Quarterly Report (10-q)

Date : 08/09/2019 @ 10:08AM
Source : Edgar (US Regulatory)
Stock : Colony Credit Real Estate Inc (CLNC)
Quote : 11.29  -0.46 (-3.91%) @ 10:14PM
After Hours
Last Trade
Last $ 11.29 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-38377
 
COLONY CREDIT REAL ESTATE, INC.
 
 
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
 
 
 
Maryland
 
38-4046290
 
 
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
515 S. Flower Street , 44th Floor
Los Angeles , CA 90071
(Address of Principal Executive Offices, Including Zip Code)

( 310 282-8820
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Class A common stock, par value $0.01 per share
CLNC
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes      No   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
As of August 7, 2019 , Colony Credit Real Estate, Inc. had 128,540,053 shares of Class A common stock, par value $0.01 per share, outstanding
 



EXPLANATORY NOTE
This Quarterly Report on Form 10-Q of Colony Credit Real Estate, Inc., a Maryland corporation (the “Company”), includes the financial statements and other financial information of (i) the Company and (ii) the Company’s accounting predecessor, which are investment entities in which Colony Capital Operating Company, LLC (“CLNY OP”) or its subsidiaries owned interests ranging from approximately 38% to 100% and that were contributed to the Company on January 31, 2018 in connection with the closing of the Combination (as defined below) and certain intercompany balances between those entities and CLNY OP or its subsidiaries (the “CLNY Investment Entities”).
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”), by and among (i) the Company, (ii) Credit RE Operating Company, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company (the “OP”), (iii) CLNY OP, a Delaware limited liability company and the operating company of Colony Capital, Inc., formerly Colony NorthStar, Inc. (“Colony Capital”), a Maryland corporation, (iv) NRF RED REIT Corp., a Maryland corporation and indirect subsidiary of CLNY OP (“RED REIT”), (v) NorthStar Real Estate Income Trust, Inc., a Maryland corporation (“NorthStar I”), (vi) NorthStar Real Estate Income Trust Operating Partnership, LP, a Delaware limited partnership and the operating partnership of NorthStar I (“NorthStar I OP”), (vii) NorthStar Real Estate Income II, Inc., a Maryland corporation (“NorthStar II”), and (viii) NorthStar Real Estate Income Operating Partnership II, LP, a Delaware limited partnership and the operating partnership of NorthStar II (“NorthStar II OP”).
Pursuant to the Combination Agreement, (i) CLNY OP contributed and conveyed to the Company a select portfolio of assets and liabilities (the “CLNY Contributed Portfolio”) of CLNY OP (the “CLNY OP Contribution”), (ii) RED REIT contributed and conveyed to the OP a select portfolio of assets and liabilities of RED REIT (the “RED REIT Contribution” and, together with the CLNY OP Contribution, the “CLNY Contributions”), (iii) NorthStar I merged with and into the Company, with the Company surviving the merger (the “NorthStar I Merger”), (iv) NorthStar II 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 Contributed Portfolio and the equity interests of each of NorthStar I OP and NorthStar II OP 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”). To satisfy the condition to completion of the Combination that the Company’s Class A common stock, par value $0.01 per share (the “Class A common stock”), be approved for listing on a national securities exchange in connection with either an initial public offering or a listing, the Class A common stock was approved for listing by the New York Stock Exchange and began trading under the ticker “CLNC” on February 1, 2018.
The CLNY Contributions were accounted for as a reorganization of entities under common control, since both the Company and CLNY Investment Entities were under common control of Colony Capital at the time the contributions were made. Accordingly, 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.
As used throughout this document, the terms the “Company,” “we,” “our” and “us” mean:
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.
Accordingly, comparisons of the period to period financial information of the Company as set forth herein may not be meaningful because the CLNY Investment Entities represents only a portion of the assets and liabilities Colony Credit Real Estate, Inc. acquired in the Combination and 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.
In addition to the financial statements contained herein, you should read and consider the audited financial statements and accompanying notes thereto of the Company for the year ended December 31, 2018 included in our Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 28, 2019.




i


COLONY CREDIT REAL ESTATE, INC.
FORM 10- Q
TABLE OF CONTENTS

Index
 
Page
 
 
 
 
 
 
 
 
 
 
 











Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and contingencies, many of which are beyond our control, and may cause actual results to differ significantly from those expressed in any forward-looking statement. Among others, the following uncertainties and other factors could cause actual results to differ from those set forth in the forward-looking statements:
operating costs and business disruption may be greater than expected;
the fair value of our investments may be subject to uncertainties;
changes in market and economic conditions may adversely impact the commercial real estate sector and our investments;
our use of leverage could hinder our ability to make distributions and may significantly impact our liquidity position;
given our dependence on our external manager, an affiliate of Colony Capital, any adverse changes in the financial health or otherwise of our manager or Colony Capital could hinder our operating performance and return on stockholder’s investment;
our external manager may not be successful in locating or allocating suitable investments;
our external manager may be unable to retain or hire key investment professionals;
we may be unable to realize substantial efficiencies as well as anticipated strategic and financial benefits from the Combination;
we may be unable to maintain our qualification as a real estate investment trust for U.S. income tax purposes;
we may be unable to maintain our exemption from registration as an investment company under the Investment Company Act of 1940, as amended; and
changes in laws or regulations governing our operations may impose additional costs on us or increase competition.
The foregoing list of factors is not exhaustive. We urge you to carefully review the disclosures we make concerning risks in the sections entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 , the section entitled “Risk Factors” in this Form 10-Q for the quarter ended June 30, 2019 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein.
We caution investors not to unduly rely on any forward-looking statements. The forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company is under no duty to update any of these forward-looking statements after the date of this Quarterly Report on Form 10-Q, nor to conform prior statements to actual results or revised expectations, and the Company does not intend to do so.



2



PART I. Financial Information
Item 1.    Financial Statements
COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED BALANCE SHEETS
(in Thousands, Except Share and Per Share Data)
 
June 30, 2019 (Unaudited)
 
December 31, 2018
Assets
 
 
 
Cash and cash equivalents
$
59,838

 
$
77,317

Restricted cash
114,127

 
110,146

Loans and preferred equity held for investment, net
2,398,191

 
2,020,497

Real estate securities, available for sale, at fair value
249,100

 
228,185

Real estate, net
1,898,299

 
1,959,690

Investments in unconsolidated ventures ($53,893 and $160,851 at fair value, respectively)
719,307

 
903,037

Receivables, net
47,229

 
48,806

Deferred leasing costs and intangible assets, net
143,521

 
134,068

Assets held for sale
147,707

 

Other assets
87,209

 
62,006

Mortgage loans held in securitization trusts, at fair value
3,175,950

 
3,116,978

Total assets
$
9,040,478

 
$
8,660,730

Liabilities
 
 
 
Securitization bonds payable, net
$
23,377

 
$
81,372

Mortgage and other notes payable, net
1,257,915

 
1,173,019

Credit facilities
1,808,790

 
1,365,918

Due to related party (Note 11)
13,844

 
15,019

Accrued and other liabilities
133,551

 
106,187

Intangible liabilities, net
31,367

 
15,096

Escrow deposits payable
63,146

 
65,995

Dividends payable
19,088

 
18,986

Mortgage obligations issued by securitization trusts, at fair value
3,026,282

 
2,973,936

Total liabilities
6,377,360

 
5,815,528

Commitments and contingencies (Note 17)

 

Equity
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized, no shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively

 

Common stock, $0.01 par value per share
 
 
 
Class A, 950,000,000 and 905,000,000 shares authorized, 128,545,190 and 83,410,376 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
1,285

 
834

Class B-3, no shares authorized, issued and outstanding as of June 30, 2019 and 45,000,000 shares authorized and 44,399,444 shares issued and outstanding as of December 31, 2018

 
444

Additional paid-in capital
2,903,126

 
2,899,353

Accumulated deficit
(397,398
)
 
(193,327
)
Accumulated other comprehensive income (loss)
25,547

 
(399
)
Total stockholders’ equity
2,532,560

 
2,706,905

Noncontrolling interests in investment entities
69,948

 
72,683

Noncontrolling interests in the Operating Partnership
60,610

 
65,614

Total equity
2,663,118

 
2,845,202

Total liabilities and equity
$
9,040,478

 
$
8,660,730


The accompanying notes are an integral part of these consolidated financial statements.

