Colony Capital Announces Second Quarter 2020 Financial Results

LOS ANGELES–(BUSINESS WIRE)–Colony Capital, Inc. (NYSE:CLNY) and subsidiaries (collectively, “Colony Capital,” or the “Company”) today announced financial results for the second quarter ended June 30, 2020. The Company reported (i) total revenues of $372 million, (ii) GAAP net income attributable to common stockholders of $(2,043) million, or $(4.33) per share and (iii) Core FFO of $(19.3) million or $(0.04) per share, excluding gains/losses, which excludes $2.1 billion CLNY OP share of non-cash impairments and other losses.

HIGHLIGHTS

Resilient Underlying Businesses

• Despite the impact of COVID-19, the Company’s digital portfolio companies across investment management and operating businesses grew core organic revenues approximately 9% on average YoY in the second quarter.
• The Company’s digital investment management business continued to grow, with FEEUM increasing YTD by $1.5 billion, or 22%, accounting for the Vantage transaction in July.
• The Company’s Healthcare segment generated revenues in the second quarter that decreased 2% year-over-year and collected 96% of contractual triple-net and medical office rents during the quarter.
• The Company’s Hospitality segment experienced a sharp rebound from its trough occupancy of 22% during April to almost 40% during June 2020 generating positive NOI before FF&E for the month.

Completed Management Transition

• Marc Ganzi assumed the role of President and CEO and Jacky Wu assumed the role of CFO and Treasurer on July 1, 2020, finalizing the transition to a digital-focused management team.
• Tom Barrack will continue to serve as Executive Chairman and Mark Hedstrom will continue to serve as Chief Operating Officer.

Significant Events Accelerating Digital Transformation

• In July, the Company closed a significant strategic investment from Wafra to invest over $400 million in the Digital Colony platform, including over $250 million for a 31.5% ownership stake in Digital Colony at an $805 million valuation, validating the Company’s 2019 acquisition of Digital Bridge. In addition to providing permanent capital for the Company to invest in high-quality digital infrastructure assets, Wafra has also committed over $150 million to Digital Colony’s current and future investment products.
• In July, the Company closed on the Company’s second significant balance sheet investment in a digital operating business, with a Colony-led investor group acquiring a majority stake in Vantage Data Centers’ portfolio of 12 stabilized North American hyperscale data centers (“Stabilized VDC”) for $1.2 billion, with $190 million allocated from the Company’s balance sheet.
• With the closing of Stabilized VDC, Digital Colony’s FEEUM stands at $8.3 billion, up 22% since the beginning of the year, ahead of the prior annual growth target of 15%.
• Digital AUM of $22 billion now represents approximately half of total AUM.

Delivered Path-To-Digital

• Delivered ‘Path-to-Digital’ with (i) $500 million revolver amendment and (ii) $300 million exchangeable notes issuance to address near-term corporate debt maturities. With over $875 million of liquidity, of which $114 million is earmarked to pay off the remaining balance of 2021 convertible debt, the Company remains focused on simplifying and executing its digital transformation through: (i) further monetization of legacy businesses, (ii) additional deployment of capital into high quality digital investments and (iii) continued growth of its digital investment management franchise.
• The impact of these corporate activities was enhanced by continued legacy asset monetizations, which now total approximately $340 million year-to-date, and the Wafra partnership.

Insight Into Value

• Legacy asset carrying values now align more closely to fair market values, with the recognition of $2.1 billion CLNY OP share of non-cash impairments and other losses (with further details herein).
• Introducing additional disclosures to improve investor insight into components of legacy and digital segment values as outlined herein and in the Company’s second quarter earnings presentation.
• Received net proceeds of approximately $340 million from the monetization of non-core assets since the beginning of 2020, including $94 million in the second quarter.

