DIGITALBRIDGE GROUP, INC. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in "Item 15. Exhibits and Financial Statement Schedules" of this Annual Report. Significant Developments During 2020 and through the date of this filing, significant developments affecting our business and results of operations included the following, in addition to the effects of COVID-19 as discussed throughout this Annual Report. In summary, we have stabilized our capital structure and strengthened our liquidity profile, accelerated our digital transformation through executed and planned divestiture of non-digital assets, and redeployed capital into growing our digital balance sheet, combined with successful fund raising of$7.4 billion of third party capital in our digital investment management business. Liquidity We addressed near-term corporate maturities and enhanced our long-term capital structure and liquidity profile as follows: •We amended our Credit Agreement inJune 2020 and exercised our first 6-month extension option inDecember 2020 . As a result, our borrowing capacity under the facility was reduced to$450 million (which will be further reduced to$400 million onMarch 31, 2021 ), and we were provided with greater financial covenant flexibility and more borrowing base credit for digital investments. The facility is scheduled to expire inJuly 2021 , with one remaining 6-month extension option. At this time, we expect to either exercise our second extension option or otherwise replace the existing credit facility. 60
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•InJuly 2020 , we issued$300 million of exchangeable senior notes maturing inJuly 2025 , bearing interest at 5.75% per annum, and have since repaid$402.5 million of convertible notes due inJanuary 2021 . As a result, we have no corporate debt maturities (other than our corporate credit facility) until 2023. Path to DigitalStrategic Partnership in Our Digital Investment Management Business •InJuly 2020 , we formed a strategic partnership with affiliates ofWafra, Inc. (collectively, "Wafra") in which Wafra made an investment representing an approximate 31.5% interest in substantially all of our digital investment management business (as defined for the purpose of this transaction, the "Digital IM Business"). Wafra paid consideration of$254 million for its investment in the Digital IM Business and for warrants issued by the Company to Wafra (assuming the consideration excludes the warrants, this implies an approximately$805 million valuation of the Digital IM Business). Wafra has agreed to assume certain of the Company's existing commitments made to DCP I and to make commitments to DCP II and to the Company's initial digital credit fund, in an aggregate amount of at least$130 million . Wafra has also agreed to make commitments to the Company's future digital funds and investment vehicles on a pro rata basis with the Company based on Wafra's percentage interest in the Digital IM Business, subject to certain caps. Wafra's investment provides us with permanent capital to pursue strategic digital infrastructure investments and grow the Digital IM Business. Investment in Hyperscale Data Centers •InJuly 2020 and following an additional investment inOctober 2020 , the Company, alongside fee bearing third party capital, invested$1.36 billion for approximately 90% equity interest in entities that holdVantage Data Centers' ("Vantage") portfolio of 12 stabilized hyperscale data centers inNorth America and$2.0 billion of secured indebtedness (the "Vantage SDC"). Our balance sheet investment is$197 million , representing a 13% equity interest. Vantage SDC is our second significant balance sheet investment in a digital operating business and achieves our transformation goals on two fronts, the rotation of our balance sheet to digital assets and growing our digital investment management business. DataBank'sStrategic Investment •InDecember 2020 , our DataBank subsidiary closed on its acquisition of zColo, the colocation assets of Zayo Group Holdings, Inc. ("Zayo"), consisting of 39 data centers in theU.S andU.K. , for approximately$1.2 billion through a combination of debt and equity financing, including$0.5 billion of third party co-invest capital raised by us and a$188 million investment from our balance sheet (decreased to approximately$145 million upon raising of additional third party capital inFebruary 2021 which maintains our 20% interest in DataBank). Acquisition of zColo's remaining five data centers inFrance for$33.0 million closed inFebruary 2021 . The acquisition of zColo accelerates DataBank's edge and hybrid cloud strategy, complements its existing relationships and significantly expands its geographic footprint to a national scale in strategically important data center markets. Digital Colony Partners II or DCP II •InFebruary 2021 , we held a closing of DCP II, our second digital opportunistic fund, with total callable commitments of$4.2 billion , inclusive of$120 million of our commitments as general partner and limited partner. Non-Digital Assets •InSeptember 2020 , we entered into a definitive agreement to sell five of the six hotel portfolios in our Hospitality segment and our 55.6% interest in theTHL Hotel Portfolio in the Other segment, with closing expected in the first half of 2021. The transaction is valued at approximately$2.8 billion , including gross aggregate selling price of$67.5 million and acquirer's assumption of$2.7 billion of investment-level debt (of which OP share is approximately$2.3 billion ). •InFebruary 2020 , we sold our equity investment inRXR Realty, LLC for proceeds of$179 million , net of tax, recording a gain of$97 million , net of tax. •InApril 2020 , we recapitalized a co-investment venture which holds common equity in the Albertsons supermarket chain, generating$73 million of proceeds to us and realizing our share of gain of approximately$30 million , which allowed us to harvest approximately 70% of the expected eventual value upfront. •InAugust 2020 , we conveyed to a lender 36 properties in our senior housing operating portfolio, which served as underlying collateral, in satisfaction of$157.5 million of outstanding wellness infrastructure debt. 61