3




COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED BALANCE SHEETS
(in Thousands)
The following table presents assets and liabilities of securitization trusts and certain real estate properties that have noncontrolling interests as variable interest entities for which the Company is determined to be the primary beneficiary.
 
June 30, 2019 (Unaudited)
 
December 31, 2018
Assets
 
 
 
Cash and cash equivalents
$
13,154

 
$
12,561

Restricted cash
19,160

 
18,464

Loans and preferred equity held for investment, net
31,430

 
167,219

Real estate, net
572,160

 
547,444

Receivables, net
21,567

 
17,811

Deferred leasing costs and intangible assets, net
55,015

 
38,681

Assets held for sale
76,076

 

Other assets
28,260

 
1,698

Mortgage loans held in securitization trusts, at fair value
3,175,950

 
3,116,978

Total assets
$
3,992,772

 
$
3,920,856

Liabilities
 
 
 
Securitization bonds payable, net
$
23,377

 
$
43,870

Mortgage and other notes payable, net
343,495

 
325,187

Credit facilities
28,722

 

Accrued and other liabilities
32,600

 
32,452

Intangible liabilities, net
28,904

 
11,993

Escrow deposits payable
7,016

 
9,603

Mortgage obligations issued by securitization trusts, at fair value
3,026,282

 
2,973,936

Total liabilities
$
3,490,396

 
$
3,397,041



The accompanying notes are an integral part of these consolidated financial statements.

4


COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in Thousands, Except Per Share Data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net interest income
 
 
 
 
 
 
 
 
Interest income
 
$
42,073

 
$
36,795

 
$
80,482

 
$
72,934

Interest expense
 
(21,046
)
 
(9,703
)
 
(40,338
)
 
(17,118
)
Interest income on mortgage loans held in securitization trusts
 
38,656

 
39,496

 
77,132

 
65,361

Interest expense on mortgage obligations issued by securitization trusts
 
(35,756
)
 
(36,459
)
 
(71,391
)
 
(60,737
)
Net interest income
 
23,927

 
30,129

 
45,885

 
60,440

 
 
 
 
 
 
 
 
 
Property and other income
 
 
 
 
 
 
 
 
Property operating income
 
64,767

 
39,477

 
127,901

 
68,022

Other income
 
434

 
899

 
611

 
1,416

Total property and other income
 
65,201

 
40,376

 
128,512

 
69,438

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Management fee expense
 
11,357

 
11,791

 
22,715

 
19,791

Property operating expense
 
28,140

 
16,256

 
56,320

 
27,969

Transaction, investment and servicing expense
 
1,051

 
3,497

 
1,580

 
34,581

Interest expense on real estate
 
13,898

 
9,850

 
27,505

 
16,106

Depreciation and amortization
 
29,257

 
23,359

 
56,919

 
42,151

Provision for loan losses
 
110,258

 

 
110,258

 

Impairment of operating real estate
 
10,124

 

 
10,124

 

Administrative expense (including $2,713, $1,798, $4,556 and $2,083 of equity-based compensation expense, respectively)
 
8,010

 
6,884

 
14,663

 
10,112

Total expenses
 
212,095

 
71,637

 
300,084

 
150,710

 
 
 
 
 
 
 
 
 
Other income (loss)
 
 
 
 
 
 
 
 
Unrealized gain on mortgage loans and obligations held in securitization trusts, net
 
5,549

 
3,696

 
6,578

 
4,193

Realized gain (loss) on mortgage loans and obligations held in securitization trusts, net
 

 
(2,203
)
 
48

 
(2,203
)
Other gain (loss), net
 
(6,062
)
 
10

 
(11,141
)
 
475

Income (loss) before equity in earnings of unconsolidated ventures and income taxes
 
(123,480
)
 
371

 
(130,202
)
 
(18,367
)
Equity in earnings of unconsolidated ventures
 
12,557

 
15,661

 
33,867

 
31,449

Income tax benefit (expense)
 
133

 
(158
)
 
502

 
391

Net income (loss)
 
(110,790
)
 
15,874

 
(95,833
)
 
13,473

Net (income) loss attributable to noncontrolling interests:
 
 
 
 
 
 
 
 
Investment entities
 
880

 
470

 
1,178

 
(1,900
)
Operating Partnership
 
2,569

 
(336
)
 
2,222

 
(279
)
Net income (loss) attributable to Colony Credit Real Estate, Inc. common stockholders
 
$
(107,341
)
 
$
16,008

 
$
(92,433
)
 
$
11,294

 
 
 
 
 
 
 
 
 
Net income (loss) per common share - basic and diluted  (Note 19)
 
$
(0.84
)
 
$
0.12

 
$
(0.73
)
 
$
0.09


 
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding - basic and diluted (Note 19)
 
128,534

 
127,887

 
128,240

 
113,355

The accompanying notes are an integral part of these consolidated financial statements.

