NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1.
|
Formation and Organization
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NorthStar Realty Europe Corp. (“NorthStar Europe” or the “Company”) (NYSE: NRE), a publicly-traded real estate investment trust (“REIT”), is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. The Company commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp. (“NorthStar Realty”) of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Realty Europe Corp., a Maryland corporation (the “Spin-off”). The Company’s objective is to provide its stockholders with stable and recurring cash flow supplemented by capital growth over time.
The Company is externally managed and advised by an affiliate of the Manager. References to “the Manager” refer to NorthStar Asset Management Group Inc. (“NSAM”) for the period prior to the Mergers (refer below) and Colony NorthStar, Inc. (“Colony NorthStar” or “CLNS”), for the period subsequent to the Mergers. As part of the Mergers, NSAM changed its name to Colony NorthStar, Inc.
Substantially all of the Company’s assets, directly or indirectly, are held by, and the Company conducts its operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the “Operating Partnership”). The Company has elected to be taxed, and will continue to conduct its operations so as to continue to qualify, as a REIT for U.S. federal income tax purposes.
All references herein to the Company refer to NorthStar Realty Europe Corp. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.
Merger Agreements among NSAM, NorthStar Realty and Colony Capital, Inc.
On January 10, 2017, the Company’s external manager, NSAM, completed a tri-party merger with NorthStar Realty and Colony Capital, Inc. (“Colony”), pursuant to which the companies combined in an all-stock merger (“the Mergers”) of equals transaction to create a diversified real estate and investment management company. Under the terms of the merger agreement, NSAM, Colony and NorthStar Realty, through a series of transactions, merged with and into NSAM, which was renamed Colony NorthStar (NYSE: CLNS). Colony NorthStar is a leading global equity REIT with an embedded investment management platform.
Amended and Restated Management Agreement
On November 9, 2017, the Company entered into an amended and restated management agreement (the “Amended and Restated Management Agreement”) with an affiliate of the Manager, effective as of January 1, 2018. Refer to Note 6 “Related Party Arrangements” for a description of the terms of the Amended and Restated Management Agreement.
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2.
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Summary of Significant Accounting Policies
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Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended
December 31, 2017
, which was filed with the U.S. Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIE”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Variable Interest Entities
A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The determination of whether an entity is a VIE includes both a qualitative and quantitative analysis. The Company bases its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and relevant financial agreements and the quantitative analysis on the forecasted cash flow of the entity. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.
A VIE must be consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents has both the: (i) power to direct the activities that most significantly impact the VIE’s economic performance; and (ii) obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE by considering qualitative and quantitative factors, including, but not limited to: which activities most significantly impact the VIE’s economic performance and which party controls such activities; the amount and characteristics of its investment; the obligation or likelihood for the Company or other interests to provide financial support; consideration of the VIE’s purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders and the similarity with and significance to the business activities of the Company and the other interests. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period. Significant judgments related to these determinations include estimates about the current and future fair value and performance of investments held by these VIEs and general market conditions.
The Company will evaluate its investments to determine whether they are a VIE. The Company analyzes new investments and financings, as well as reconsideration events for existing investments and financings, which vary depending on type of investment or financing.
Voting Interest Entities
A voting interest entity is an entity in which the total equity investment at risk is sufficient to enable it to finance its activities independently and the equity holders have the power to direct the activities of the entity that most significantly impact its economic performance, the obligation to absorb the losses of the entity and the right to receive the residual returns of the entity. The usual condition for a controlling financial interest in a voting interest entity is ownership of a majority voting interest. If the Company has a majority voting interest in a voting interest entity, the entity will generally be consolidated. The Company does not consolidate a voting interest entity if there are substantive participating rights by other parties and/or kick-out rights by a single party or through a simple majority vote.
The Company performs on-going reassessments of whether entities previously evaluated under the voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework.
Non-controlling Interests
A non-controlling interest in a consolidated subsidiary is defined as the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to the Company. A non-controlling interest is required to be presented as a separate component of equity on the consolidated balance sheets and presented separately as net income (loss) and other comprehensive income (loss) (“OCI”) attributable to non-controlling interests. An allocation to a non-controlling interest may differ from the stated ownership percentage interest in such entity as a result of a preferred return and allocation formula, if any, as described in such governing documents.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.
Comprehensive Income (Loss)
The Company reports consolidated comprehensive income (loss) in separate statements following the consolidated statements of operations. Comprehensive income (loss) is defined as the change in equity resulting from net income (loss) and OCI. The components of OCI principally include the foreign currency translation adjustment, net.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Cash and Cash Equivalents
The Company considers all highly-liquid investments with an original maturity date of three months or less and deposits held with third parties that are readily convertible to cash to be cash equivalents. Cash, including amounts restricted at certain banks and financial institutions, may at times exceed insurable amounts. The Company seeks to mitigate credit risk by placing cash and cash equivalents with major financial institutions. To date, the Company has not experienced any losses on cash and cash equivalents. Cash and cash equivalents exclude escrow arrangements entered into for specific warranties in relation to the real estate sales which are recorded in other assets in the consolidated financial statements.
Restricted Cash
Restricted cash primarily consists of amounts related to operating real estate such as escrows for taxes, insurance, capital expenditures, tenant security deposits and payments required under certain lease agreements and amounts related to the Company’s borrowings.
Operating Real Estate
Operating real estate is carried at historical cost less accumulated depreciation. Ordinary repairs and maintenance are expensed as incurred. Major replacements and improvements which extend the life of the asset are capitalized and depreciated over their useful life. Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets.
The Company accounts for purchases of operating real estate using the acquisition method, where the purchase price is allocated to tangible assets such as land, building, tenant and land improvements and other identified intangibles, such as in-place leases, above/below-market leases and goodwill to the extent the acquisition is a business combination. Costs directly related to an acquisition deemed to be a business combination are expensed and included in transaction costs in the consolidated statements of operations.
Operating real estate is depreciated using the straight-line method over the estimated useful lives of the assets, summarized as follows:
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Category:
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Term:
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Building
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40 years
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Building improvements
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Lesser of the useful life or remaining life of the building
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Building leasehold interests
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Lesser of 40 years or remaining term of the lease
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Tenant improvements
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Lesser of the useful life or remaining term of the lease
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Preferred Equity Investments
Preferred equity investments are generally intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan fees, premium, discount and unfunded commitments, if any. Preferred equity investments that are deemed to be impaired are carried at amortized cost less a loan loss reserve, if deemed appropriate, which approximates fair value. Preferred equity investments where the Company does not intend to hold the investment for the foreseeable future or until its expected payoff are classified as held for sale and recorded at the lower of cost or fair value.
Assets and Related Liabilities Held For Sale
Operating real estate which has met the criteria to be classified as held for sale is separately presented on the consolidated balance sheets. Such operating real estate is recorded at the lower of its carrying value or its estimated fair value less the cost to sell, net of the intangible assets associated with the asset, with any write-down to fair value less cost to sell recorded as an impairment loss. Once a property is determined to be held for sale, depreciation and amortization is no longer recorded. The Company records a gain or loss on sale of real estate when title is conveyed to the buyer and the Company has no substantial economic involvement with the property. If the sales criteria for the full accrual method are not met, the Company defers some or all of the gain or loss recognition by applying the finance, leasing, profit sharing, deposit, installment or cost recovery method, as appropriate, until the sales criteria are met.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Deferred Costs
Deferred costs primarily include deferred financing costs and deferred lease costs. Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. Costs related to revolving credit facilities are recorded in other assets and are amortized to interest expense using the straight-line basis over the term of the facility. Costs related to other borrowings are recorded net against the carrying value of such borrowings and are amortized into interest expense using the effective interest method or straight-line method depending on the type of financing. Unamortized deferred financing costs are expensed when the associated borrowing is repaid before maturity to realized gain (loss) on sales and other. Costs incurred in seeking financing transactions, which do not close, are expensed in the period in which it is determined that the financing will not occur. Deferred lease costs consist of fees incurred to initiate and renew operating leases, which are amortized on a straight-line basis over the remaining lease term and are recorded to depreciation and amortization in the consolidated statements of operations.
Intangible Assets and Intangible Liabilities
The Company records acquired identified intangibles, which includes intangible assets (such as value of the above-market leases, in-place leases, below-market ground leases, goodwill and other intangibles) and intangible liabilities (such as the value of below-market leases), based on estimated fair value. The value allocated to the above or below-market leases is amortized net to rental income, the value of below-market ground leases is amortized into properties - operating expense and in-place leases is amortized into depreciation and amortization expense, respectively, in the consolidated statements of operations on a straight-line basis over the respective remaining lease term.
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. The Company analyzes goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit, related to such goodwill, is less than the carrying amount. If the carrying amount exceeds fair value an impairment is recorded for the difference.