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•InDecember 2020 , we sold our 51% interest in the bulk industrial portfolio to our joint venture partner, and received approximately$85 million in aggregate of net equity proceeds and distributions that we expect to redeploy into future digital assets. •During 2020, we recognized approximately$3.5 billion ($2.6 billion attributable to OP) of impairment charges and unrealized and realized fair value losses on our non-digital assets, a majority of which was driven by our accelerated timeline to digital transformation. The following amounts were recorded in impairment loss, other loss, equity method losses, and within impairment loss in discontinued operations on the statement of operations: •$2.0 billion ($1.5 billion attributable to OP) impairment on real estate and related asset group, primarily hotel and wellness infrastructure properties, based upon (i) shortened hold period assumptions on the assets, primarily driven by the Company's accelerated digital transformation and further exacerbated by a decline in property operating performance and market values as a result of the economic effects of COVID-19, and (ii) recoverable value from sale of theTHL Hotel Portfolio ; •$594 million impairment of goodwill in theOther Investment Management segment, driven by acceleration of the Company's digital transformation and a significant reduction in the value of its non-digital balance sheet assets; •$275 million impairment on our equity investment in CLNC as the shortfall in market value over carrying value of our CLNC investment was not expected to be recovered in the near term; •$296 million ($97 million attributable to OP) of impairment and fair value decreases on other equity method investments, generally reflecting a decrease in recoverable values based upon revised exit strategies in light of our accelerated digital transformation and the economic effects of COVID-19; and •$324 million ($77 million attributable to OP) of net unrealized and realized losses on loans receivable carried at fair value as recoverability is affected by increasing uncertainty and deterioration in the economic environment arising from the effects of COVID-19. Results of Operations The following table summarizes our results from continuing operations by reportable segment. Excluded are discontinued operations (Note 16 to the consolidated financial statements) which generated loss from discontinued operations attributable toColony Capital, Inc. of$1.0 billion in 2020 and$79.1 million in 2018, and income from discontinued operations attributable toColony Capital, Inc. of$360.9 million in 2019. Income (Loss) Attributable toColony Capital, Inc. from
(In thousands) Total Revenues Income (Loss) from Continuing Operations Continuing Operations Year EndedDecember 31, 2020 2019 2018 2020 2019 2018 2020 2019 2018 Digital Operating$ 313,283 $ 6,039 $ -$ (130,818) $ (691) $ -$ (19,784) $ (124) $ -Digital Investment Management 84,420 34,368 - 9,793 48,942 3,971 9,196 44,808 3,738 Digital Other 4,160 - - 35,922 (4,465) 1,984 23,261 (4,026) 1,868 Wellness Infrastructure 527,176 582,139 592,455 (754,709) (243,688) (283,516) (503,925) (183,510) (199,277) Other 293,538 570,042 570,238 (1,373,552) (880,972) 82,572 (916,861) (869,453) (43,705) Amounts not allocated to segments 14,017 14,235 9,239 (250,873) (437,478) (222,974) (218,636) (397,352) (203,100)$ 1,236,594 $ 1,206,823 $ 1,171,932 $ (2,464,237) $ (1,518,352) $ (417,963) $ (1,626,749) $ (1,409,657) $ (440,476) 62
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Selected Balance Sheet Data The following table summarizes key balance sheet data by reportable segment, excluding$3.9 billion of real estate held for disposition and$3.5 billion of debt to be assumed by the counterparties upon disposition, including debt under receivership. Real Estate, net Loans Receivable (1) Equity and Debt Investments Debt, netDecember 31 ,December 31 ,December 31 ,December 31 ,December 31 ,December 31 ,December 31 , (In thousands) 2020 2019 2020 2019December 31, 2020 2019 2020 2019 Digital Operating$ 4,451,865 $ 846,393 $ 5,070 $ - $ - $ -$ 3,213,240 $ 539,155 Digital Investment Management - - - - 19,167 1,059 - - Digital Other - - 31,727 - 377,048 46,832 - - Wellness Infrastructure 3,338,085 4,433,825 47,232 48,270 - - 2,700,806 2,910,032 Other 937,970 937,978 1,211,308 1,518,058 1,337,522 2,262,172 1,103,131 1,218,417 Amounts not allocated to segments - - - - 3,742 3,742 772,561 850,314 Total$ 8,727,920 $ 6,218,196 $ 1,295,337 $ 1,566,328 $ 1,737,479 $ 2,313,805 $ 7,789,738 $ 5,517,918 _________
(1) Carried at fair value upon adoption of fair value option on