5


COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in Thousands)
(Unaudited)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income (loss)
 
$
(110,790
)
 
$
15,874

 
$
(95,833
)
 
$
13,473

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized gain (loss) on real estate securities, available for sale
 
7,863

 
(997
)
 
17,621

 
(2,845
)
Change in fair value of net investment hedges
 
938

 

 
8,333

 

Foreign currency translation gain
 
3,923

 

 
613

 

Total other comprehensive income (loss)
 
12,724

 
(997
)
 
26,567

 
(2,845
)
Comprehensive income (loss)
 
(98,066
)
 
14,877

 
(69,266
)
 
10,628

Comprehensive (income) loss attributable to noncontrolling interests:
 
 
 
 
 
 
 
 
Investment entities
 
880

 
470

 
1,178

 
(1,900
)
Operating Partnership
 
2,272

 
(269
)
 
1,601

 
(212
)
Comprehensive income (loss) attributable to common stockholders
 
$
(94,914
)
 
$
15,078

 
$
(66,487
)
 
$
8,516
































The accompanying notes are an integral part of these consolidated financial statements.

6



COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in Thousands)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
 
Noncontrolling Interests in Investment Entities
 
Noncontrolling Interests in the Operating Partnership
 
Total
Equity
 
 
Class A
 
Class B-3
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 31, 2017

 
$

 

 
$

 
$
821,031

 
$
258,777

 
$

 
$
1,079,808

 
 
$
327,762

 
$

 
$
1,407,570

 
Distributions

 

 

 

 

 

 

 

 
 
(1,003
)
 

 
(1,003
)
 
Adjustments related to the Combination
82,484

 
825

 
44,399

 
444

 
2,073,186

 
(79,774
)
 

 
1,994,681

 
 
(230,818
)
 
73,626

 
1,837,489

 
Issuance and amortization of equity-based compensation
1,004

 
10

 

 

 
275

 

 

 
285

 
 

 

 
285

 
Other comprehensive loss

 

 

 

 

 

 
(1,848
)
 
(1,848
)
 
 

 

 
(1,848
)
 
Dividends and distributions declared ($0.29 per share)

 

 

 

 

 
(37,843
)
 

 
(37,843
)
 
 

 

 
(37,843
)
 
Net income (loss)

 

 

 

 

 
(4,714
)
 

 
(4,714
)
 
 
2,370

 
(57
)
 
(2,401
)
 
Balance at March 31, 2018
83,488

 
$
835

 
44,399

 
$
444

 
$
2,894,492

 
$
136,446

 
$
(1,848
)
 
$
3,030,369

 
 
$
98,311

 
$
73,569

 
$
3,202,249

 
Contributions

 

 

 

 

 

 

 

 
 
87

 

 
87

 
Distributions

 

 

 

 

 

 

 

 
 
(928
)
 

 
(928
)
 
Adjustments related to the Combination

 

 

 

 
1,070

 

 

 
1,070

 
 
(47
)
 

 
1,023

 
Issuance and amortization of equity-based compensation

 

 

 

 
1,798

 

 

 
1,798

 
 

 

 
1,798

 
Other comprehensive loss

 

 

 

 

 

 
(930
)
 
(930
)
 
 

 
(67
)
 
(997
)
 
Dividends and distributions declared ($0.44 per share)

 

 

 

 

 
(54,739
)
 

 
(54,739
)
 
 

 
(2,230
)
 
(56,969
)
 
Reallocation of equity

 

 

 

 
(665
)
 

 

 
(665
)
 
 

 
665

 

 
Net income (loss)

 

 

 

 

 
16,008

 

 
16,008

 
 
(470
)
 
336

 
15,874

 
Balance at June 30, 2018
83,488

 
$
835

 
44,399

 
$
444

 
$
2,896,695

 
$
97,715

 
$
(2,778
)
 
$
2,992,911

 
 
$
96,953

 
$
72,273

 
$
3,162,137

 

The accompanying notes are an integral part of these consolidated financial statements.