The following table presents identified intangibles as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
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|
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|
|
|
|
|
|
|
|
|
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|
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March 31, 2018 (Unaudited)
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December 31, 2017
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Gross Amount
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Accumulated Amortization
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Net
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Gross Amount
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Accumulated Amortization
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Net
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Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
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In-place lease
|
$
|
66,787
|
|
|
$
|
(28,097
|
)
|
|
$
|
38,690
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|
|
$
|
64,427
|
|
|
$
|
(24,290
|
)
|
|
$
|
40,137
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|
Above-market lease
|
36,145
|
|
|
(11,469
|
)
|
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24,676
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|
|
34,882
|
|
|
(9,919
|
)
|
|
24,963
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|
Below-market ground lease
|
36,801
|
|
|
(1,754
|
)
|
|
35,047
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|
|
34,497
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|
|
(1,109
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)
|
|
33,388
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|
Goodwill
(1)
|
16,145
|
|
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N/A
|
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|
16,145
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|
|
15,697
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|
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N/A
|
|
|
15,697
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Total
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$
|
155,878
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|
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$
|
(41,320
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)
|
|
$
|
114,558
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|
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$
|
149,503
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|
|
$
|
(35,318
|
)
|
|
$
|
114,185
|
|
|
|
|
|
|
|
|
|
|
|
|
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Intangible liabilities:
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|
|
|
|
|
|
|
|
|
|
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Below-market lease
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$
|
34,244
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|
|
$
|
(11,029
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)
|
|
$
|
23,215
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|
|
$
|
32,267
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|
|
$
|
(8,964
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)
|
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$
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23,303
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|
Above-market ground lease
|
5,670
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|
|
(208
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)
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5,462
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|
|
5,513
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|
|
(184
|
)
|
|
5,329
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|
Total
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$
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39,914
|
|
|
$
|
(11,237
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)
|
|
$
|
28,677
|
|
|
$
|
37,780
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|
|
$
|
(9,148
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)
|
|
$
|
28,632
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|
_____________________________
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(1)
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Represents goodwill associated with certain acquisitions in exchange for shares in the underlying portfolios. The goodwill and a corresponding deferred tax liability was recorded at acquisition based on tax basis differences.
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NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other Assets and Other Liabilities
The following tables present a summary of other assets and other liabilities as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
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|
|
|
|
|
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March 31, 2018 (Unaudited)
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|
December 31, 2017
|
Other assets:
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|
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Prepaid expenses
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$
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4,246
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$
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1,936
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Deferred leasing and other costs, net
|
6,756
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|
|
6,019
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|
Deferred tax assets, net
|
435
|
|
|
—
|
|
Straight-line rent, net
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13,939
|
|
|
10,969
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|
Escrow receivable
|
3,209
|
|
|
3,286
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|
Other
|
711
|
|
|
905
|
|
Total
|
$
|
29,296
|
|
|
$
|
23,115
|
|
|
|
|
|
|
March 31, 2018 (Unaudited)
|
|
December 31, 2017
|
Other liabilities:
|
|
|
|
Deferred tax liabilities
|
$
|
8,837
|
|
|
$
|
8,548
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Prepaid rent received and unearned revenue
|
13,290
|
|
|
8,406
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|
Tenant security deposits
|
4,482
|
|
|
4,435
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Prepaid escalation and other income
|
2,143
|
|
|
3,982
|
|
Other
|
509
|
|
|
386
|
|
Total
|
$
|
29,261
|
|
|
$
|
25,757
|
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Revenue Recognition
Operating Real Estate
Rental and escalation income from operating real estate is derived from leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for annual rentals, subject to indexation, and expense reimbursements to be paid in quarterly or monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in other assets, net on the consolidated balance sheets. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Escalation income represents revenue from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.
In a situation in which a lease or leases associated with a significant tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above and below market lease intangibles, in-place lease value and leasing commissions). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within depreciation and amortization in the consolidated statements of operations.
Preferred Equity Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such investment is reclassified to held for sale.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Impairment on Investments
Operating Real Estate
The Company’s real estate portfolio is reviewed on a quarterly basis, or more frequently as necessary, to assess whether there are any indicators that the value of its operating real estate may be impaired or that its carrying value may not be recoverable. A property’s value is considered impaired if the Company’s estimate of the aggregate expected future undiscounted cash flow to be generated by the property is less than the carrying value of the property. In conducting this review, the Company considers global macroeconomic factors, real estate sector conditions, together with investment specific and other factors. To the extent an impairment has occurred, the loss is measured as the excess of the carrying value of the property over the estimated fair value of the property and recorded in impairment losses in the consolidated statements of operations. For the
three months ended
March 31, 2018
and 2017, the Company did not recognize any impairment losses.
An allowance for a doubtful account for a tenant receivable is established based on a periodic review of aged receivables resulting from estimated losses due to the inability of a tenant to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on unbilled rent receivable based on an evaluation of the collectability of such amounts.
Preferred Equity Investments
Preferred equity investments are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all principal and interest amounts due according to the contractual terms. The Company assesses the credit quality of the portfolio and adequacy of investment loss reserves on an annual basis or more frequently as necessary. Significant judgment of the Company is required in this analysis. The Company considers the estimated net recoverable value of the investment as well as other factors, including but not limited to the fair value of any collateral, the amount and the status of any senior debt, the quality and financial condition of the borrower and the competitive situation of the area where the underlying collateral is located. Because this determination is based on projections of future economic events, which are inherently subjective, the amount ultimately realized may differ materially from the carrying value as of the balance sheet date. If upon completion of the assessment, the estimated fair value of the underlying collateral is less than the net carrying value of the investment, an investment loss reserve is recorded with a corresponding charge to provision for investment losses. The investment loss reserve for each investment is maintained at a level that is determined to be adequate by management to absorb probable losses.
Income recognition is suspended for an investment when, in the opinion of the Company, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired investment is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired investment is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the investment becomes contractually current and performance is demonstrated to be resumed. Interest accrued and not collected will be reversed against interest income. An investment is written off when it is no longer realizable and/or legally discharged. As of
March 31, 2018
, the Company did not have any impaired preferred equity investments.
Equity-Based Compensation
The Company accounts for equity-based compensation awards using the fair value method, which requires an estimate of fair value of the award. Awards may be based on a variety of measures such as time, performance, market or a combination thereof. For time-based awards, fair value is determined based on the stock price on the grant date. The Company recognizes compensation expense over the vesting period on a straight-line basis or the attribution method depending if the grant is to an employee or non-employee. For performance-based awards, fair value is determined based on the stock price at the date of grant and an estimate of the probable achievement of such measure. The Company recognizes compensation expense over the requisite service period, net of estimated forfeitures, using the accelerated attribution expense method. For market-based measures, fair value is determined using a Monte Carlo analysis under a risk-neutral premise using a risk-free interest rate. The Company recognizes compensation expense, over the requisite service period, net of estimated forfeitures, on a straight-line basis. For awards with a combination of performance or market measures, the Company estimates the fair value as if it were
two
separate awards. First, the Company estimates the probability of achieving the performance measure. If it is not probable the performance condition will be met, the Company records the compensation expense based on the fair value of the market measure, as described above. This expense is recorded even if the market-based measure is never met. If the performance-based measure is subsequently estimated to be achieved, the Company records compensation expense based on the performance-based measure. The Company would then record a cumulative catch-up adjustment for any additional compensation expense.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Equity-based compensation issued to non-employees is accounted for using the fair value of the award at the earlier of the performance commitment date or performance completion date. Time-based awards are remeasured every quarter based on the stock price as of the end of the reporting period until such awards vest, if any.
Derivatives
The Company seeks to use derivative instruments to manage exposure to interest rate risk and foreign currency exchange rate risk. The change in fair value for a derivative is recorded in unrealized gain (loss) on derivatives and other in the consolidated statements of operations.
The Company’s derivative instruments are recorded on the consolidated balance sheets at fair value and do not qualify as hedges under U.S. GAAP.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment (“CTA”), net, is recorded as a component of accumulated OCI in the consolidated statements of equity. For the
three months ended
March 31, 2018
and
2017
, the Company reclassified
$0.3 million
and
$(0.4) million
, respectively, of CTA to realized gain (loss) on sales and other in the consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3).
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in unrealized gain (loss) on derivatives and other in the consolidated statements of operations.
Earnings Per Share
The Company’s basic earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to common stockholders by the weighted average number of common stock outstanding. Diluted EPS includes restricted stock and the potential dilution that could occur if outstanding restricted stock units (“RSUs”) or other contracts to issue common stock, assuming performance hurdles have been met, were converted to common stock (including limited partnership interests in the Operating Partnership owned by holders other than the Company (“Common Units”) and Common Units which are structured as profits interests (“LTIP Units” collectively referred to as Unit Holders) (refer to Note 8), where such exercise or conversion would result in a lower EPS. The dilutive effect of such RSUs and Unit Holders is calculated assuming all units are converted to common stock.
Income Taxes
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes with the initial filing of its 2015 U.S. federal tax return and will continue to comply with the related provisions of the Internal Revenue Code of 1986, as amended, the (“Internal Revenue Code”). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least
90%
of its REIT taxable income to its stockholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company distributes to its stockholders
100%
of its taxable income and therefore no provision for U.S. federal income taxes has been included in the accompanying consolidated financial statements for the
three months ended
March 31, 2018
and
2017
.