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Consolidated Results of Operations A comparative discussion of our consolidated results of operations for 2020 and 2019 is presented below. Refer to Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report on Form 10-K for comparative discussion of our consolidated results of operations for 2019 and 2018. InSeptember 2020 , our hotel business qualified as discontinued operations. The operating results of our hotel business for all periods presented have been recast as income from discontinued operations on the consolidated statements of operations. Additionally, beginning the third quarter of 2020, we disaggregated the Digital segment into three digital reportable segments, and aggregated the non-digital segments of CLNC, OED and Other IM into a single Other reportable segment. The operating results by segment have been recast for all prior periods presented. The discussion of our consolidated results of operations for 2019 and 2018 in our 2019 Form 10-K should be read in conjunction with Item 15. "Exhibits and Financial Statement Schedules" in this Annual Report, specifically the consolidated statement of operations, Note 16. Discontinued Operations and Note 23. Segment Reporting. Year Ended December 31, (In thousands) 2020 2019 Change Revenues Property operating income$ 936,160 $ 737,364 $ 198,796 Interest income 80,471 166,765 (86,294) Fee income 177,755 223,915 (46,160) Other income 42,208 78,779 (36,571) Total revenues 1,236,594 1,206,823 29,771 Expenses Property operating expense 423,716 333,354 90,362 Interest expense 310,454 306,809 3,645 Investment and servicing expense 62,529 60,646 1,883 Transaction costs 5,966 3,607 2,359 Depreciation and amortization 431,443 307,594 123,849 Provision for loan loss - 35,880 (35,880) Impairment loss 1,473,997 1,086,530 387,467 Compensation expense-cash and equity-based 246,938 209,504 37,434 Compensation expense-carried interest and incentive fee (8,437) 16,564 (25,001) Administrative expenses 110,210 89,906 20,304 Settlement loss 5,090 - 5,090 Total expenses 3,061,906 2,450,394 611,512
Other income (loss)
Gain on sale of real estate 25,986 62,003 (36,017) Other loss, net (211,084) (194,106) (16,978) Equity method losses (455,840) (140,384) (315,456) Equity method earnings (losses)-carried interest (8,026) 11,682 (19,708) Loss before income taxes (2,474,276) (1,504,376) (969,900) Income tax benefit (expense) 10,039 (13,976) 24,015 Loss from continuing operations (2,464,237) (1,518,352) (945,885) Income (loss) from discontinued operations (1,326,173) 1,369,437 (2,695,610) Net loss (3,790,410) (148,915) (3,641,495)
Net income (loss) attributable to noncontrolling interests: Redeemable noncontrolling interests
616 2,559 (1,943)
Investment entities (812,547) 990,360 (1,802,907)
Operating Company (302,720) (93,027) (209,693)
Net loss attributable to Colony Capital, Inc. (2,675,759) (1,048,807) (1,626,952)
Preferred stock redemption - (5,150) 5,150
Preferred stock dividends 75,023 108,550 (33,527)
Net loss attributable to common stockholders $ (2,750,782) $ (1,152,207) (1,598,575)
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Property Operating Income and Property Operating Expenses
Year Ended December 31,
(In thousands) 2020 2019 Change
Property operating income:
Digital Operating $ 312,883 $ 6,038 $ 306,845
Digital Other 45 - 45
Wellness Infrastructure 517,186 577,669 (60,483)
Other 106,046 153,657 (47,611)
$ 936,160 $ 737,364 198,796
Property operating expenses:
Digital Operating $ 119,729 $ 2,197 $ 117,532
Digital Other 105 - 105
Wellness Infrastructure 249,357 260,374 (11,017)
Other 54,525 70,783 (16,258)
$ 423,716 $ 333,354 90,362
Digital Operating-Amounts represent income from data center leases and related
services, and associated operating expenses from acquisitions of DataBank in
December 2019 , Vantage SDC in July 2020 and zColo in December 2020 .
Digital Other-Amounts reflect activities from investments warehoused in the
third quarter of 2020. These investments were transferred to DCP II in December
2020 .
Wellness Infrastructure-Property operating income decreased $60.5 million , of
which $56.2 million is attributed to the conveyance of a 36 property senior
housing operating portfolio to the lender in August 2020 , and sales of 25 and
six net lease properties in 2019 and 2020, respectively. Other factors
contributing to the decrease include: (i) a decline in occupancy across our
senior housing operating portfolio due to restrictions on new admissions in an
effort to contain COVID-19; (ii) restructuring of leases which resulted in lower
rental income; (iii) an acceleration of above- and below-market lease
intangibles due to the conversion of a senior housing net lease portfolio to a
senior housing operating portfolio which had higher property operating income in
2019; and (iv) less recovery of previously recognized uncollectable rents and
lease termination fees based on assessment of collectability. These decreases
were partially offset by a gross-up of resident fee income in 2020 following the
conversion of six properties from a net lease portfolio to a senior housing
operating portfolio and contractual rent step-ups.
Property operating expenses decreased $11.0 million . The conveyance of the
senior housing operating portfolio to the lender and the disposition of
properties as noted above reduced expenses by $25.2 million , absent which
property operating expenses would have increased $14.2 million . The increase was
driven by a gross up of expenses following the net lease to senior housing
operating conversion of six properties and incremental costs incurred in our
senior housing operating facilities in response to COVID-19. The incremental
COVID-19 related costs were partially abated by government stimulus funding
under the CARES Act Provider Relief Fund , reflected in other income.
