segments:
|
|
|
|
•
|
The acquired CRE securities formed the new CRE Debt Securities segment.
|
|
|
|
|
•
|
The Net Leased Real Estate of the combined organization is aggregated into the Net Leased Real Estate segment.
|
|
|
|
|
•
|
All non-core operating real estate and PE Investments of the combined organization is aggregated into the Other segment.
|
|
|
|
|
•
|
The Corporate segment consists of corporate level cash and corresponding interest income, fixed assets, corporate level financing and related interest expense, expense for management fees and cost reimbursement to the Manager, as well as Combination-related transaction costs.
|
The Company primarily generates revenue from net interest income on the loan, preferred equity and securities portfolios, rental and other income from its net leased, multi-tenant office and multifamily real estate assets, as well as equity in earnings of unconsolidated ventures, including from PE Investments. CRE debt securities include the Company’s investment in the subordinate tranches of the securitization trusts which are eliminated in consolidation. The Company’s income is primarily derived through the difference between revenue and the cost at which the Company is able to finance its investments. The Company may also acquire investments which generate attractive returns without any leverage.
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables present segment reporting for the
three and nine months ended
September 30, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Loan
|
|
CRE Debt Securities
|
|
Net Leased Real Estate
|
|
Other
|
|
Corporate
(1)
|
|
Total
|
|
Net interest income (loss)
|
|
$
|
24,652
|
|
|
$
|
7,701
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2,395
|
)
|
|
$
|
29,958
|
|
|
Property and other income
|
|
40
|
|
|
6
|
|
|
23,412
|
|
|
30,112
|
|
|
367
|
|
|
53,937
|
|
|
Management fee expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,877
|
)
|
|
(11,877
|
)
|
|
Property operating expense
|
|
—
|
|
|
—
|
|
|
(5,362
|
)
|
|
(15,855
|
)
|
|
—
|
|
|
(21,217
|
)
|
|
Transaction, investment and servicing expense
|
|
(2,239
|
)
|
|
—
|
|
|
(45
|
)
|
|
(65
|
)
|
|
(1,282
|
)
|
|
(3,631
|
)
|
|
Interest expense on real estate
|
|
—
|
|
|
—
|
|
|
(8,189
|
)
|
|
(5,152
|
)
|
|
—
|
|
|
(13,341
|
)
|
|
Depreciation and amortization
|
|
—
|
|
|
—
|
|
|
(17,509
|
)
|
|
(13,029
|
)
|
|
—
|
|
|
(30,538
|
)
|
|
Provision for loan losses
|
|
(35,059
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(35,059
|
)
|
|
Impairment of operating real estate
|
|
—
|
|
|
—
|
|
|
(7,094
|
)
|
|
(22,284
|
)
|
|
—
|
|
|
(29,378
|
)
|
|
Administrative expense
|
|
(155
|
)
|
|
(416
|
)
|
|
(58
|
)
|
|
(2
|
)
|
|
(6,166
|
)
|
|
(6,797
|
)
|
|
Unrealized gain (loss) on mortgage loans and obligations held in securitization trusts, net
|
|
—
|
|
|
(1,834
|
)
|
|
—
|
|
|
—
|
|
|
895
|
|
|
(939
|
)
|
|
Realized loss on mortgage loans and obligations held in securitization trusts, net
|
|
—
|
|
|
(549
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(549
|
)
|
|
Other gain (loss), net
|
|
—
|
|
|
(128
|
)
|
|
113
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
Income (loss) before equity in earnings of unconsolidated ventures and income taxes
|
|
(12,761
|
)
|
|
4,780
|
|
|
(14,732
|
)
|
|
(26,275
|
)
|
|
(20,458
|
)
|
|
(69,446
|
)
|
|
Equity in earnings (losses) of unconsolidated ventures