The Company conducts its business through foreign subsidiaries which may be subject to local level income tax in the European jurisdictions it operates. The Company has also elected taxable REIT subsidiary (“TRS”) status on certain subsidiaries. This enables the Company to provide services that would otherwise be considered impermissible for REITs and participate in activities that do not qualify as “rents from real property.” The TRS that is not resident in the U.S. (“foreign TRS”) and, as such, not subject to U.S. taxation but is subject to foreign income taxes only. In addition, the REIT will not generally be subject to any additional U.S. taxes on the repatriation of foreign TRS earnings.
For the Company’s foreign subsidiaries, including the Company’s foreign TRS, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the foreign tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. The Company evaluates the realizability of its deferred tax assets (e.g. net operating loss) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets,
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Due to past and projected losses in certain local jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company recognized net cumulative valuation allowances against the Company’s deferred tax assets. The Company will continue to review its deferred tax assets in accordance with U.S. GAAP. The Company recorded an income tax expense of
$0.1 million
for the three months ended March 31, 2018 and an income tax benefit of
$0.3 million
for the three months ended March 31, 2017.
Recent Accounting Pronouncements: Accounting Standards Adopted in 2018
Revenue Recognition -
In May 2014, FASB issued an accounting update (ASU No. 2014-09) requiring a company to recognize as revenue the amount of consideration it expects to be entitled to in connection with the transfer of promised goods or services to customers. The Company has adopted the standard on its required effective date of January 1, 2018 using the modified retrospective approach and has applied the guidance to contracts not yet completed as of the date of adoption. The new revenue standard specifically excludes revenue streams for which specific guidance is stipulated in other sections of the codification and therefore it will not impact rental income or interest income generated on financial instruments such as preferred equity investments. The Company is the lessor for triple net and gross leases classified as operating leases in which rental income and tenant reimbursements are recorded. The revenue from these leases are scoped out of the new revenue recognition guidance. All leases are accounted for under ASC 840 until the adoption of the new leasing guidance within ASC 842. There were no significant changes as a result of the new revenue recognition standard. In addition, the Company expects to adopt the practical expedient which allows lessors to consider lease and non-lease components as a single performance obligation to the extent that the timing and pattern of transfer is the same and the lease is classified an operating lease.
Cash Flow Classification
- In August 2016, the FASB issued guidance (ASU No. 2016-15) that makes eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new guidance requires adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures.
Restricted Cash -
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows: Restricted Cash,
which requires that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item of the balance sheet, this ASU requires disclosure of a reconciliation between the totals in the statement of cash flows and the related captions on the balance sheet. The new guidance also requires disclosure of the nature of the restricted cash and restricted cash equivalents, similar to the existing requirements under Regulation S-X, however, it does not define restricted cash and restricted cash equivalents. The Company adopted this guidance on January 1, 2018 and the required retrospective application of this new standard resulted in changes to the previously reported statement of cash flows as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
Cash flow provided by (used in):
|
|
As Previously Reported
|
|
After Adoption of ASU 2016-18
|
Operating activities
|
|
$
|
5,707
|
|
|
$
|
4,388
|
|
Investing activities
|
|
20,582
|
|
|
20,582
|
|
Financing activities
|
|
(18,606
|
)
|
|
(18,606
|
)
|
Business Combination -
In January 2017, the FASB issued guidance (ASU No. 2017-01) to clarify the definition of a business under ASC 805. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company expects that acquisitions of real estate or in-substance real estate will not meet the revised definition of a business because substantially all of the fair value is concentrated in a single identifiable asset or group of similar identifiable assets (i.e. land, buildings, and related intangible assets). A significant difference between the accounting for an asset acquisition and a business combination is that transaction costs are capitalized for an asset acquisition, rather than expensed for a business
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
combination. The Company adopted the standard on its required effective date of January 1, 2018. This guidance did not have a material impact on its consolidated financial statements and related disclosures.
Derecognition and Partial Sales of Nonfinancial Assets
- In February 2017, the FASB issued an accounting update (ASU No. 2017-05) which clarifies the scope of recently established guidance on nonfinancial asset derecognition, which applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. In addition, the guidance clarifies the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets to align with the new revenue recognition standard to be more consistent with the accounting for sale of a business. Specifically, in a partial sale to a noncustomer, when a noncontrolling interest is received or retained, the latter is considered a noncash consideration and measured at fair value, which would result in full gain or loss recognized upon sale. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures as there were no such sales for the three months ended March 31, 2018.
Goodwill Impairment
- In January 2017, the FASB issued guidance (ASU No. 2017-04) which removes Step 2 from the goodwill impairment test. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures.
Share-based Payments -
In May 2017, the FASB issued guidance (ASU No. 2017-09) clarifying when to account for a change to the terms or conditions of a share-based payment award as a modification. The Company has adopted this guidance on January 1, 2018 and it did not have a material impact on its consolidated financial statements and related disclosures.
Recent Accounting Pronouncements: Future Application of Accounting Standards
Leases -
In February 2016, the FASB issued an accounting update (ASU No. 2016-02) which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. The update is expected to result in the recognition of a right-to-use asset and related liability to account for the Company’s future obligations under its ground lease arrangements for which it is the lessee. The update will require that lessees and lessors capitalize, as initial direct costs, only those costs that are incurred due to the execution of a lease. Under this guidance, allocated payroll costs and other costs that are incurred regardless of whether the lease is obtained will no longer be capitalized as initial direct costs and instead will be expensed as incurred. Lessors will continue to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company expects to adopt the package of practical expedients under the guidance and the Company will not need to reassess whether any expired or expiring contracts contain leases; will not need to revisit lease classification for any expired or expiring leases; and will not need to reassess initial direct costs for any existing leases. In addition, the Company expects to adopt the practical expedient which allows lessors to consider lease and non-lease components as a single performance obligation to the extent that the timing and pattern of transfer is the same and the lease is classified an operating lease. As of March 31, 2018, the Company has
two
ground lease agreements with annual payments of
$0.7 million
. The new guidance is to be applied using a modified retrospective approach at the beginning of the earliest comparative period in the financial statements and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the impact, if any, that this guidance will have on its consolidated financial position, results of operations and financial statement disclosures.
Financial Instruments -
In June 2016, the FASB issued guidance (ASU No. 2016-13) that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. The Company continues to assess the potential effect the adoption of this guidance will have on its consolidated financial statements and related disclosures.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents operating real estate, net as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018 (Unaudited)
|
|
December 31, 2017
|
Land
|
|
$
|
405,248
|
|
|
$
|
393,691
|
|
Buildings and improvements
|
|
983,350
|
|
|
954,314
|
|
Building, leasehold interests and improvements
|
|
204,131
|
|
|
195,929
|
|
Furniture, fixtures and equipment
|
|
1,774
|
|
|
1,653
|
|
Tenant improvements
|
|
64,120
|
|
|
61,303
|
|
Operating real estate, gross
|
|
1,658,623
|
|
|
1,606,890
|
|
Less: accumulated depreciation
|
|
(107,538
|
)
|
|
(95,356
|
)
|
Operating real estate, net
|
|
$
|
1,551,085
|
|
|
$
|
1,511,534
|
|
Real Estate Held for Sale
The following table summarizes the Company’s operating real estate held for sale as of
March 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(1)(2)
|
|
Liabilities
(1)(2)
|
Location
|
|
Type
|
|
Properties
|
|
Operating Real Estate, Net
|
|
Intangible Assets, Net
|
|
Other Assets
|
|
Total
|
|
Intangible Liabilities, Net
|
|
Other Liabilities
|
|
Total
|
Lisbon, Portugal
|
|
Office
|
|
1
|
|
$
|
12,250
|
|
|
$
|
64
|
|
|
$
|
1,175
|
|
|
$
|
13,489
|
|
|
$
|
—
|
|
|
$
|
355
|
|
|
$
|
355
|
|
Rotterdam, Netherlands
(3)
|
|
Office
|
|
1
|
|
152,988
|
|
|
5,217
|
|
|
4,394
|
|
|
162,599
|
|
|
667
|
|
|
—
|
|
|
667
|
|
Total
|
|
|
|
2
|
|
$
|
165,238
|
|
|
$
|
5,281
|
|
|
$
|
5,569
|
|
|
$
|
176,088
|
|
|
$
|
667
|
|
|
$
|
355
|
|
|
$
|
1,022
|
|
_____________________________
|
|
(1)
|
The assets and liabilities classified as held for sale are expected to be sold on the open market as an asset sale for the asset in Rotterdam and as a share sale for the asset in Lisbon subject to standard industry terms and conditions. The assets together contributed
$3.5 million
and
$3.6 million
of revenue and
$(0.1) million
and
$(1.3) million
of income (loss) before income tax benefit (expense) for the
three months ended
March 31, 2018
and
2017
, respectively.
|
|
|
(2)
|
Represents operating real estate and intangible assets, net of accumulated depreciation and amortization of
$20.3 million
prior to being reclassified into held for sale.
|
|
|
(3)
|
In April 2018, the Company completed the sale of the Maastoren property in Rotterdam, our largest non-core asset, for approximately
$195 million
.
|
Real Estate Sales
During the first quarter 2018, the Company did not sell any properties. During the first quarter 2017, the Company sold
one
non-core asset for
$20.6 million
and received
$19.9 million
of proceeds, net of sales costs. In connection with this sale, for the three months ended March 31, 2017, the Company recorded a
$3.4 million
realized gain in the Company’s consolidated statements of operations.