7



COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(in Thousands)
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
(Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Stockholders’
Equity
 
 
Noncontrolling Interests in Investment Entities
 
Noncontrolling Interests in the Operating Partnership
 
Total
Equity
 
 
Class A
 
Class B-3
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at December 31, 2018
83,410

 
$
834

 
44,399

 
$
444

 
$
2,899,353

 
$
(193,327
)
 
$
(399
)
 
$
2,706,905

 
 
$
72,683

 
$
65,614

 
$
2,845,202

 
Contributions

 

 

 

 

 

 

 

 
 
24

 

 
24

 
Distributions

 

 

 

 

 

 

 

 
 
(394
)
 

 
(394
)
 
Conversion of Class B-3 common stock
44,399

 
444

 
(44,399
)
 
(444
)
 

 

 

 

 
 

 

 

 
Issuance and amortization of equity-based compensation
800

 
8

 

 

 
1,835

 

 

 
1,843

 
 

 

 
1,843

 
Other comprehensive income

 

 

 

 

 

 
13,519

 
13,519

 
 

 
324

 
13,843

 
Dividends and distributions declared ($0.44 per Class A share and $0.15 per Class B-3 share)

 

 

 

 

 
(55,726
)
 

 
(55,726
)
 
 

 
(1,340
)
 
(57,066
)
 
Shares canceled for tax withholding on vested stock awards
(96
)
 
(1
)
 

 

 
(1,496
)
 

 

 
(1,497
)
 
 

 

 
(1,497
)
 
Reallocation of equity

 

 

 

 
(23
)
 

 

 
(23
)
 
 

 
23

 

 
Net income (loss)

 

 

 

 

 
14,908

 

 
14,908

 
 
(298
)
 
347

 
14,957

 
Balance at March 31, 2019
128,513

 
$
1,285

 

 
$

 
$
2,899,669

 
$
(234,145
)
 
$
13,120

 
$
2,679,929

 
 
$
72,015

 
$
64,968

 
$
2,816,912

 
Contributions

 

 

 

 

 

 

 

 
 
11

 

 
11

 
Distributions

 

 

 

 

 

 

 

 
 
(1,198
)
 

 
(1,198
)
 
Issuance and amortization of equity-based compensation
32

 

 

 

 
2,713

 

 

 
2,713

 
 

 

 
2,713

 
Other comprehensive income

 

 

 

 

 

 
12,427

 
12,427

 
 

 
297

 
12,724

 
Dividends and distributions declared ($0.44 per share)

 

 

 

 

 
(55,912
)
 

 
(55,912
)
 
 

 
(1,342
)
 
(57,254
)
 
Shares canceled for tax withholding on vested stock awards

 

 

 

 

 

 

 

 
 

 

 

 
Reallocation of equity

 

 

 

 
744

 

 

 
744

 
 

 
(744
)
 

 
Net income (loss)

 

 

 

 

 
(107,341
)
 

 
(107,341
)
 
 
(880
)
 
(2,569
)
 
(110,790
)
 
Balance at June 30, 2019
128,545

 
$
1,285

 

 
$

 
$
2,903,126

 
$
(397,398
)
 
$
25,547

 
$
2,532,560

 
 
$
69,948

 
$
60,610

 
$
2,663,118

 
The accompanying notes are an integral part of these consolidated financial statements.