FINANCIAL STATUS & OUTLOOK

As of August 5, 2020, the Company had $875 million of liquidity, including $375 million of corporate cash-on-hand and the full $500 million of availability on the Company’s corporate revolver. The Company recently amended the terms of its revolver to right-size availability and enhanced financial flexibility. The Company currently has no borrowings outstanding on its revolver and remains in full compliance with all of its covenants and terms.

The Company’s results of operations in the second quarter of 2020 were impacted by COVID-19, particularly within the legacy non-digital businesses, including our hospitality portfolio. The Company expects the effects of COVID-19 to continue to be significant in future periods. Further, while the Company has recently amended the terms of its revolver, issued $300 million of 2025 exchangeable notes to address near-term maturities and maintains ample liquidity to meet its operating needs, the length and severity of the crisis remain uncertain. The Company’s business and operations will also be affected by the health of the capital markets and future government actions, among other factors. Consequently, the Company will continue to refrain from providing forward looking guidance with respect to Core FFO or other operating metrics.

Digital

The Company made significant progress in its digital transformation since its last earnings report.

• In July, the Company closed a significant strategic investment from Wafra to invest over $400 million in the Digital Colony platform, including over $250 million for a 31.5% ownership stake in Digital Colony, the Company’s digital investment management business, providing permanent capital for the Company to invest in high-quality digital infrastructure assets as well as commitments of over $150 million to Digital Colony’s current and future investment products.
• In July, the Company closed on the Company’s second significant balance sheet investment in a digital operating business, with a Colony-led investor group acquiring a majority stake in Vantage Data Centers’ portfolio of 12 stabilized North American hyperscale data centers for $1.2 billion, with $190 million allocated from the Company’s balance sheet.

During the second quarter 2020, the Digital segment generated revenue of $63.4 million, net income attributable to common stockholders of $8.5 million and Core FFO of $21.2 million

Digital Investment Management (“IM”)

Digital IM generated $20.7 million of revenue, $9.3 million in Fee Related Earnings (“FRE”), net income of $1.9 million and Core FFO of $7.7 million.

• Digital IM Growth: Digital IM revenues grew 8% QoQ, reflecting the full-quarter contribution from the Zayo co-invest fees.
• Digital IM FRE Margins: As expected, FRE margins declined QoQ to 45% as Digital IM invested in additional resources to support future investment product offerings.
• New FEEUM: After the end of the quarter, the Company raised approximately $1.0 billion of new FEEUM to close on Stabilized VDC. This brings YTD FEEUM growth in the Digital IM business to 22%.
• Wafra Investments: Wafra’s strategic investment in Digital Colony includes a minimum commitment to fund over $150 million to Digital Colony’s current and next two investment products, with at least $80 million allocated to DCP I, and a commitment to invest in subsequent Digital Colony investment products.

Digital Balance Sheet – Operating Businesses

During the second quarter, Digital Operating Businesses generated revenues of $42.7 million, net income of $8.4 million and Core FFO of $13.5 million.

• Continued DataBank Growth: Continued growth in the second quarter YoY with MRR up 22% and EBITDA up 15%. All data centers remained open and operational, and DataBank opened one additional data center in Salt Lake City.

  DataBank generated solid net bookings during the quarter, in line with historical performance.

  Conditions remain generally favorable with increased customer demand for incremental power and bandwidth during the period.

• Vantage Investment: In July 2020, the Company invested approximately $190 million as part of a $1.2 billion Colony-led investment in Vantage Data Centers’ portfolio of 12 North American stabilized hyperscale data centers. The Company owns 12.3% of the stabilized portfolio.

Healthcare (Wellness Infrastructure)

During the second quarter, the Healthcare segment generated revenues of $142.7 million, net income attributable to common stockholders of $(434.4) million and Core FFO of $15.1 million

Despite the unprecedented pressure on healthcare real estate owners and operators imposed by the COVID pandemic, the Company’s healthcare properties performed well, with second quarter 2020 revenues decreasing 2% YoY.