Certain escrow accounts are not held by the Company and are expected to be released within the next 12 months and to the extent this cash has not been released to purchasers to satisfy claims, the Company will recognize an additional gain on the sale at the earlier of the time of the cash receipt or when collection can be reasonably assured. As of
March 31, 2018
, there were
$1.2 million
in certain escrow accounts that were not held by the Company which the Company could potentially record as a realized gain. The Company recorded a realized gain of
$0.6 million
and
$1.7 million
for the three months ended March 31, 2018 and 2017, respectively, related to the release of an escrow account from a prior disposal.
|
|
4.
|
Preferred Equity Investments
|
In May 2017, the Company partnered with a property developer in China to acquire 20 Gresham Street, a Class A office building in London, United Kingdom and the Company invested
$36.8 million
(
£26.2 million
) of preferred equity
,
which the Company accounts for as a debt investment.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents one preferred equity investment as of
March 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
|
Asset Type
|
|
Principal Amount
|
|
Carrying Value
|
|
Fixed Rate
|
|
Mandatory Redemption
|
Preferred equity investment
|
|
$
|
36,770
|
|
|
$
|
36,770
|
|
|
8.00
|
%
|
|
May 2020
|
Credit Quality Monitoring
The Company’s preferred equity investment is secured by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its preferred equity investment at least quarterly and determines the relative credit quality principally based on: (i) whether the borrower is currently paying debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a preferred equity investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality preferred equity investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality preferred equity investment that is not performing, which the Company defines as a loan in maturity default and/or past due on its contractual debt service payments and deemed not to be collectible, as a non-performing loan (“NPL”).
As of
March 31, 2018
, the Company’s preferred equity investment was performing in accordance with the contractual terms of its governing documents, in all material respects, and was categorized as a performing loan. For the
three months ended
March 31, 2018
, the preferred equity investment contributed all interest income recorded on the consolidated statement of operations.
The following table presents borrowings as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
Final
Maturity
|
|
Contractual
Interest Rate
(2)
|
|
Principal
Amount
|
|
Carrying
Value
|
|
Principal
Amount
|
|
Carrying
Value
|
Mortgage and other notes payable:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Trias Portfolio 1
(3)(5)
|
|
Apr-20
|
|
EURIBOR + 2.70%
|
|
$
|
10,674
|
|
|
$
|
10,437
|
|
|
$
|
10,378
|
|
|
$
|
10,116
|
|
Trias Portfolio 2
(3)(5)(7)
|
|
Dec-20
|
|
EURIBOR + 1.55%
|
|
94,188
|
|
|
93,552
|
|
|
91,577
|
|
|
90,880
|
|
Trias Portfolio 3
(3)(5)
|
|
Apr-20
|
|
EURIBOR + 1.65%
|
|
46,092
|
|
|
45,069
|
|
|
44,814
|
|
|
43,684
|
|
Trias Portfolio 4
(3)(5)
|
|
Apr-20
|
|
GBP LIBOR + 2.70%
|
|
18,023
|
|
|
17,816
|
|
|
17,326
|
|
|
17,123
|
|
SEB Portfolio 1
(5)
|
|
Jul-24
|
|
EURIBOR + 1.55%
(8)
|
|
326,365
|
|
|
322,275
|
|
|
317,317
|
|
|
313,153
|
|
SEB Portfolio 2
(5)
|
|
Jul-24
|
|
GBP LIBOR + 1.55%
(8)
|
|
260,924
|
|
|
258,022
|
|
|
250,825
|
|
|
247,902
|
|
SEB Portfolio - Preferred
(4)
|
|
Apr-60
|
|
2.30%
|
|
105,484
|
|
|
105,204
|
|
|
102,560
|
|
|
102,271
|
|
Trianon Tower
(5)
|
|
Jul-23
|
|
EURIBOR + 1.30%
|
|
406,567
|
|
|
405,059
|
|
|
395,294
|
|
|
393,763
|
|
Other - Preferred
(6)
|
|
Oct-45
|
|
1.00%
|
|
4,681
|
|
|
4,681
|
|
|
4,551
|
|
|
4,551
|
|
Total mortgage and other notes payable
|
|
|
|
|
|
$
|
1,272,998
|
|
|
$
|
1,262,115
|
|
|
$
|
1,234,642
|
|
|
$
|
1,223,443
|
|
_____________________________
|
|
(1)
|
All mortgage notes and other notes payable are denominated in local currencies, and as such, the principal amount generally increased from 2017 to 2018 due to the change in the Euro or U.K. Pound Sterling compared to the U.S. dollar. All borrowings are non-recourse and are interest-only through maturity, subject to compliance with covenants of the respective borrowing, and denominated in the same currency as the assets securing the borrowing.
|
|
|
(2)
|
All floating rate debt is subject to interest rate caps of
0.5%
for EURIBOR and
2.0%
for GBP LIBOR which are used to manage interest rate exposure.
|
|
|
(3)
|
Trias Portfolio represents the cross-collateralized borrowings among the IVG Portfolio, Internos Portfolio and Deka Portfolio.
|
|
|
(4)
|
Represents preferred equity certificates with a contractual interest rate of
2.3%
through May 2019, which increases to EURIBOR plus
12.0%
through May 2022 and subsequently to EURIBOR plus
15.0%
through final maturity. Certain prepayments prior to May 2019 are subject to the payment of the unpaid coupon on outstanding principal amount through May 2019.
|
|
|
(5)
|
Prepayment provisions include a fee based on principal amount ranging from
0.25%
to
1.0%
through December 2019 for the Trias Portfolio borrowings and
1.0%
to
2.0%
through July 2020 for the SEB Portfolio borrowings and
0.60%
through June 30, 2018 and
0.30%
through June 30, 2019 for Trianon Tower borrowings.
|
|
|
(6)
|
Represents preferred equity certificates each with a fixed contractual interest rate of
1.0%
per annum plus variable interest based on specified income levels associated with the German property companies of the Trias Portfolio which can be prepaid at any time without penalty through final maturity, which is
thirty
years from the issuance date.
|
|
|
(7)
|
In June 2017, the Company amended and restated the agreement to increase the loan amount by
$5.9 million
and reduce future minimum capital expenditure spending requirements.
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
(8)
|
In September 2017, the Company amended and restated the agreement to reduce the margin from
1.80%
to
1.55%
and extended the maturity date from April 1, 2022 to July 20, 2024.
|
The following table presents a reconciliation of principal amount to carrying value of the Company’s mortgage and other notes payable as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018 (Unaudited)
|
|
December 31, 2017
|
|
|
Principal amount
|
|
$
|
1,272,998
|
|
|
$
|
1,234,642
|
|
|
Deferred financing costs, net
|
|
(10,883
|
)
|
|
(11,199
|
)
|
|
Carrying value
|
|
$
|
1,262,115
|
|
|
$
|
1,223,443
|
|
The following table presents scheduled principal on borrowings, based on final maturity as of
March 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
Mortgage
and Other Notes
Payable
|
Remaining 2018
|
|
$
|
—
|
|
Years ending December 31:
|
|
|
2019
|
|
—
|
|
2020
|
|
168,977
|
|
2021
|
|
—
|
|
2022
|
|
—
|
|
2023
|
|
406,567
|
|
2024 and thereafter
|
|
697,454
|
|
Total
|
|
$
|
1,272,998
|
|
As of
March 31, 2018
and December 31,
2017
, the Company was in compliance with all of its financial covenants.
Credit Facility
In May 2016, the Company entered into a
$75.0 million
corporate revolving credit facility (the “Credit Facility”) with certain commercial bank lenders, with an initial
one
year term. The Credit Facility was secured by collateral relating to a borrowing base at that time and guarantees by certain subsidiaries of the Company. In October 2016, the Company permanently reduced the aggregate commitments under the Credit Facility to
$35.0 million
. In April 2017, the Company amended and restated the Credit Facility with aggregate commitments of
$35.0 million
and an initial
two
year term. The Credit Facility no longer contains a limitation on availability based on a borrowing base and the interest rate remains the same. The Credit Facility has an accordion feature, allowing the total facility to increase to
$70 million
. In March 2018, the Company amended the Credit Facility, increasing the size to
$70 million
and extending the term until April 2020 with
one year
extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to
$105 million
. As of
March 31, 2018
, there was
no
outstanding balance on the Credit Facility.
6. Related Party Arrangements
Colony NorthStar, Inc.
The Company entered into a management agreement with an affiliate of the Manager in November 2015 (the “Original Management Agreement”). On November 9, 2017, the Company entered into an Amended and Restated Management Agreement with an affiliate of the Manager, effective as of January 1, 2018 (the “Amended and Restated Management Agreement”). As asset manager, the Manager is responsible for the Company’s day-to-day operations, subject to supervision and management of the Company’s board of directors (the “Board”). Through its global network of subsidiaries and branch offices, the Manager performs services and engages in activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries. The management agreement with the Manager provides for a base management fee, incentive fee and expense reimbursement.