8



COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(95,833
)
 
$
13,473

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Equity in earnings of unconsolidated ventures
(33,867
)
 
(31,449
)
Depreciation and amortization
56,919

 
42,151

Straight-line rental income
(3,552
)
 
(2,348
)
Amortization of above/below market lease values, net
(1,737
)
 
222

Amortization of premium/accretion of discount and fees on investments and borrowings, net
(5,701
)
 
(3,688
)
Amortization of deferred financing costs
4,252

 
1,564

Amortization of right-of-use lease assets and operating lease liabilities
48

 

Paid-in-kind interest added to loan principal, net of interest received
(3,738
)
 
(1,234
)
Distributions of cumulative earnings from unconsolidated ventures
30,879

 
27,400

Unrealized gain on mortgage loans and obligations held in securitization trusts, net
(6,578
)
 
(4,193
)
Realized (gain) loss on mortgage loans and obligations held in securitization trusts, net
(48
)
 
2,203

Provision for loan loss
110,258

 

Recovery of allowance for loan loss

 
(517
)
Impairment of operating real estate
10,124

 

Amortization of equity-based compensation
4,556

 
2,083

Mortgage notes above/below market value amortization
164

 
(307
)
Deferred income tax benefit
(3,589
)
 
(1,480
)
Changes in assets and liabilities:
 
 
 
Receivables, net
(8,113
)
 
14,607

Deferred costs and other assets
5,890

 
(33,204
)
Due to related party
(2,672
)
 
5,204

Other liabilities
5,483

 
(1,571
)
Net cash provided by operating activities
63,145

 
28,916

Cash flows from investing activities:
 
 
 
Acquisition, origination and funding of loans and preferred equity held for investment, net
(886,397
)
 
(392,278
)
Repayment on loans and preferred equity held for investment
287,437

 
272,636

Cash and restricted cash received in the Combination

 
302,342

Acquisition of and additions to real estate, related intangibles and leasing commissions
(9,281
)
 
(5,661
)
Investments in unconsolidated ventures
(7,801
)
 
(5,486
)
Proceeds from sale of investments in unconsolidated ventures
76,861

 

Distributions in excess of cumulative earnings from unconsolidated ventures
119,472

 
49,438

Acquisition of real estate securities, available for sale

 
(33,281
)
Net receipts on settlement of derivative instruments
1,638

 

Deposit on investments
(372
)
 
(15,700
)
Change in escrow deposits
(2,848
)
 
(83
)
Net cash provided by (used in) investing activities
(421,291
)
 
171,927

Cash flows from financing activities:
 
 
 
Distributions paid on common stock
(111,536
)
 
(73,589
)
Distributions paid on common stock to noncontrolling interests
(2,682
)
 
(2,230
)
Borrowings from mortgage notes
85,481

 
43,782

Repayment of mortgage notes
(2,948
)
 
(42,088
)
Borrowings from credit facilities
1,420,569

 
326,820

Repayment of credit facilities
(977,697
)
 
(175,143
)
Repayment of securitization bonds
(57,995
)
 
(63,354
)
Payment of deferred financing costs
(6,972
)
 
(8,459
)
Contributions from noncontrolling interests
35

 
87

Distributions to noncontrolling interests
(1,592
)
 
(1,931
)
Net cash provided by financing activities
344,663

 
3,895

Effect of exchange rates on cash, cash equivalents and restricted cash
(15
)
 

Net increase (decrease) in cash, cash equivalents and restricted cash
(13,498
)
 
204,738

Cash, cash equivalents and restricted cash - beginning of period
187,463

 
67,105

Cash, cash equivalents and restricted cash - end of period
$
173,965

 
$
271,843

The accompanying notes are an integral part of these consolidated financial statements.

9


COLONY CREDIT REAL ESTATE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(in Thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2019
 
2018
Reconciliation of cash, cash equivalents, and restricted cash to consolidated balance sheets
 
 
 
Beginning of the period
 
 
 
Cash and cash equivalents
$
77,317

 
$
25,204

Restricted cash
110,146

 
41,901

Total cash, cash equivalents and restricted cash, beginning of period
$
187,463

 
$
67,105

 
 
 
 
End of the period
 
 
 
Cash and cash equivalents
$
59,838

 
$
155,377

Restricted cash
114,127

 
116,466

Total cash, cash equivalents and restricted cash, end of period
$
173,965

 
$
271,843


 
Six Months Ended June 30,
 
2019
 
2018
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
Assets acquired in the Combination
$

 
$
6,916,046

Liabilities assumed in the Combination

 
4,812,353

Noncontrolling interests assumed in the Combination

 
82,320

Common stock issued for acquisition of NorthStar I and NorthStar II (Note 3)

 
2,021,373

Deconsolidation of certain CLNY Contributed Portfolio investments (Note 2)

 
313,133

Secured Financing

 
50,314

Other Payables to Manager adjustment (refer to Note 11)

 
2,934

Noncontrolling interests in the Operating Partnership

 
73,626

Consolidation of securitization trust (VIE asset / liability)
52,346

 
175,078

Accrual of distribution payable
19,088

 
18,993

Foreclosure of loans held for investment, net of provision for loan loss
127,356

 

Right-of-use lease assets and operating lease liabilities
26,348

 

Assets transferred to held for sale (Note 7)
147,707

 

Conversion of Class B-3 common stock to Class A common stock
444

 

















The accompanying notes are an integral part of these consolidated financial statements.