|
|
15,264
|
|
|
—
|
|
|
—
|
|
|
(6,940
|
)
|
|
—
|
|
|
8,324
|
|
|
Income tax benefit
|
|
—
|
|
|
—
|
|
|
91
|
|
|
2,365
|
|
|
—
|
|
|
2,456
|
|
|
Net income (loss)
|
|
$
|
2,503
|
|
|
$
|
4,780
|
|
|
$
|
(14,641
|
)
|
|
$
|
(30,850
|
)
|
|
$
|
(20,458
|
)
|
|
$
|
(58,666
|
)
|
_________________________________________
|
|
|
|
(1)
|
Includes income earned from the CRE securities purchased at a discount, recognized using the effective interest method had the transaction been recorded as an available for sale security, at amortized cost. During the
three months ended
September 30, 2018
,
$0.9 million
was attributable to discount accretion income and was eliminated in consolidation in the corporate segment. The corresponding interest expense is recorded in net interest income in the Corporate column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Loan
|
|
Net Leased Real Estate
|
|
Other
|
|
Corporate
|
|
Total
|
|
Net interest income
|
|
$
|
31,693
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,693
|
|
|
Property and other income
|
|
828
|
|
|
5,586
|
|
|
—
|
|
|
—
|
|
|
6,414
|
|
|
Property operating expense
|
|
(566
|
)
|
|
(1,673
|
)
|
|
—
|
|
|
—
|
|
|
(2,239
|
)
|
|
Transaction, investment and servicing expense
|
|
(672
|
)
|
|
(30
|
)
|
|
(14
|
)
|
|
—
|
|
|
(716
|
)
|
|
Interest expense on real estate
|
|
—
|
|
|
(1,717
|
)
|
|
—
|
|
|
—
|
|
|
(1,717
|
)
|
|
Depreciation and amortization
|
|
(94
|
)
|
|
(2,443
|
)
|
|
—
|
|
|
—
|
|
|
(2,537
|
)
|
|
Administrative expense
|
|
(201
|
)
|
|
—
|
|
|
—
|
|
|
(2,712
|
)
|
|
(2,913
|
)
|
|
Other loss, net
|
|
(75
|
)
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
|
Income (loss) before equity in earnings of unconsolidated ventures and income taxes
|
|
30,913
|
|
|
(282
|
)
|
|
(14
|
)
|
|
(2,712
|
)
|
|
27,905
|
|
|
Equity in earnings (losses) of unconsolidated ventures
|
|
5,734
|
|
|
—
|
|
|
(2,692
|
)
|
|
—
|
|
|
3,042
|
|
|
Income tax benefit
|
|
418
|
|
|
—
|
|
|
117
|
|
|
—
|
|
|
535
|
|
|
Net income (loss)
|
|
$
|
37,065
|
|
|
$
|
(282
|
)
|
|
$
|
(2,589
|
)
|
|
$
|
(2,712
|
)
|
|
$
|
31,482
|
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
Loan
|
|
CRE Debt Securities
|
|
Net Leased Real Estate
|
|
Other
|
|
Corporate
(1)
|
|
Total
|
|
Net interest income (loss)
|
|
$
|
76,893
|
|
|
$
|
18,403
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(4,898
|
)
|
|
$
|
90,398
|
|
|
Property and other income
|
|
215
|
|
|
19
|
|
|
51,897
|
|
|
69,824
|
|
|
903
|
|
|
122,858
|
|
|
Management fee expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(31,668
|
)
|
|
(31,668
|
)
|
|
Property operating expense
|
|
—
|
|
|
—
|
|
|
(14,703
|
)
|
|
(34,483
|
)
|
|
—
|
|
|
(49,186
|
)
|
|
Transaction, investment and servicing expense
|
|
(3,089
|
)
|
|
—
|
|
|
(62
|
)
|
|
(232
|
)
|
|
(34,829
|
)
|
|
(38,212
|
)
|
|
Interest expense on real estate
|
|
—
|
|
|
—
|
|
|
(16,786
|
)
|
|
(12,661
|
)
|
|
—
|
|
|
(29,447
|
)
|
|
Depreciation and amortization
|
|
—
|
|
|
—
|
|
|
(32,989
|
)
|
|
(39,700
|
)
|
|
—
|
|
|
(72,689
|
)
|
|
Provision for loan loss
|
|
(34,542
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(34,542
|
)
|
|
Impairment of operating real estate
|
|
—
|
|
|
—
|
|
|
(7,094
|
)
|
|
(22,284
|
)
|
|
—
|
|
|
(29,378
|
)
|
|
Administrative expense
|
|
(456
|
)
|
|
(817
|
)
|
|
(68
|
)
|
|
(20
|
)
|
|
(15,548
|
)
|
|
(16,909
|
)
|