Term: Renewals
The Amended and Restated Management Agreement provides for an initial term (beginning January 1, 2018) of
five
years (the “Initial Term”), with subsequent automatic renewals for additional
three
year terms, unless either party provides notice to the other
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
party of its intention to decline to renew the agreement at least
six
months prior to the expiration of the then-current term. During the Initial Term, the Amended and Restated Management Agreement is terminable only for cause (as described in the Amended and Restated Management Agreement).
If the Company elects not to renew the Amended and Restated Management Agreement at the end of a term, it will be obligated to pay the Manager a termination fee (the “Termination Fee”) equal to three times the amount of the base management fees earned by the Manager over the four most recent quarters immediately preceding the non-renewal. In addition, if at any time after the Initial Term, the Company undergoes a “change of control” (as described in the Amended and Restated Management Agreement), the Company may elect to terminate the agreement but upon any such termination it will be obligated to pay the Termination Fee to the Manager.
Assignment
The Amended and Restated Management Agreement provides that in the event of a change of control of the Manager or other event that could be deemed an assignment of the Amended and Restated Management Agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The Amended and Restated Management Agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over $
10 billion
of assets under management. The Amended and Restated Management Agreement also provides that, notwithstanding anything in the agreement to the contrary, to the maximum extent permitted by applicable law, rules and regulations, in connection with any merger, sale of all or substantially all of the assets, change of control, reorganization, consolidation or any similar transaction by the Company or the Manager, directly or indirectly, the surviving entity will succeed to the terms of the Amended and Restated Management Agreement.
Base Management Fee
Pursuant to the Amended and Restated Management Agreement, beginning January 1, 2018, the Company is obligated to pay quarterly, in arrears, in cash, the Manager a base management fee per annum equal to:
|
|
•
|
1.50%
of the Company’s reported EPRA NAV (as described in the Amended and Restated Management Agreement) for EPRA NAV amounts up to and including
$2.0 billion
; plus
|
|
|
•
|
1.25%
of the Company’s reported EPRA NAV on any EPRA NAV amount exceeding
$2.0 billion
.
|
EPRA NAV is based on a U.S. GAAP balance sheet adjusted based on the Company’s interpretation of the European Public Real Estate Association (“EPRA”) guidelines, and similar as prior practices, including adjustments such as fair value of operating real estate, straight-line rent and deferred taxes and additional adjustments to be determined by the Company in good faith based on any changes to U.S. GAAP, international accounting standards or EPRA guidelines. In calculating EPRA NAV, the liquidation preference of preferred securities outstanding shall not be included as a liability of the Company and shall not reduce EPRA NAV.
For the three months ended March 31, 2018, the Company incurred
$4.2 million
related to the base management fee.
Under the Original Management Agreement, for the three months ended March 31, 2017, the Company incurred
$3.6 million
, related to the base management fee. The Original Management Agreement base management fee to the Manager was calculated as
1.5%
per annum of the sum of:
|
|
•
|
any equity the Company issues in exchange or conversion of exchangeable or stock-settlable notes;
|
|
|
•
|
any other issuances by the Company of common equity, preferred equity or other forms of equity, including but not limited to LTIP Units in the Operating Partnership (excluding units issued to the Company and equity-based compensation, but including issuances related to an acquisition, investment, joint venture or partnership); and
|
|
|
•
|
cumulative cash available for distribution (“CAD”), if any, of the Company in excess of cumulative distributions paid on common stock, LTIP Units or other equity awards which began with the Company’s fiscal quarter ended March 31, 2016.
|
Incentive Fee
In addition to the base management fees, the Company is obligated to pay the Manager an incentive fee, if any (the “Incentive Fee”), with respect to each measurement period equal to twenty percent (
20%
) of: (i) the excess of (a) the Company’s Total Stockholder Return (as defined in the Amended and Restated Management Agreement, which includes stock price appreciation and dividends received and is subject to a high watermark price established when a prior incentive fee is realized) for the relevant measurement period above (b) a
10%
cumulative annual hurdle rate, multiplied by (ii) the Company’s Weighted Average Shares (as defined in the Amended and Restated Management Agreement) during the measurement period. The first measurement period for the incentive fee will begin January 1, 2018 (based on an initial price of
$13.67
) and end on December 31 of the applicable
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
calendar year and subsequent measurement periods will begin on January 1 of the subsequent calendar year. Subject to the conditions set forth in Section 4(d) of the Amended and Restated Management Agreement for common stock payments, the Company may elect to pay the Incentive Fee, if any, in cash or in shares of restricted common stock or shares of unrestricted common stock repurchased by the Company in the open market or a combination thereof. Any shares of common stock delivered by the Company will be subject to lock-up restrictions that will be released in equal one-third increments on each anniversary of the end of the measurement period with respect to which such incentive fee was earned. In calculating the value of the shares of the Company’s common stock paid in satisfaction of the Incentive Fee obligation, the shares of restricted common stock will be valued at the higher of: (i) the volume weighted average trading price per share for the
ten
consecutive trading days (as defined in the Amended and Restated Management Agreement) ending on the trading day prior to the date the payment is due and (ii) the Company’s EPRA NAV per share, based on the Company’s most recently published EPRA NAV and the Weighted Average Shares as of the end of the period with respect to which such EPRA NAV was published. For the three months ended March 31, 2018, the Company did not record an incentive fee.
Under the Original Management Agreement, for the three months ended March 31, 2017, the Company did not incur an incentive fee. The incentive fee under the Original Management Agreement was calculated and was payable quarterly in arrears in cash, equal to:
|
|
•
|
the product of: (a)
15.0%
and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of
$0.30
per share and up to
$0.36
per share; plus
|
|
|
•
|
the product of: (a)
25.0%
and (b) the Company’s CAD before such incentive fee, divided by the weighted average shares outstanding for the calendar quarter, of any amount in excess of
$0.36
per share;
|
|
|
•
|
multiplied by the Company’s Weighted Average Shares outstanding for the calendar quarter.
|
Weighted Average Shares represents the number of shares of the Company’s common stock, LTIP Units or other equity-based awards (with some exclusions), outstanding on a daily weighted average basis. With respect to the base management fee under the Original Management Agreement, all equity issuances are allocated on a daily weighted average basis during the fiscal quarter of issuance. With respect to the incentive fee under the Original Management Agreement, such amounts will be appropriately adjusted from time to time to take into account the effect of any stock split, reverse stock split, stock dividend, reclassification, recapitalization or other similar transaction.
Costs and Expenses
The Company is responsible to pay (or reimburse the Manager) for all of the Company’s direct, out of pocket costs and expenses of the Company as a stand alone company incurred by or on behalf of the Company and its subsidiaries, all of which must be reasonable, customary and documented. Internalized Service Costs (as defined below) are not intended to be covered costs and expenses under this provision and are subject to the limits described in the next paragraph.
The Company is obligated to reimburse the Manager for (i) all direct, reasonable, customary and documented costs and expenses incurred by the Manager for salaries, wages, bonuses, payroll taxes and employee benefits for personnel employed by the Manager: (a) who solely provide services to the Company which prior to January 1, 2018 were provided by unaffiliated third parties, including accounting and treasury services or (b) who were hired by the Manager after January 1, 2018 but who solely provide services to the Company in respect of one of the categories of services previously internalized pursuant to clause (a) and who were not hired in connection with any event which otherwise resulted in an increase to the Company’s net asset value (such costs and expenses set forth in clauses (i) and (ii), the “Internalized Service Costs”), plus (ii)
20%
of the amount calculated under clause (i) to cover reasonable overhead charges with respect to such personnel, provided that the Company shall not be obligated to reimburse the Manager for such costs and expenses to the extent they exceed the following quarterly limits:
|
|
•
|
0.0375%
of the Company’s aggregate gross asset value as of the end of the prior calendar quarter (excluding cash and cash equivalents and certain other exclusions) as calculated for purposes of determining EPRA NAV (“GAV”), for GAV amounts to and including
$2.5 billion
, plus
|
|
|
•
|
0.0313%
of GAV amounts between
$2.5 billion
and
$5.0 billion
, plus
|
|
|
•
|
0.025%
of GAV amounts exceeding
$5.0 billion
.
|
If the Manager’s actual Internalized Service Costs during any quarter exceed the quarterly limit described in the preceding paragraph (the cumulative excess amounts, if any, in respect of each quarter during a calendar year, the (“Quarterly Cap Excess Amount”), the Company is obligated to reimburse the Manager on an annual basis for an amount equal to the lesser of (i) the Quarterly Cap Excess Amount and (ii) the sum of the amounts, if any, determined for each quarter within such calendar year by which Internalized Services Costs in respect of such quarter were less than the quarterly limits described in the prior paragraph.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the three months ended March 31, 2018, the Manager allocated
$0.3 million
of Internalized Service Costs to the Company which is recorded in general and administration expenses in the consolidation statements of operations.