Refer to further discussion in "-Segment Results-Wellness Infrastructure."
Other-Property operating income and expenses decreased $47.6 million and $16.3
million , respectively, driven primarily by sales of properties in our European
portfolio and U.S. multi-tenant offices, and the economic effects of COVID-19
negatively affecting rental income.
Interest Income
Interest income decreased $86.3 million , attributed to loans placed on
nonaccrual in 2020 as the COVID-19 crisis has led to increased uncertainty over
collectability, and loan payoffs and sales over time.
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Fee Income
Fee income is earned from the following sources:
Year Ended December 31,
(In thousands) 2020 2019 Change
Digital Investment Management segment
Institutional funds and other investment vehicles $ 83,356 $ 33,095 $ 50,261
Other segment
Institutional funds and other investment vehicles 45,730 49,093 (3,363)
Public companies (CLNC, and NRE prior to its sale in
September 2019) 29,739 118,049 (88,310)
Non-traded REIT 17,170 19,896 (2,726)
Other 1,760 3,782 (2,022)
Subtotal-Other segment 94,399 190,820 (96,421)
$ 177,755 $ 223,915 (46,160)
Digital Investment Management-Fee income was $50.3 million higher as 50% of fees
from DCP I in 2019 was recognized as equity method income from our Digital
Colony Manager ("DCM") joint venture, prior to consolidation of DCM upon
acquisition of DBH in July 2019 . 2020 also includes fees from co-investment
capital raised for the acquisitions of Zayo by DCP I in March 2020 and Vantage
SDC in July 2020 , and the initial close of DCP II in mid-November 2020 .
Other-Fee income from the non-digital investment management business decreased
$96.4 million , driven by the following:
•2019 had included termination fee of $64.6 million , inclusive of $21.5 million
of incentive fees, and management fees of $11.5 million from NorthStar Realty
Europe ("NRE"), previously a publicly-traded REIT managed by us that was sold in
September 2019 with concurrent termination of our management agreement;
•approximately $12.0 million decrease in fees from CLNC due to a lower
stockholders' equity fee base;
•$2.6 million decrease in fees from NorthStar Healthcare based on a lower net
asset value ("NAV") fee base; and
•continuing liquidation of credit and opportunistic funds.
Other Income
Other income decreased $36.6 million , attributed primarily to (i) $29.2 million
gross-up of other income and compensation expense related to NRE equity awards
and other cash compensation paid by NRE to employees in connection with the NRE
sale in 2019; and (ii) reversal of other income and compensation expense on CLNC
equity awards resulting from the remeasurement of those awards at fair value
based upon CLNC's stock price at each reporting period (refer to Note 19 to the
consolidated financial statements in Item 15. "Exhibits and Financial Statement
Schedules" of this Annual Report for a description of the accounting treatment
of managed company awards).
Interest Expense
Year Ended December 31,
(In thousands) 2020 2019 Change
Investment-level financing:
Digital Operating $ 77,976 $ 1,272 $ 76,704
Digital Investment Management - 3,230 (3,230)
Wellness Infrastructure 138,182 192,621 (54,439)
Other 37,400 54,814 (17,414)
Corporate-level debt 56,896 54,872 2,024
$ 310,454 $ 306,809 3,645
Net increase in interest expense of $3.6 million is attributed to the following:
Digital Operating-Amount represents interest expense on debt financing our data
center business of DataBank, Vantage SDC and zColo acquired in December 2019 ,
July 2020 and December 2020 , respectively. This included prepayment penalties
incurred upon refinancing of the Vantage SDC assumed debt through a new
securitization in October 2020 , partially offset by the write-off of debt
premium in connection with the securitization.