|
Unrealized gain on mortgage loans and obligations held in securitization trusts, net
|
|
—
|
|
|
655
|
|
|
—
|
|
|
—
|
|
|
2,599
|
|
|
3,254
|
|
|
Realized loss on mortgage loans and obligations held in securitization trusts, net
|
|
—
|
|
|
(2,752
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,752
|
)
|
|
Other gain (loss), net
|
|
—
|
|
|
(128
|
)
|
|
146
|
|
|
442
|
|
|
—
|
|
|
460
|
|
|
Income (loss) before equity in earnings of unconsolidated ventures and income taxes
|
|
39,021
|
|
|
15,380
|
|
|
(19,659
|
)
|
|
(39,114
|
)
|
|
(83,441
|
)
|
|
(87,813
|
)
|
|
Equity in earnings of unconsolidated ventures
|
|
38,490
|
|
|
—
|
|
|
—
|
|
|
1,283
|
|
|
—
|
|
|
39,773
|
|
|
Income tax benefit
|
|
—
|
|
|
—
|
|
|
91
|
|
|
2,756
|
|
|
—
|
|
|
2,847
|
|
|
Net income (loss)
|
|
$
|
77,511
|
|
|
$
|
15,380
|
|
|
$
|
(19,568
|
)
|
|
$
|
(35,075
|
)
|
|
$
|
(83,441
|
)
|
|
$
|
(45,193
|
)
|
_________________________________________
|
|
|
|
(1)
|
Includes income earned from the CRE securities purchased at a discount, recognized using the effective interest method had the transaction been recorded as an available for sale security, at amortized cost. During the
nine months ended
September 30, 2018
,
$2.6 million
was attributable to discount accretion income and was eliminated in consolidation in the corporate segment. The corresponding interest expense is recorded in net interest income in the Corporate column.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Loan
|
|
Net Leased Real Estate
|
|
Other
|
|
Corporate
|
|
Total
|
|
Net interest income
|
|
$
|
91,997
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
91,997
|
|
|
Property and other income
|
|
2,481
|
|
|
15,385
|
|
|
—
|
|
|
—
|
|
|
17,866
|
|
|
Property operating expense
|
|
(1,782
|
)
|
|
(3,925
|
)
|
|
—
|
|
|
—
|
|
|
(5,707
|
)
|
|
Transaction, investment and servicing expense
|
|
(1,880
|
)
|
|
(232
|
)
|
|
(14
|
)
|
|
—
|
|
|
(2,126
|
)
|
|
Interest expense on real estate
|
|
—
|
|
|
(3,759
|
)
|
|
—
|
|
|
—
|
|
|
(3,759
|
)
|
|
Depreciation and amortization
|
|
(261
|
)
|
|
(7,306
|
)
|
|
—
|
|
|
—
|
|
|
(7,567
|
)
|
|
Administrative expense
|
|
(570
|
)
|
|
(9
|
)
|
|
—
|
|
|
(9,075
|
)
|
|
(9,654
|
)
|
|
Other loss, net
|
|
(388
|
)
|
|
(5
|
)
|
|
—
|
|
|
|
|
(393
|
)
|
|
Income (loss) before equity in earnings of unconsolidated ventures and income taxes
|
|
89,597
|
|
|
149
|
|
|
(14
|
)
|
|
(9,075
|
)
|
|
80,657
|
|
|
Equity in earnings of unconsolidated ventures
|
|
14,503
|
|
|
|
|
796
|
|
|
—
|
|
|
15,299
|
|
|
Income tax expense
|
|
(48
|
)
|
|
|
|
(79
|
)
|
|
—
|
|
|
(127
|
)
|
|
Net income (loss)
|
|
$
|
104,052
|
|
|
$
|
149
|
|
|
$
|
703
|
|
|
$
|
(9,075
|
)
|
|
$
|
95,829
|
|
The following table presents total assets by segment as of
September 30, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
Loan
(1)
|
|
CRE Debt Securities
|
|
Net Leased Real Estate
|
|
Other
(2)
|
|
Corporate
(3)
|
|
Total
|
|
September 30, 2018 (Unaudited)
|
|
$
|
2,570,137
|
|
|
$
|
3,519,691
|
|
|
$
|
1,365,671
|
|
|
$
|
1,291,953
|
|
|
$
|
(99,151
|
)
|
|
$
|
8,648,301
|
|
|
December 31, 2017
|
|
1,573,714
|
|
|
—
|
|
|
241,271
|
|
|
24,417
|
|
|
—
|
|
|
1,839,402
|
|
_________________________________________
|
|
|
|
(1)
|
Includes investments in unconsolidated ventures totaling
$559.7 million
an
d
$179.3 million
as of September 30, 2018 and
December 31, 2017
.