Equity Based Compensation
In addition, the Company expects to make annual equity compensation grants to management of the Company and other employees of the Manager, provided that the aggregate annual grant amount, type and other terms of such equity compensation must be approved by the Company’s compensation committee. The Manager will have discretion in allocating the aggregate grant among the Company’s management and other employees of the Manager.
Under the Amended and Restated Management Agreement, beginning with the Company’s 2018 annual stockholders’ meeting, the Manager will have the right to nominate one director (who is expected to be one of the Company’s current directors employed by the Manager) to the Company’s board of directors.
Colony NorthStar Ownership Waiver and Voting Agreement
In connection with the entry into the Amended and Restated Management Agreement, the Company provided Colony NorthStar with an ownership waiver under the Company’s Articles of Amendment and Restatement, allowing Colony NorthStar to purchase up to
45%
of the Company’s stock. The waiver provides that if the Amended and Restated Management Agreement is terminated, Colony NorthStar may not purchase any shares of the Company’s common stock to the extent Colony NorthStar owns (or would own as a result of such purchase) more than
9.8%
of the Company’s capital stock. In connection with the waiver, Colony NorthStar also agreed that for all matters submitted to a vote of the Company’s stockholders, to the extent Colony NorthStar owns more than
25%
of the Company’s common stock (such shares owned by Colony NorthStar in excess of the
25%
threshold, the “Excess Shares”), it will vote the Excess Shares in the same proportion that the remaining shares of the Company not owned by Colony NorthStar or its affiliates are voted. If the Amended and Restated Management Agreement is terminated, then beginning on the third anniversary of such termination, the threshold described in the prior sentence will be reduced from
25%
to
9.8%
.
Manager Ownership of Common Stock
As of
March 31, 2018
, Colony NorthStar and its subsidiaries owned
5.6 million
shares of the Company’s common stock, or approximately
10.3%
of the total outstanding common stock.
The following summarizes the equity-based compensation for the three months ended
March 31, 2018
and
2017
:
For the
three months ended
March 31, 2018
and
2017
, the Company recorded
$0.6 million
and
$15.9 million
respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statements of operations. As of
March 31, 2018
, equity-based compensation expense to be recognized over the remaining vesting period through March 2021 is
$7.6 million
, provided there are
no
additional forfeitures.
2015 Omnibus Stock Incentive Plan
Pursuant to the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan (the “2015 Plan”), the Company may issue equity awards to directors, officers, employees, co-employees, consultants and advisors of the Company, the Manager or of any parent or subsidiary who provides services to the Company. The number of shares that may be issued under the 2015 Plan equals
10 million
shares of common stock, plus on January 1, 2017 and each January 1 thereafter, an additional
2%
of the number of shares of common stock issued and outstanding on the immediately preceding December 31. In addition, shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise of a stock option or settlement of an award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2015 Plan. As of
March 31, 2018
, under the 2015 Plan, a total of
1.4 million
shares of common stock had been issued (net of forfeitures and shares held back for tax withholding),
1.6 million
shares were reserved for issuance pursuant to outstanding equity awards (including
0.4 million
reserved for issuance upon conversion of outstanding LTIP Units and Common Units and
1.2 million
reserved for issuance pursuant to the outstanding Absolute RSUs and Relative RSUs) and
9.2 million
otherwise unreserved shares remained available for issuance.
All of the equity awards issued by the Company since the spin-off from NorthStar Realty on November 1, 2015 have been issued under the 2015 Plan. During the year ended December 31, 2017, the Company issued
500,642
restricted shares of common stock under the 2015 Plan to employees of the Manager or its subsidiaries in accordance with the terms of the management agreement described above in Note 6, of which
379,594
vested in connection with the Mergers.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In March 2016, as contemplated in connection with the Spin-off, the Company granted an aggregate of
995,698
restricted shares of common stock and
1,493,551
RSUs to employees of the Manager or one of its subsidiaries under the 2015 Plan. The restricted shares of common stock were subject to vesting over the approximately
four
year period ending December 31, 2019, subject to continued employment with the Manager or one of its subsidiaries and the RSUs were market-based awards subject to the achievement of performance-based vesting conditions and continued employment with the Manager or one of its subsidiaries. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return and continued employment with the Manager or one of its subsidiaries over the approximately
four
year period from the grant date through December 31, 2019 (the “Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index and continued employment with the Manager or one of its subsidiaries over the approximately
four
year period from the grant date through December 31, 2019 (the “Relative RSUs”). Award recipients may earn up to
100%
of the Absolute RSUs that were granted and up to
125%
of the Relative RSUs that were granted. Upon vesting pursuant to the terms of the Absolute RSUs and Relative RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted. In accordance with their terms, all of these restricted shares of common stock that remained outstanding vested in connection with the Mergers. The Absolute and Relative RSUs were not affected by the Mergers and remain outstanding, subject to forfeitures occurring in connection with termination of employment with the Manager or one of its subsidiaries. During the three months ended March 31, 2018,
170,454
Absolute RSUs and
170,453
Relative RSUs that had previously been granted to key employees of the Manager who are no longer providing services to the Company were forfeited. Subsequent to March 31, 2018, in order to assist in the retention of employees of the Manager who are continuing to provide services to the Company, the Company’s compensation committee utilized
300,000
of these forfeited RSUs to make retention grants consisting of
150,000
restricted shares of common stock that are subject to vesting based on continued service and established a retention pool consisting of an additional
150,000
shares of common stock or RSUs that will be allocated prior to May 2019 to employees of the Manager who are providing services to the Company as designated by the compensation committee, in its discretion.
In March 2018, as contemplated by the Amended and Restated Management Agreement, the Company established an annual equity compensation pool under the 2015 Plan to be allocated among members of management of the Company and other employees of the Manager consisting of an aggregate of
198,000
restricted shares of common stock and
132,000
performance based RSUs. This annual equity compensation pool was then allocated to individual award recipients by the Manager, and individual grants were made. The restricted shares of common stock are subject to vesting in approximately equal annual installments over the
three
-year period ending March 1, 2021, subject to the Manager continuing to serve as our manager and the recipient’s continued employment with the Manager or Colony NorthStar or one of its subsidiaries. The RSUs are market-based awards subject to the achievement of performance-based vesting conditions. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return over the
three
-year period from the grant date through February 28, 2021 (the “2018 Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index over the
three
-year period from the grant date through February 28, 2021 (the “2018 Relative RSUs”). Award recipients may earn up to
200%
of the 2018 Absolute RSUs and Relative RSUs that were granted. Vesting of the 2018 Absolute and Relative RSUs are also subject to the Manager continuing to serve as our manager and the recipient’s continued employment with the Manager or Colony NorthStar or one of its subsidiaries through the end of the performance period. The RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted.
Pre-Spin-off NorthStar Realty Equity Awards
In addition to equity awards issued under the 2015 Plan, the Company also had equity subject to outstanding equity-based awards granted by NorthStar Realty prior to the Spin-Off. In connection with the Spin-Off, holders of shares of common stock of NorthStar Realty and LTIP units of NorthStar Realty’s operating partnership subject to outstanding equity awards received one share of the Company’s common stock or one Common Unit in the Operating Partnership, respectively, for every six shares of common stock of NorthStar Realty or LTIP units of NorthStar Realty’s operating partnership held. Other equity and equity-based awards relating to NorthStar Realty’s common stock, such as RSUs, were adjusted to also relate to one-sixth of a share of the Company’s common stock, but otherwise generally remained subject to the same vesting and other terms that applied prior to the Spin-off. Performance-based vesting conditions based on total stockholder return of NorthStar Realty or NorthStar Realty and NSAM were adjusted to refer to combined total stockholder return of NorthStar Realty and the Company or NorthStar Realty, NSAM and the Company, respectively, with respect to periods after the Spin-Off and references to a change of control or similar term in outstanding awards, which referred to a change of control of either NorthStar Realty or NSAM, were adjusted, to the extent such awards relate to
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
common stock of the Company or Common Units in the Operating Partnership, to refer to a change of control of either the Company or NSAM.
Following the Spin-off, NorthStar Realty and the compensation committee of its Board continued to administer all awards granted by NorthStar Realty prior to the Spin-off, but the Company was obligated to issue shares of the Company’s common stock or other equity awards of its subsidiaries or make cash payments in lieu thereof or with respect to dividend or distribution equivalent obligations to the extent required by these awards. These awards continued to be governed by the NorthStar Realty equity plans, as applicable, and shares of the Company’s common stock issued pursuant to these awards were not be issued pursuant to, and did not reduce availability under, the 2015 Plan. In connection with the Mergers, all of these outstanding equity-based awards vested or were forfeited.