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Digital Investment Management-Interest expense in 2019 was related to borrowings on our corporate credit facility to partially finance the DBH acquisition inJuly 2019 , with such borrowings repaid inDecember 2019 using proceeds from sale of the industrial business. Wellness Infrastructure-Interest expense was$54.4 million lower as a result of: (i) debt repayment upon certain sales of net lease properties; (ii) conveyance of underlying collateral to lender in satisfaction of$157.5 million of outstanding debt principal inAugust 2020 ; (iii) decrease in LIBOR on debt which is predominantly variable rate; and (iv) interest expense recognized from the write-off of debt discount and prepayment penalties incurred in connection with aJune 2019 refinancing. These decreases were partially offset by interest expense recognized from amortization of deferred financing costs incurred in connection with theJune 2019 refinancing. Other-Interest expense decreased$17.4 million , primarily due to debt repayments from sale of investments. Corporate-level Debt-Interest expense increased$2.0 million as a result of writing off a portion of deferred financing costs on our corporate credit facility to reflect a reduction in borrowing capacity inJune 2020 , along with a higher average outstanding balance on the facility, and new exchangeable notes issued inJuly 2020 . This increase was partially offset by the effect of lower LIBOR on our junior subordinated debt, partial repurchase of our convertible notes in the third quarter of 2020 and lower unused fees on our credit facility in 2020. Investment and Servicing Expense Investment and servicing costs were$1.9 million higher, attributed primarily to the write-off of investment deposit and third party fees related to investments in our other equity and debt portfolio, and management fees paid to Vantage for the day-to-day operations of Vantage SDC. These increases were largely offset by higher costs in 2019 related to refinancing of our wellness infrastructure debt, settlement of a litigation claim associated with our European investments, unconsummated deal costs and bad debt expense. Transaction Costs Transaction costs in 2020 represent primarily fees incurred for advisory services in connection with our corporate debt strategy, partial repurchase of the 3.875% convertible notes and corporate initiatives related to our non-digital business. In 2019, transaction costs were related primarily to our acquisitions of DBH, DataBank and the Latin American investment management business of TheAbraaj Group (renamed Colony Latam). Depreciation and Amortization Increase in depreciation and amortization expense is attributed primarily to real estate and intangible assets from acquisitions of DBH inJuly 2019 , DataBank inDecember 2019 , Vantage SDC inJuly 2020 and zColo inDecember 2020 . The increase was partially offset by decreases due to the effects of lower real estate basis after impairment charges, sales or held-for-sale classification of non-digital assets, termination of the NRE management contract inSeptember 2019 and write-down of the NorthStar Healthcare management contract. Impairment Loss Year Ended December 31, (In thousands) 2020 2019 Change Digital Investment Management$ 3,832 $ -$ 3,832 Wellness Infrastructure 716,501 187,341 529,160 Other 732,417 898,540 (166,123) Unallocated 21,247 649 20,598$ 1,473,997 $ 1,086,530 387,467
Impairment loss attributable to OP
Impairment charges on real estate and goodwill are discussed further in Notes 4
and 7, respectively, to the consolidated financial statements in Item 15.
"Exhibits and Financial Statement Schedules" of this Annual Report.
Digital Investment Management-Impairment reflects reduced cash flows from the
original Vantage management contract, replaced by a new fee stream from third
party capital raised in connection with the acquisition of Vantage SDC from its
existing owners.
Wellness Infrastructure-In 2020, impairment was recognized on wellness
infrastructure assets resulting primarily from shortened hold period
assumptions, attributable to both the Company's accelerated digital
transformation, and in contemplation of debt that was at risk of default. These
assumptions resulted in a shortfall in projected future cash flows,
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which was further exacerbated by a decline in property operating performance and market values as a result of the economic effects of COVID-19, such that the carrying value of these assets would not be recoverable. Additional impairment was also recorded on two skilled nursing portfolios that were sold in 2020 and unrecoverable losses from property damage. Impairment in 2019 arose from shortened hold period assumptions on a senior housing operating portfolio and a net lease property, a negotiated purchase option exercised by a tenant on three hospitals, and offers received on certain net lease properties. Other-Impairment was lower in our Other IM business but higher in our OED portfolio. In our Other IM business, impairment of$594.0 million in 2020 and$788.0 million in 2019 reflect the write-down of goodwill. This was driven by the acceleration of the Company's digital transformation and a significant reduction in the value of its non-digital balance sheet assets beginning in the fourth quarter of 2019 through 2020. The 2019 write-down also reflects the loss of future fee income from sale of the industrial business and a reduction in CLNC's fee base consistent with its reduced book value. Additionally, the NorthStar Healthcare management contract was impaired by$3.6 million in 2020 and$8.6 million in 2019 based upon a lower NAV fee base. Within our other equity and debt portfolio, impairment was$134.8 million in 2020, an increase of$34.2 million compared to 2019. This was driven by impairment onU.S. net lease properties, attributed primarily to shortened hold period assumptions due to the Company's accelerated digital transformation or risk of default on non-recourse investment level debt; and/or the economic effects of COVID-19 on property operating cash flows and market values. Unallocated-Impairment of$9.4 million was recorded on office operating leases in the fourth quarter of 2020 as the Company determined there is a reduced need for office space based upon the Company's current operations. 