|
|
|
|
|
(2)
|
Includes PE Investments totaling
$210.4 million
and
$24.4 million
as of
September 30, 2018
and
December 31, 2017
, respectively.
|
|
|
|
|
(3)
|
Includes cash, unallocated receivables, deferred costs and other assets, net and the elimination of the subordinate tranches of the securitization trusts in consolidation.
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Geography
Geography is generally defined as the location in which the income producing assets reside or the location in which income generating services are performed. Geography information on total income and long lived assets are presented as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Total income by geography:
|
|
|
|
|
|
|
|
|
United States
|
$
|
135,743
|
|
|
$
|
44,936
|
|
|
$
|
373,458
|
|
|
$
|
138,898
|
|
|
Europe
|
5,559
|
|
|
—
|
|
|
5,559
|
|
|
—
|
|
|
Other
|
359
|
|
|
907
|
|
|
1,309
|
|
|
2,709
|
|
|
Total
(1)
|
$
|
141,661
|
|
|
$
|
45,843
|
|
|
$
|
380,326
|
|
|
$
|
141,607
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Long-lived assets by geography:
|
|
|
United States
|
$
|
1,767,887
|
|
|
Europe
|
353,869
|
|
|
Total
(2)
|
$
|
2,121,756
|
|
_________________________________________
|
|
|
|
(1)
|
Includes interest income, interest income on mortgage loans held in securitization trusts, property and other income and equity in earnings of unconsolidated ventures.
|
|
|
|
|
(2)
|
Long-lived assets comprise real estate, real estate related intangible assets, and exclude financial instruments and assets held for sale. As of December 31, 2017, all long-lived assets are located in United States.
|
The Company’s net income (loss) and weighted average shares outstanding for the
three and nine months ended
September 30, 2018
and
2017
consist of the following (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Net income (loss)
|
$
|
(58,666
|
)
|
|
$
|
31,482
|
|
|
$
|
(45,193
|
)
|
|
$
|
95,829
|
|
|
Net (income) loss attributable to noncontrolling interests:
|
|
|
|
|
|
|
|
|
Investment Entities
|
4,688
|
|
|
(10,230
|
)
|
|
2,788
|
|
|
(28,742
|
)
|
|
Operating Partnership
(1)
|
1,275
|
|
|
(1,377
|
)
|
|
996
|
|
|
(4,346
|
)
|
|
Net income (loss) attributable to Colony Credit Real Estate, Inc. common stockholders
|
$
|
(52,703
|
)
|
|
$
|
19,875
|
|
|
$
|
(41,409
|
)
|
|
$
|
62,741
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income allocated to participating securities (nonvested shares)
|
(436
|
)
|
|
—
|
|
|
(1,019
|
)
|
|
—
|
|
|
Net income (loss) attributable to common stockholders
|
$
|
(53,139
|
)
|
|
$
|
19,875
|
|
|
$
|
(42,428
|
)
|
|
$
|
62,741
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
(2)
|
127,887
|
|
|
44,399
|
|
|
118,252
|
|
|
44,399
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share - basic and diluted
(3)
|
$
|
(0.42
|
)
|
|
$
|
0.45
|
|
|
$
|
(0.36
|
)
|
|
$
|
1.41
|
|
_________________________________________
|
|
|
|
(1)
|
For earnings per share for the
three and nine months ended
September 30, 2017
, the Company allocated Company OP’s share of net income as if Company OP held
3,075,623
CLNC OP Units during the period for comparative purposes. The CLNC OP units were not issued until
January 31, 2018
.