The following table presents activity related to the issuance, vesting, redemption, conversion and forfeitures of restricted stock, Common Units and performance RSUs. The balance as of
March 31, 2018
represents vested Common Units and unvested restricted stock and performance RSUs (grants in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Restricted Stock
(1)
|
|
Common Units
|
|
Performance RSUs
(2)
|
|
Total Grants
|
|
Weighted
Average
Grant Price
|
December 31, 2017
|
121
|
|
|
420
|
|
|
1,453
|
|
|
1,994
|
|
|
$
|
11.95
|
|
Granted
|
198
|
|
|
—
|
|
|
132
|
|
|
330
|
|
|
12.65
|
|
Redeemed
|
—
|
|
|
(43
|
)
|
|
—
|
|
|
(43
|
)
|
|
12.67
|
|
Converted
|
—
|
|
|
(23
|
)
|
|
—
|
|
|
(23
|
)
|
|
11.92
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(341
|
)
|
|
(341
|
)
|
|
12.60
|
|
March 31, 2018 (Unaudited)
|
319
|
|
|
354
|
|
|
1,244
|
|
|
1,917
|
|
|
$
|
11.94
|
|
_____________________________
|
|
(1)
|
Represents restricted stock included in common stock.
|
|
|
(2)
|
As of
March 31, 2018
, represented outstanding Absolute and Relative RSUs.
|
Share Repurchase
In March 2018, the Company’s board of directors authorized the repurchase of up to
$100 million
of its outstanding common stock. The authorization expires in March 2019, unless otherwise extended by the Company’s board of directors.
The following table presents the number of share repurchased by the Company, the average price paid per share and the gross amount paid for the repurchased shares for the
three months ended
March 31, 2018
and the period subsequent to quarter end, from April 1, 2018 through May 7, 2018 (dollars and shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Shares
|
|
Average Price Paid per Share
|
|
Gross
|
January 1 - March 31
(1)
|
|
1,051
|
|
|
$
|
12.70
|
|
|
$
|
13,350
|
|
April 1 - May 7
|
|
2,383
|
|
|
13.81
|
|
|
32,918
|
|
Total
|
|
3,434
|
|
|
$
|
13.47
|
|
|
$
|
46,268
|
|
_____________________________
|
|
(1)
|
The authorization for the repurchases was approved by the Company’s board of directors in March 2018. For the three months ended March 31, 2017, the Company did not repurchase any shares of its common stock.
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Dividends
The following table presents dividends declared (on a per share basis) with respect to the
three months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
Common Stock
|
Declaration Date
|
|
Dividend Per Share
|
2018
|
|
|
May 7
|
|
$
|
0.15
|
|
2017
|
|
|
May 1
|
|
$
|
0.15
|
|
Earnings Per Share
The following table presents EPS for the
three months ended
March 31, 2018
and
2017
(dollars and shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income (loss) attributable to NorthStar Realty Europe Corp. common stockholders
|
$
|
(1,281
|
)
|
|
$
|
(15,350
|
)
|
Net income (loss) attributable to Unit Holders non-controlling interest
|
(15
|
)
|
|
(193
|
)
|
Net income (loss) attributable to common stockholders and Unit Holders
(1)
|
$
|
(1,296
|
)
|
|
$
|
(15,543
|
)
|
Denominator:
(2)
|
|
|
|
Weighted average shares of common stock
|
55,193
|
|
|
54,832
|
|
Weighted average Unit Holders
(1)
|
411
|
|
|
673
|
|
Weighted average shares of common stock and Unit Holders
(2)
|
55,604
|
|
|
55,505
|
|
Earnings (loss) per share:
|
|
|
|
Basic
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
Diluted
|
$
|
(0.02
|
)
|
|
$
|
(0.28
|
)
|
_____________________________
|
|
(1)
|
The EPS calculation takes into account Unit Holders, which receive non-forfeitable dividends from the date of grant, share equally in the Company’s net income (loss) and convert on a
one
-for-one basis into common stock.
|
|
|
(2)
|
Excludes the effect of restricted stock and RSUs outstanding that were not dilutive as of
March 31, 2018
. These instruments could potentially impact diluted EPS in future periods, depending on changes in the Company’s stock price and other factors.
|
|
|
9.
|
Non-controlling Interests
|
Operating Partnership
Non-controlling interests include the aggregate Unit Holders’ interest in the Operating Partnership. Net income (loss) attributable to the non-controlling interest is based on the weighted average Unit Holders’ ownership percentage of the Operating Partnership for the respective period. The issuance of additional common stock, Common Units or LTIP Units changes the percentage ownership of both the Unit Holders and the Company. Since a Common Unit or LTIP Unit is generally redeemable for cash or common stock at the option of the Company, it is deemed to be equivalent to common stock. Therefore, such transactions are treated as capital transactions and result in an allocation between stockholders’ equity and non-controlling interests on the accompanying consolidated balance sheets to account for the change in the ownership of the underlying equity in the Operating Partnership. On a quarterly basis, the carrying value of such non-controlling interest is reallocated based on the number of Unit Holders in total in proportion to the number of Units Holders plus the number of shares of common stock outstanding. As of March 31, 2018 and December 31, 2017, the Company allocated an immaterial amount and
$1.8 million
, respectively, from stockholders’ equity to non-controlling interest on the consolidated balance sheets and consolidated statement of equity.
As of
March 31, 2018
,
353,817
Common Units and LTIP Units were outstanding, representing a
0.7%
ownership and non-controlling interest in the Operating Partnership. Net income (loss) attributable to the Operating Partnership non-controlling interest for the
three months ended
March 31, 2018
and 2017 was a net loss of an immaterial amount and
$0.2 million
, respectively.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Redeemable Non-controlling Interest
In connection with the acquisition of the Trianon Tower in July 2015, the Company sold a
5.5%
non-controlling interest in certain subsidiaries that own the Trianon Tower for
$1.5 million
. In conjunction with the sale, the Company entered into a put option whereby the holder may redeem its interest for cash at the greater of fair market value of such non-controlling interest or
€2.1 million
beginning in November 2020 through January 2021. The Company recorded the non-controlling interest at its acquisition date fair value as temporary equity due to the redemption option. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in additional paid-in capital.
|
|
10.
|
Risk Management and Derivative Activities
|
Derivatives
The Company uses derivative instruments primarily to manage interest rate and currency risk and such derivatives are not considered speculative. These derivative instruments are in the form of interest cap agreements where the primary objective is to minimize interest rate risks associated with investment and financing activities and foreign currency forward agreements where the primary objective is to minimize foreign currency exchange rate risks associated with operating activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations.
The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
(1)
|
|
Notional
Amount
|
|
Fair Value
Asset (Liability)
|
|
Range of
Fixed GBP LIBOR / EURIBOR
|
|
Range of Maturity
|
As of March 31, 2018 (Unaudited):
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
26
|
|
|
$
|
1,211,087
|
|
|
$
|
7,100
|
|
|
(2)
|
|
April 2020 - July 2023
|
Foreign currency forwards
(3)
|
7
|
|
|
105,559
|
|
|
(6,342
|
)
|
|
N/A
|
|
May 2018 - November 2019
|
Total
|
33
|
|
|
$
|
1,316,646
|
|
|
$
|
758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
31
|
|
|
$
|
1,193,012
|
|
|
$
|
7,024
|
|
|
(2)
|
|
April 2020 - July 2023
|
Foreign currency forwards
(3)
|
4
|
|
|
58,647
|
|
|
(5,270
|
)
|
|
N/A
|
|
February 2018 - November 2018
|
Total
|
35
|
|
|
$
|
1,251,659
|
|
|
$
|
1,754
|
|
|
|
|
|
_____________________________
(1) Represents number of transactions.
(2) Includes a range of interest rate caps of
0.5%
for EURIBOR and
2.0%
for GBP LIBOR.
(3) Includes Euro currency forwards. The strike prices for the foreign currency forwards maturing in 2018 and 2019 are an average of
$1.11
and
1.25
, respectively.
The following table presents the fair value of derivative instruments, as well as their classification on the consolidated balance sheets, as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
March 31, 2018 (Unaudited)
|
|
December 31,
2017
|
|
Location
|
|
|
Interest rate caps
|
Derivative assets
|
|
$
|
7,100
|
|
|
$
|
7,024
|
|
Foreign currency forwards
|
Derivative liabilities
|
|
$
|
6,342
|
|
|
$
|
5,270
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the effect of derivative instruments in the consolidated statements of operations for the
three months ended
March 31, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
2017
|
Amount of gain (loss) recognized in earnings:
|
Statements of operations location:
|
|
|
|
|
Adjustment to fair value of interest rate caps
|
Unrealized gain (loss) on derivatives and other
(1)
|
|
$
|
(119
|
)
|
|
$
|
319
|
|
Adjustment to fair value of foreign currency forwards held at the end of the reporting period
|
Unrealized gain (loss) on derivatives and other
(1)
|
|
(1,072
|
)
|
|
(1,264
|
)
|
Net cash receipt (payment) on derivatives
|
Realized gain (loss) on sales and other
|
|
(1,740
|
)
|
|
817
|
|
_____________________________
(1) Excludes the unrealized gain (loss) relating to foreign currency remeasurement adjustments.
The Company’s counterparties held
no
cash margin as collateral against the Company’s derivative contracts as of
March 31, 2018
and
December 31, 2017
. The Company had
no
derivative financial instruments that were designated as hedges in qualifying hedging relationships as of
March 31, 2018
and
December 31, 2017
.