2020 also included impairment on the corporate aircraft to reflect its recoverable value. The aircraft was sold to a third party inJanuary 2021 . Compensation Expense The following table provides the components of compensation expense. Year Ended December 31, (In thousands) 2020 2019 Change Cash compensation and benefits$ 210,715 $ 143,709 $ 67,006 Equity-based compensation 34,156 29,899 4,257 Incentive and carried interest compensation (8,437) 16,564 (25,001) 236,434 190,172 46,262 Compensation grossed up in income and expense NRE related cash compensation - 3,576 (3,576) Equity-based compensation-CLNC and NRE (prior to September 2019) awards 2,067 32,320 (30,253) 2,067 35,896 (33,829) Total compensation expense$ 238,501 $ 226,068 12,433 Total compensation expense was$12.4 million higher, attributed primarily to full year of compensation cost associated with DBH and DataBank which were acquired inJuly 2019 andDecember 2019 , respectively, and higher retention costs in 2020. These increases were largely offset by (i)$51.4 million of incremental compensation in 2019 in connection with NRE equity awards, including awards that accelerated upon the sale of NRE, along with retention and termination payments, and incentive compensation; (ii) reversals in accrued carried interest compensation as minimum return hurdles were no longer met following fair value decreases in investments held by sponsored vehicles; (iii) reversal of compensation on CLNC equity awards in 2020 as a result of remeasurement at fair value based upon CLNC's stock price; and (iv) decrease in compensation cost following the Company's cost reduction initiative and sale of NRE inSeptember 2019 . Administrative Expenses Administrative expense was$20.3 million higher, largely attributable to higher insurance, legal and professional service costs, and a full year of administrative costs incurred by DBH and DataBank which were acquired in July andDecember 2019 , respectively. 68
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Settlement Loss Amount represents the initial fair value of the settlement arrangement with Blackwells, when it was reached inMarch 2020 , plus the reimbursement of Blackwells' legal costs. Refer to additional discussion in Note 12 to the consolidated financial statements in Item 15. "Exhibits and Financial Statement Schedules" of this Annual Report. Gain on Sale of Real Estate There were higher gains in 2019 from sales of our European properties andU.S. multi-tenant office buildings. Gain on sale of$8.5 million in 2020 and$20.7 million in 2019 were attributable to OP. Equity Method Earnings (Losses) Year Ended December 31, (In thousands) 2020 2019 ChangeDigital Investment Management (including carried interest income of$12,709 and$0 )$ 13,039 $ 7,112 $ 5,927 Digital Other 22,548 (4,465) 27,013 Other (including carried interest reversal of$20,735 and income of$11,682 ) (499,453) (131,349) (368,104)$ (463,866) $ (128,702) (335,164) Digital Investment Management-Earnings represent primarily (i) gross unrealized carried interest in 2020 from a digital investment vehicle, attributed to a higher valuation of its investment in Zayo, of which the Company ultimately shares in 15%, net of carried interest compensation and noncontrolling interests; and (ii) throughJuly 25, 2019 , fee income from DCM, the manager of DCP funds which was co-owned with DBH, prior to its consolidation upon acquisition of DBH. Digital Other-Amount represents our share of earnings from our interest in DCP I and beginningMarch 31, 2020 , from investments held by our digital liquid securities strategy. Other-We recorded other-than-temporary impairment on our investment in CLNC of$274.7 million and$227.9 million in the second quarters of 2020 and 2019, respectively. Excluding the CLNC impairment, equity method losses of$224.8 million in 2020 compared to earnings of$96.6 million in 2019, arose from (i)$270.3 million of higher impairment and fair value decreases (under the fair value option), generally reflecting a decrease in recoverable values based upon revised exit strategies in light of our accelerated digital transformation and the economic effects of COVID-19; (ii) our share of investee net losses or decreases in earnings; and (iii) reversal of unrealized carried interest allocation. The losses in 2020 were partially offset primarily by$106.1 million gain from sale of our equity investment inRXR Realty . Additionally, basis difference of$83.9 million in 2020 and$141.1 million in 2019 was applied to reduce our share of net loss from CLNC (refer to Note 6 to the consolidated financial statements in Item 15. "Exhibits and Financial Statement Schedules" of this Annual Report for further discussion on CLNC). Other Loss, Net We recognized other net loss of$211.1 million in 2020 and$194.1 million in 2019, driven primarily by the following: 2020 •$323.7 million ($77.4 million attributable to OP) of net unrealized and realized losses on loans receivable carried at fair value as recoverability is affected by increasing uncertainty and deterioration in the economic environment arising from the effects of COVID-19 (fair value option was elected on loans receivable beginning 2020); •$24.7 million of unrealized credit losses on CRE debt securities; and •$20.4 million increase in the settlement liability to Blackwells, driven by an increase in the CLNY stock price; partially offset by: •realized gain of$60.7 million and recognition of future profit allocation at fair value of$66.0 million ($32.3 million attributable to OP) from recapitalization inApril 2020 of our co-investment venture which holds common equity in the Albertsons supermarket chain, followed by$16.0 million unrealized gain from subsequent increase in share price. 69