10


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Business and Organization
Colony Credit Real Estate, Inc. (together with its consolidated subsidiaries, 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 ended 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 June 30, 2019 , the Company owned 97.7% of the OP, as its sole managing member. The remaining 2.3% 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 Combination” and the accounting treatment thereof in Note 2, “Summary of Significant Accounting Policies.”

11

COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2.
Summary of Significant Accounting Policies
The significant accounting policies of the Company are described below. The accounting policies of the Company’s unconsolidated ventures are substantially similar to those of the Company.
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, 2019 , or for any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements 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, 2018 .
The consolidated financial statements include the results of operations of Colony Credit Real Estate, Inc. and certain consolidated investment entities contributed by Colony Capital (the “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 Colony Capital 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 consolidated financial statements were prepared giving consideration to the rules and regulations of the U.S. 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

12


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 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 .
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.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries. 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 it has 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
Variable Interest Entities— A VIE is an entity that either (i) lacks sufficient equity to finance its activities without additional subordinated financial support from other parties; (ii) whose equity holders lack the characteristics of a controlling financial interest; or (iii) is established with non-substantive voting rights. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company also considers interests held by its related parties, including de facto agents. The Company assesses whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In performing the related party analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to the related party; the Company’s and the related party’s ability to control or significantly influence key decisions of the VIE including consideration of involvement by de facto agents; the obligation or likelihood for the Company or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of the Company and the related party. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE.
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.
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.
As of June 30, 2019 , 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.

13


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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, 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 the 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 the 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 .
Other consolidated VIEs include the Investing VIEs (as defined and discussed below) and certain operating real estate properties that have noncontrolling interests. The noncontrolling interests in the operating real estate properties represent third party joint venture partners with ownership ranging from 3.5% to 20.0% . These noncontrolling interests do not have substantive kick-out nor 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 consolidating parent entity of an Investing VIE, nor to any of the Company’s other consolidated entities.
As of June 30, 2019 , 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. As a result, 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 although the Company legally owns the subordinate tranches of the securitization trusts only. 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 are presented separately on the consolidated statements of operations, and the assets and liabilities of the Investing VIEs are separately presented as “Mortgage loans held in securitization trusts, at fair value” and “Mortgage obligations issued by securitization trusts, at fair value,” respectively, on the consolidated balance sheets. Refer to Note 15, “Fair Value” for further discussion.
The Company has adopted guidance issued by the Financial Accounting Standards Board (“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 fair value of the assets of its Investing VIEs. Refer to Note 15, “Fair Value” for further discussion.

14


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Unconsolidated VIEs
As of June 30, 2019 , 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. 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 June 30, 2019 .
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.
The following table presents the Company’s classification, carrying value and maximum exposure of unconsolidated VIEs as of June 30, 2019 (dollars in thousands):
 
 
Carrying Value
 
Maximum Exposure to Loss
Real estate securities, available for sale
 
$
249,100

 
$
232,806

Investments in unconsolidated ventures
 
457,917

 
469,361

Loans and preferred equity held for investment, net
 
119,196

 
119,196

Total assets
 
$
826,213

 
$
821,363


The Company did not provide financial support to the unconsolidated VIEs during the six months ended June 30, 2019 . As of June 30, 2019 , there were no explicit arrangements or implicit variable interests that could require the Company to provide financial support to the unconsolidated VIEs. The maximum exposure to loss of real estate securities, available for sale was determined as the amortized cost, which represents the purchase price of the investments adjusted by any unamortized premiums or discounts as of the reporting date. The maximum exposure to loss of investments in unconsolidated ventures and loans and preferred equity held for investment, net was determined as the carrying value plus any future funding commitments. Refer to Note 4, “Loans and Preferred Equity Held for Investment, net” and Note 17, “Commitments and Contingencies” for further discussion.
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.