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities are recorded at fair value on the consolidated balance sheets and are categorized based on the inputs to the valuation techniques as follows:
|
|
Level 1.
|
Quoted prices for identical assets or liabilities in an active market.
|
|
|
Level 2.
|
Financial assets and liabilities whose values are based on the following:
|
|
|
(a)
|
Quoted prices for similar assets or liabilities in active markets.
|
|
|
(b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets.
|
|
|
(c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
|
|
|
(d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
|
|
|
Level 3.
|
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of the valuation techniques used to measure fair value of assets and liabilities accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
Derivative Instruments
Derivative instruments consist of interest rate caps and foreign currency exchange contracts that are traded over-the-counter, and are valued using a third-party service provider. These quotations are not adjusted and are generally based on valuation models with observable inputs such as contractual cash flow, yield curve, foreign currency rates and credit spreads and as such, are classified as Level 2 of the fair value hierarchy. Derivative instruments are also assessed for credit valuation adjustments due to the risk of non-performance by the Company and derivative counterparties.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of
March 31, 2018
and
December 31, 2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Principal/Notional
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
|
Principal/Notional
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
Financial assets:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
1,211,087
|
|
|
$
|
7,100
|
|
|
$
|
7,100
|
|
|
$
|
1,193,012
|
|
|
$
|
7,024
|
|
|
$
|
7,024
|
|
Preferred equity investment
|
36,770
|
|
|
36,770
|
|
|
37,224
|
|
|
35,347
|
|
|
35,347
|
|
|
35,783
|
|
Financial liabilities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other notes payable, net
|
$
|
1,272,998
|
|
|
$
|
1,262,115
|
|
|
$
|
1,266,114
|
|
|
$
|
1,234,642
|
|
|
$
|
1,223,443
|
|
|
$
|
1,231,321
|
|
Derivative liabilities
|
105,559
|
|
|
6,342
|
|
|
6,342
|
|
|
58,647
|
|
|
5,270
|
|
|
5,270
|
|
_____________________________
|
|
(1)
|
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
|
Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Mortgage and Other Notes Payable
For mortgage and other notes payable, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using rates as of the end of the reporting period or market credit spreads over the rate payable on fixed rate of like maturities. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Preferred Equity Investments
For preferred equity investments, fair value was computed by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment. Fair value was determined assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.
|
|
12.
|
Commitments and Contingencies
|
The Company is involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, the current legal proceedings are not expected to have a material adverse effect on the Company’s financial position or results of operations.
The Company engages third-party service providers for its portfolio who are remunerated based on either a fixed fee or a percentage of rental income. The contract terms vary by party and are subject to termination options. These costs are recorded in properties - operating expense and other expenses in the consolidated statements of operations.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As part of the terms of agreements relating to certain assets the Company disposed, as is customary for such transactions in Europe, the Company agreed to provide certain warranties to the buyer.
Risk Management
Concentrations of credit risk arise when a number of tenants related to the Company’s investments are engaged in similar business activities or located in the same geographic region to be similarly affected by changes in economic conditions. The Company monitors its portfolios to identify potential concentrations of credit risks. For the three months ended March 31, 2018,
one
tenant, DekaBank Deutsche Girozentrale, accounted for more than 10% of the Company’s total revenues. This tenant has
6.2
years remaining on its lease. Otherwise, the Company has no other tenant that generates 10% or more of its total revenues. Additionally, for the three months ended March 31, 2018, Germany, France and the United Kingdom each accounted for more than 10% of the Company’s total revenues. The Company believes the remainder of its portfolio is well diversified and does not contain any unusual concentrations of credit risks.
The Company currently conducts its business through the following
three
segments, based on how management reviews and manages its business:
|
|
•
|
Real Estate Equity-
Focused on European prime office properties located in key cities within Germany, the United Kingdom and France.
|
|
|
•
|
Preferred Equity
- Represents the Company’s preferred equity investment secured by interest in a United Kingdom prime office property.
|
|
|
•
|
Corporate
- The corporate segment significantly includes corporate level interest expense, management fee and general and administrative expenses.
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables present segment reporting for the
three months ended
March 31, 2018
and
2017
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
Statement of Operations:
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
Revenues
|
|
|
|
|
|
|
|
Rental income
|
$
|
27,224
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27,224
|
|
Escalation income
|
5,341
|
|
|
—
|
|
|
—
|
|
|
5,341
|
|
Interest income
|
—
|
|
|
729
|
|
|
—
|
|
|
729
|
|
Expenses
|
|
|
|
|
|
|
|
Interest expense
(1)
|
5,955
|
|
|
—
|
|
|
152
|
|
|
6,107
|
|
Management fee, related party
|
—
|
|
|
—
|
|
|
4,157
|
|
|
4,157
|
|
Transaction costs
|
—
|
|
|
—
|
|
|
481
|
|
|
481
|
|
Depreciation and amortization
|
11,651
|
|
|
—
|
|
|
—
|
|
|
11,651
|
|
Other, net
|
7,189
|
|
(2)
|
—
|
|
|
4,947
|
|
(3)
|
12,136
|
|
Income (loss) before income tax benefit (expense)
|
7,770
|
|
|
729
|
|
|
(9,737
|
)
|
|
(1,238
|
)
|
Income tax benefit (expense)
|
(39
|
)
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
Net income (loss)
|
$
|
7,731
|
|
|
$
|
729
|
|
|
$
|
(9,737
|
)
|
|
$
|
(1,277
|
)
|
_____________________________
|
|
(1)
|
Includes
$0.6 million
and
$0.1 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(2)
|
Primarily relates to properties - operating expenses and unrealized loss on interest rate caps offset by other income and realized gain on sale adjustments.
|
|
|
(3)
|
Primarily relates to general and administrative expense, unrealized loss on foreign currency forwards and net realized loss related to the settlement of foreign currency derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
(1)
|
Statement of Operations:
|
Real Estate Equity
|
|
Corporate
|
|
Total
|
Revenues
|
|
|
|
|
|
Rental income
|
$
|
25,536
|
|
|
$
|
—
|
|
|
$
|
25,536
|
|
Escalation income
|
5,161
|
|
|
—
|
|
|
5,161
|
|
Expenses
|
|
|
|
|
|
Interest expense
(2)
|
6,119
|
|
|
264
|
|
|
6,383
|
|
Management fee, related party
|
—
|
|
|
3,559
|
|
|
3,559
|
|
Transaction costs
|
—
|
|
|
260
|
|
|
260
|
|
Depreciation and amortization
|
12,563
|
|
|
—
|
|
|
12,563
|
|
Other, net
|
4,971
|
|
(3)
|
18,760
|
|
(4)
|
23,731
|
|
Income (loss) before income tax benefit (expense)
|
7,044
|
|
|
(22,843
|
)
|
|
(15,799
|
)
|
Income tax benefit (expense)
|
273
|
|
|
—
|
|
|
273
|
|
Net income (loss)
|
$
|
7,317
|
|
|
$
|
(22,843
|
)
|
|
$
|
(15,526
|
)
|
_____________________________
|
|
(1)
|
The Company did not have a preferred equity segment for the three months ended September 30, 2016.
|
|
|
(2)
|
Includes
$0.7 million
and
0.2 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(3)
|
Primarily relates to properties - operating expenses and unrealized loss on interest rate caps offset by other income and realized gain on sales.
|
|
|
(4)
|
Primarily relates to general and administrative expense, compensation expense and unrealized loss on foreign currency forwards offset by the net realized gain related to the settlement of foreign currency derivatives.
|
The following table presents total assets by segment as of March 31, 2018 and December 31, 2017 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
March 31, 2018 (Unaudited)
|
$
|
1,936,271
|
|
|
$
|
37,614
|
|
|
$
|
5,779
|
|
|
$
|
1,979,664
|
|
December 31, 2017
|
1,901,282
|
|
|
37,133
|
|
|
2,502
|
|
|
1,940,917
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Geography
The following table presents geographic information about the Company’s total rental income for the
three months ended
March 31, 2018 and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
Office
|
|
|
|
Germany
|
$
|
11,964
|
|
|
$
|
9,915
|
|
United Kingdom
|
6,146
|
|
|
6,791
|
|
France
|
4,931
|
|
|
4,234
|
|
Other office
|
2,871
|
|
(1)
|
3,527
|
|
Subtotal
|
25,912
|
|
|
24,467
|
|
Other
|
1,312
|
|
|
1,069
|
|
Total
|
$
|
27,224
|
|
|
$
|
25,536
|
|
_____________________________
|
|
(1)
|
Includes an asset in Portugal and an asset in the Netherlands which are classified as held-for-sale as of March 31, 2018.
|
Dividends
On
May 7, 2018
, the Company declared a dividend of
$0.15
per share of common stock. The common stock dividend is expected be paid on
May 25, 2018
to stockholders of record as of the close of business on
May 21, 2018
.
Share Repurchases
From the authorization in March 2018 through
May 7, 2018
, the Company repurchased
3.4 million
shares of its common stock for approximately
$46.3 million
(refer to Note 8 “Stockholders’ Equity”).
Disposals
In April 2018, the Company completed the sale of the Maastoren property, our largest non-core asset, for approximately
$195 million
. The Company released approximately
$60 million
of net equity after repayment of financing (including release premium) and transaction costs.