Efforts to address COVID-19 have, in some cases, forced temporary closures of medical offices, restricted the admission of new senior housing and skilled nursing residents and patients, and caused the incurrence of unanticipated operating and staff expenses.

Portfolio Performance & Outlook

• Revenues decreased 2% primarily due to the sale of certain NNN properties in the prior year, and to a lesser extent, lower resident fees due to admissions restrictions related to COVID-19.
• The Company expects move-in restrictions at its Senior Housing Operated Properties (SHOP), which represents 15% of the healthcare portfolio’s NOI, to continue to impact future periods.
• NOI decreased 22% YoY primarily driven by COVID-19 related labor costs as well as higher usage and cost of personal protective equipment at SHOP, which were not incurred in the prior year period.
• Core FFO increased 28% YoY. This increase was a result of reduced interest expense, due to lower interest rates and debt balances and the incurrence of one-time refinancing expenses in 2Q 2019. These positive variances were partially offset by lower NOI.
• Overall, rental collections in the medical office building and triple-net lease portfolios remain at levels consistent with pre-COVID levels; during the quarter contractual rent collections were 96%.

Capital Structure & Activity

• Sale activity is limited, given uncertain market conditions.
• The Company is focused on resolving portfolios with operating covenant defaults or potential defaults and, in select cases, seeking debt service forbearance or loan modifications.
• The healthcare portfolio has total consolidated debt of $2.9 billion ($2.1 billion CLNY OP share) with a weighted average interest rate of 3.9%.

Hospitality

During the second quarter, the Hospitality segment generated revenues of $57.1 million, net income attributable to common stockholders of $(633.9) million and Core FFO of $(39.6) million.

The Company’s Hospitality segment was materially impacted by COVID-19, including government mandated travel restrictions implemented in late March 2020. The Company’s hotels experienced significant declines in occupancy, down 62% YoY, during the second quarter. These occupancy declines were compounded by lower average daily rates, resulting in average RevPAR of $29 during the quarter, down 73% from the prior year period.

Portfolio Performance & Outlook

• Reduced leisure and business travel due to travel restrictions and public anxiety surrounding the spread of COVID-19 led to declines in occupancy levels (30.2% average) and realized RevPAR (average $29).
• NOI before FF&E expense, reflecting performance at the operating level was negative during the quarter. Hotel management teams worked actively to cut operating cash burn by effectively reducing hotel footprints and cutting all non-essential expenses. A combination of these cost cutting initiatives and a recovery in occupancy resulted in positive NOI before FF&E during June.
• Average occupancy levels troughed in April at 22% and subsequently rebounded to 39% in June. They currently remain above 40% on a portfolio wide basis.
• Portfolios with extended stay concentrations (38% of hotels) and weekend leisure demand have outperformed.

Capital Structure & Activity

• The Hospitality segment owns its hotels through six separately financed portfolios (THL Hotel Portfolio is held in the OED segment), each capitalized with debt that is (i) not cross-collateralized between portfolios and (ii) non-recourse to the Company.
• The Company is in default under a majority of its non-recourse hospitality debt, but the Company has either (i) reached a modification / forbearance with its lenders or (ii) remains in active negotiations with lenders and servicers to modify debt terms in order to protect the value of individual investment-level portfolios or appoint a receiver on one portfolio. The individual portfolios are unable to fully service interest expense, but corporate cash is currently not being used to service debt and the Company does not anticipate allocating material amounts of its own capital to these portfolios.
• The hospitality portfolio has total consolidated debt of $2.7 billion ($2.5 billion CLNY OP share) with a weighted average interest rate of 3.3%.
• Individual asset sales have been put on hold as a result of COVID-19. When market conditions permit, the Company will evaluate all monetization opportunities, including (i) single asset sales, (ii) portfolio sales, and (iii) overall platform exits.