|
|
|
|
|
(2)
|
For earnings per share, the Company assumes
44.4 million
shares of Class B-3 common stock were outstanding prior to
January 31, 2018
to reflect the standalone pre-merger financial information of the CLNY Investment Entities, the Company’s predecessor for accounting purposes.
|
|
|
|
|
(3)
|
Excludes
3,075,623
CLNC OP Units, which are redeemable for cash, or at the Company’s option, shares of Class A common stock on a
one
-for-one basis, and therefore would not be dilutive.
|
COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Dividends
On
October 17, 2018
, the Company’s board of directors declared a monthly cash dividend of
$0.145
per share of Class A common stock and Class B-3 common stock for the month ended
October 31, 2018
. The common stock dividend will be paid on
November 9, 2018
to stockholders of record on
October 31, 2018
. These distributions represent an annualized dividend of
$1.74
per share of Class A common stock and Class B-3 common stock.
On
November 1, 2018
, the Company’s board of directors declared a monthly cash dividend of
$0.145
per share of Class A common stock and Class B-3 common stock for the month ended
November 30, 2018
. The common stock dividend will be paid on
December 10, 2018
to stockholders of record on
November 30, 2018
. These distributions represent an annualized dividend of
$1.74
per share of Class A common stock and Class B-3 common stock.
New Investments
Investments in Unconsolidated Ventures
In
October 2018
, the Company entered into a joint venture to invest in a mixed-use development project in Ireland. The Company agreed to invest up to
$162.4 million
of the
$266.5 million
total commitment. The Company co-invested along with two affiliates of the Manager, with the Company owning
61.0%
of the joint venture and the affiliate entities owning the remaining
39.0%
. The joint venture will invest in a senior mortgage loan with a fixed interest rate of
15.0%
and a maturity date of
2.0
years from origination.
Loans and Preferred Equity Held for Investment
In October 2018, the Company acquired a
$20.0 million
mezzanine loan from an affiliate of the Company’s Manager, secured by a pledge of an ownership interest in a luxury condominium development project located in New York, NY. The loan bears interest at
9.5%
plus LIBOR.
In October 2018, the Company refinanced a
$34.4 million
mezzanine loan into a
$145.2 million
first mortgage loan, including
$10.0 million
in unfunded commitments. The loan bears interest at
4.8%
plus LIBOR and is secured by a hotel in San Diego, California.
Sale of Investments
Real Estate Held for Sale
In
October 2018
, the Company sold its multi-tenant office portfolio located in Bothell, Washington for a total sales price of
$177.0 million
. The
$97.4 million
mortgage on the multi-tenant office portfolio was repaid in full in connection with the sale.
Master Repurchase Agreement
On October 23, 2018, the Company entered into a Master Repurchase Agreement with a major financial institution. This agreement provides up to
$200.0 million
to finance the Company’s lending activities and has a
one
-year term, with
three
one
-year extension options subject to the satisfaction of certain customary conditions. Assets pledged as collateral under this agreement are limited to first mortgage loans, mezzanine loans, senior loan participations and other commercial mortgage loan debt instruments secured by commercial real estate.
On November 2, 2018, the Company entered into a Master Repurchase and Securities Contract with a major financial institution. This agreement provides up to
$300.0 million
to finance the Company’s lending activities and has a
three
-year term, with
two
one
-year extension options subject to the satisfaction of certain customary conditions. Assets pledged as collateral under this agreement are limited to first mortgage loans, mezzanine loans, senior loan participations and other commercial mortgage loan debt instruments secured by commercial real estate.