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2019
•realized and unrealized loss totaling$239.3 million on a non-designated interest rate swap that was intended to hedge future refinancing risk on certain wellness infrastructure mortgage debt. Such debt was refinanced inJune 2019 and the swap was terminated at the end of 2019; partially offset by: •$51.4 million gain from remeasurement of our 50% interest in DCM upon closing of the DBH acquisition (Note 3 to the consolidated financial statements). Income Tax Benefit (Expense) We recognized income tax benefit of$10.0 million in 2020 and income tax expense of$14.0 million in 2019. The income tax benefit is attributed primarily to deferred tax benefit recognized in connection with our DataBank subsidiary and our OED portfolio, partially offset by the following: (i) valuation allowance established against deferred tax assets in our wellness infrastructure business due to uncertainties in future realization of net operating losses; (ii) income tax expense on a gain from sale of our equity investment inRXR Realty inFebruary 2020 ; and (iii) deferred tax expense related to our wellness infrastructure business due to revaluation of deferred tax balances necessitated by a change in income tax rates inU.K. The income tax expense in 2019 arose primarily from gains recognized on remeasurement of our preexisting interest in DCM upon the acquisition of DBH and from the sale of the industrial management platform. 70
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Income (Loss) from Discontinued Operations
Year Ended December 31, 2020 Year Ended December 31, 2019 Change
(In thousands) Hotel Industrial Total Hotel Industrial Total Hotel Industrial
Revenues
Property operating income $ 573,787 $ 20,217 $ 594,004 $ 1,119,045 $ 346,431 $ 1,465,476 $ (545,258) $ (326,214)
Fee income - - - - 11,646 11,646 - (11,646)
Interest and other income 185 79 264 486 5,163 5,649 (301) (5,084)
Revenues from discontinued
operations 573,972 20,296 594,268 1,119,531 363,240 1,482,771 (545,559) (342,944)
Expenses
Property operating expense 489,975 5,993 495,968 757,555 93,440 850,995 (267,580) (87,447)
Interest expense 157,287 6,665 163,952 228,729 91,863 320,592 (71,442) (85,198)
Investment and servicing
expense 16,811 20 16,831 17,612 658 18,270 (801) (638)
Transaction costs 4,500 - 4,500 - - - 4,500 -
Depreciation and amortization 144,499 2,340 146,839 182,198 106,470 288,668 (37,699) (104,130)
Impairment loss 1,107,133 - 1,107,133 59,913 - 59,913 1,047,220 -
Compensation expense-cash and
equity-based 4,395 82 4,477 5,322 29,791 35,113 (927) (29,709)
Compensation expense-carried
interest - (489) (489) - 35,170 35,170 - (35,659)
Administrative expenses 2,937 1,199 4,136 2,252 6,089 8,341 685 (4,890)
Expenses from discontinued
operations 1,927,537 15,810 1,943,347 1,253,581 363,481 1,617,062 673,956 (347,671)
Other income (loss)
Gain on sale of real estate - 15,936 15,936 913 1,457,892 1,458,805 (913) (1,441,956)
Other gain (loss), net 9,732 - 9,732 804 1,338 2,142 8,928 (1,338)
Equity method earnings
(losses), including carried
interest - (115) (115) - 41,258 41,258 - (41,373)
Income (loss) from discontinued
operations before income taxes (1,343,833) 20,307 (1,323,526) (132,333) 1,500,247 1,367,914 (1,211,500) (1,479,940)
Income tax benefit (expense) (2,662) 15 (2,647) (27) 1,550 1,523 (2,635) (1,535)
Income (loss) from discontinued
operations (1,346,495) 20,322 (1,326,173) (132,360) 1,501,797 1,369,437 (1,214,135) (1,481,475)
Income (loss) from discontinued
operations attributable to:
Noncontrolling interests in
investment entities (172,419) 10,651 (161,768) (20,758) 989,358 968,600 (151,661) (978,707)
Noncontrolling interests in
Operating Company (116,350) 955 (115,395) (9,404) 49,391 39,987 (106,946) (48,436)
Income (loss) from discontinued
operations attributable to
Colony Capital, Inc. $ (1,057,726) $ 8,716 $ (1,049,010) $ (102,198) $ 463,048 $ 360,850 (955,528) (454,332)
Hotel
Discontinued operations of the hotel business represent our Hospitality segment
and the THL Hotel Portfolio that was previously reported in the Other segment.
Loss from discontinued operations increased $1.21 billion , attributable to the
following:
•Impairment loss was $1.1 billion in 2020. Impairment resulted principally from
shortened hold period assumptions, attributable to both the Company's
accelerated digital transformation, and the risk that the Company is unable to
obtain accommodation from lenders on non-recourse mortgage debt that is in
default. These assumptions resulted in a shortfall in projected future cash
flows, which was further exacerbated by a decline in property operating
performance and market values as a result of the economic effects of COVID-19,
such that the carrying value of the hotel assets would not be recoverable.
Additional impairment was recorded based upon pending sales price net of selling
costs.
In comparison, $59.9 million of impairment was recorded in 2019 on hotel assets
based upon shortened hold period assumptions, unfavorable operating performance,
or based upon final net proceeds from sales.
•Operating losses in 2020 reflect the loss of net income from sale of hotel
properties in 2019 and the economic effects of COVID-19. There was a significant
decline in room demand with average occupancy at 52% in 2020
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compared to 73% in 2019. This was further compounded by lower average daily rate
("ADR"), resulting in a 40% decline in revenue per available room ("RevPAR")
compared to 2019.
•Transaction costs in 2020 are related to fees for advisory and legal services
in connection with debt refinancing, portfolio restructuring and pending sale of
the hotels.