Colony Credit Real Estate, Inc. (“CLNC”)

Colony Credit Real Estate, Inc. is a publicly-traded (NYSE:CLNC) commercial real estate credit REIT externally managed by the Company with $4.7 billion in at-share assets and $1.7 billion in GAAP book equity value, $13.06 per share, as of June 30, 2020. The Company owns approximately 48.0 million shares and share equivalents, or 36%, of CLNC.

• Net Income/Core FFO: During the second quarter 2020, net income attributable to common stockholders was $(315.5) million and Core FFO ex-gains/losses was $13.6 million. The Company’s Core FFO pickup from CLNC represents a 36% share of CLNC’s Core Earnings.
• Focus on Liquidity: CLNC implemented a series of initiatives during the second quarter designed to boost liquidity and enhance financial flexibility, notably doubling liquidity to approximately $525 million while reducing recourse financing by over $600 million.
• Carrying Value Adjustment: As an equity method investment, the Company’s carrying value in CLNC is periodically compared to the trading price of CLNC shares. Based on the differential between the prior carrying value and the value implied by CLNC’s trading price, the Company took an other-than-temporary impairment charge to set carrying value based on CLNC’s closing price of $7.02 per share as of June 30, 2020.
• CLNC dividend: CLNC suspended its monthly cash dividend beginning with the month ending April 30, 2020.

Other Investment Management

During the second quarter, the Other Investment Management segment generated revenues of $30.2 million, net income attributable to common stockholders of $(446.7) million and Core FFO of $24.1 million.

The Company’s non-digital investment management business had FEEUM of $8.5 billion as of June 30, 2020, down 28% from the prior year due principally to the sale of the light industrial platform and NorthStar Realty Europe. Excluding the light industrial platform and NorthStar Realty Europe, FEEUM was down 6% over the prior year.

The Company expects to continue to monetize investment franchises within its Other Investment Management segment, and in other cases for certain of these legacy investment funds to run-off as they reach the end of the respective fund’s life.

• Revenue and Core FFO: Revenues from Other IM declined 30% YoY to $30.2 million in the second quarter, due to the reduction in FEEUM referenced above.
• Reduction of goodwill and intangibles: In the second quarter of 2020, the Company recognized a $515 million non-cash impairment to goodwill in its non-digital investment management business, which was added back to the Company’s Core FFO. The net book value of such goodwill and intangibles following the reduction is $142 million, which principally reflects the value of the Company’s management contract with CLNC.

Other Equity and Debt (“OED”)

During the second quarter, the OED segment generated revenues of $74.4 million, net income attributable to common stockholders of $(143.5) million and Core FFO ex-gains/losses of $(1.0) million.

The Company owns a diversified group of non-digital real estate and real estate-related debt and equity investments, many of which are through joint ventures with funds managed by the Company’s other investment management business. Over time, the Company expects to monetize the bulk of its existing portfolio as it completes its digital transformation.

• Enhanced Disclosure: Given the segment’s significant contribution to net book value and expectation that it will be a meaningful source of liquidity from monetizations over the course of the next 18 months, including the second half of 2020, the Company is providing enhanced disclosure on OED assets, as detailed below.
• Sales and/or monetization: During the second quarter, the Company monetized $94 million of OED or other non-core investments. Most notably, the Company recapped its interest in a grocery retail asset for $74 million, harvesting approximately 70% of the expected eventual value upfront. Year-to-date, the Company has generated approximately $340 million from OED and other non-core monetizations.
• THL Hotel Portfolio Impacted by COVID: The primary driver of reduced revenue and Core FFO from the OED segment, excluding the impact of monetizations over the last twelve months, is the impact of COVID-19 on the THL Hotel Portfolio, in which the Company owns a 55% stake.
  • THL consolidated revenues decreased $48 million.
  • In active negotiations with the portfolio’s lender and servicer to modify debt terms in order to protect value.

Contacts

Investor Contacts:
Severin White

Managing Director, Head of Public Investor Relations

212-547-2777

swhite@clny.com

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