15


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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):
 
As of the Closing Date
Assets
 
Cash and cash equivalents
$
(11,408
)
Restricted cash
(14,704
)
Loans and preferred equity held for investment, net
(553,678
)
Investments in unconsolidated ventures
127,062

Receivables, net
(4,344
)
Other assets
(114
)
Total assets
$
(457,186
)
Liabilities
 
Mortgage and other notes payable, net
$
(128,709
)
Accrued and other liabilities
(640
)
Escrow deposits payable
(14,704
)
Total liabilities
(144,053
)
 
 
Stockholders’ equity
(313,133
)
Total liabilities and equity
$
(457,186
)

Prior to the deconsolidation of the CLNY Investment Entities, noncontrolling interest as recorded in the CLNY Investment Entities combined financial statements consisted of interests in the held by third party joint ventures. Following the deconsolidation of the CLNY Investment Entities, the noncontrolling interest in the Company’s consolidated financial statements additionally consists of Colony Capital ownership interests in joint ventures. These interests were previously classified as other owners in the CLNY Investment Entities combined financial statements, but have been reclassified to noncontrolling interests in the Company’s consolidated financial statements.
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 Combination,” 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.
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 (“designated hedges”), and gain (loss) on foreign currency translation.

16


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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.
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
Definition of a Business— 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 costs, 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.
Asset Acquisitions— 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. 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.
Business Combinations— The Company accounts for acquisitions that qualify as 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.

17


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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 June 30, 2019 or December 31, 2018 . 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.
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 collected is recognized on a cash basis by crediting income when received; or if ultimate collectability of loan and preferred equity principal is uncertain, interest collected is recognized using a cost recovery method by applying interest collected as a reduction to loan and preferred equity carrying value. Loans and preferred equity investments may be restored to accrual status when all principal and interest are current and full repayment of the remaining contractual principal and interest are 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 three and six months ended June 30, 2019 , the Company recorded $110.3 million of 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

18


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

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, through a provision and a charge-off against allowance for loan losses.
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”) Arrangements
The Company provides loans to third party developers for the acquisition, development and construction of real estate. Under an ADC 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 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 arrangements with characteristics implying loan classification are presented as loans held for investment and result in the recognition of interest income. ADC 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 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 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 forgone 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, and 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.

19


COLONY CREDIT REAL ESTATE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Depreciation— Real estate held for investment, other than land, is depreciated on a straight-line basis over the estimated useful lives of the assets, as follows:
Real Estate Assets
 
Term
Building (fee interest)
 
7 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
 
1 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 real estate for impairment generally on an individual property basis. If an impairment indicator exists, the Company evaluates the undiscounted future net cash flows that are expected to be generated by the property, including any estimated proceeds from the eventual disposition of the property. If multiple outcomes are under consideration, the Company may apply a probability-weighted approach to the impairment analysis. Based upon the analysis, if the carrying value of a property exceeds its undiscounted future net cash flows, an impairment loss is recognized for the excess of the carrying value of the property over the estimated fair value of the property. In evaluating and/or measuring impairment, the Company considers, 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. Another key consideration in this assessment is the Company’s assumptions about the highest and best use of its real estate investments and its intent and ability to hold them for a reasonable period that would allow for the recovery of their carrying values. If such assumptions change and the Company shortens its expected hold period, this may result in the recognition of impairment losses. During the three and six months ended June 30, 2019 , the Company recorded a $10.1 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
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. At the time a sale is consummated, the excess, if any, of sale price less selling costs over carrying value of the real estate is recognized as a gain.
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 three months ended June 30, 2019 , the Company classified its student housing portfolio, a retail property, and a hotel as held for sale. See Note 7, “Real Estate, net and Real Estate Held for Sale” and Note 20, “Subsequent Events” for further detail.
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 generally recognized at the time the real estate is received at foreclosure sale or upon execution of a deed in lieu of foreclosure. Foreclosed properties are initially measured at fair value. If the fair value of the property is lower than the carrying value of the loan, the difference is recognized as provision for loan loss and the cumulative loss allowance on the loan is charged off. 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.

20


COLONY CREDIT REAL ESTATE, INC.