•The higher income tax expense is attributed to valuation allowance established
against deferred tax assets in the hotel portfolio as a result of uncertainties
in future realization of net operating losses and taking into consideration a
decrease in the value of these properties.
•The increase in loss from discontinued operations was partially offset by:
•Decrease in interest expense, driven by a decline in LIBOR on predominantly
variable rate debt on our hotel portfolio, partially offset by additional hotel
debt obtained in connection with debt refinancing in 2019 and higher deferred
financing costs expensed as a result of the refinancing;
•Decrease in depreciation and amortization expense due to a lower basis on our
hotel properties after significant impairment charges in 2020 and cessation of
depreciation on hotels held for sale beginning fourth quarter of 2020, partially
offset by capital improvements and fixed asset additions in our hotel properties
that were completed throughout 2019 and early 2020; and
•Write-off of contingent liability on the THL Hotel Portfolio (recorded as other
gain) as it is no longer probable that such payment would be made to a former
preferred equity holder following the adverse effects of COVID-19 on the
operations and performance of the THL Hotel Portfolio .
Industrial
Results of discontinued operations in 2020 represent (i) operations of the bulk
industrial portfolio prior to its sale in December 2020 and a gain on sale
recorded based upon depreciated carrying values; and (ii) final adjustments to
proceeds from the December 2019 sale of the light industrial portfolio upon
release of escrowed funds, which resulted in a loss of $7.4 million , including
corresponding effect on carried interest and related compensation.
In addition to operating results from the light and bulk industrial portfolios,
2019 saw (i) significant gains from sale of the light industrial portfolio in
December 2019 of approximately $1.5 billion (of which $0.9 billion was
attributed to noncontrolling interests in investment entities) and $9.4 million
from the associated management platform; along with (ii) recognition of
significant carried interest of $69.0 million ($40.6 million as equity method
earnings and $28.4 million as disproportionate allocation to the Company from
noncontrolling interests in investment entities), of which approximately $35.2
million was allocated to certain employees as compensation expense.
Assets Under Management and Fee Earning Equity Under Management
Below is a summary of our third party AUM and FEEUM for our digital and other
investment management business.
AUM (1) (In billions) FEEUM (2) (In billions)
December 31, December 31, December 31, December 31,
Type Products Description 2020 2019 (3) 2020 2019 (3)
Digital Investment Management segment
Institutional Digital Colony Partners Earns base management fees $ 9.3 $ 4.3 $ 7.0 $ 3.8
Funds opportunistic strategy and potential for carried
interest
Liquid securities 0.5 - 0.4 -
strategyOther Investment Digital real estate and Earns base management fees,
18.8 9.2 5.4 3.0
Vehicles infrastructure held by business service fees and
portfolio companies and potential for carried
co-invest vehicles interest
Subtotal-Digital IM
28.6 13.5 12.8 6.8
Other segment
Institutional Credit funds, Earns base and asset 7.4 8.5 4.6 5.6
Funds opportunistic funds, management fees from all
value-add funds and managed funds; potential
other co-investment for carried interest from
vehicles sponsored funds
Retail Companies NorthStar Healthcare Earns base management fees 3.4 3.4 0.7 1.2
and potential for carried
interest
Public Companies Colony Credit Real NYSE-listed credit REIT 2.6 3.5 1.9 2.2
Estate, Inc.(4) Earns base management fees
and potential for incentive
income
Subtotal-Other segment 13.4 15.4 7.2 9.0
Total Company $ 42.0 $ 28.9 $ 20.0 $ 15.8
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__________
(1) Assets for which the Company and its affiliates provide investment management services, including assets for which the Company may or may not charge management fees and/or performance allocations. AUM is based on the cost basis of managed investments as reported by each underlying vehicle as of the end of the reporting period and includes uncalled capital commitments. The Company's calculations of AUM may differ from other asset managers, and as a result, may not be comparable to similar measures presented by other asset managers. (2) Equity for which the Company and its affiliates provide investment management services and derive management fees and/or incentives. FEEUM generally represents the basis used to derive fees, which may be based upon invested equity, stockholders' equity, or fair value, pursuant to the terms of each underlying investment management agreement. The Company's calculation of FEEUM may differ from other asset managers, and as a result, may not be comparable to similar measures presented by other asset managers. (3) EffectiveJune 30, 2020 , we no longer include the Company's share of AUM and FEEUM managed by third party asset managers in which we have an equity interest. AUM and FEEUM forDecember 31, 2019 have been revised to conform to the current definition. (4) Represents third party ownership share of CLNC's pro rata share of total assets, excluding consolidated securitization trusts. •Total third party FEEUM increased$4.2 billion to$20.0 billion atDecember 31, 2020 . •Digital FEEUM-There was a$6.0 billion or 88% increase in our digital FEEUM as we successfully raised$7.4 billion of third party capital in 2020, attributed primarily to the first closing of DCP II, co-investment vehicles for the acquisition of Vantage SDC and Zayo, and our digital liquid securities strategy. Zayo, a provider of bandwidth infrastructure services inthe United States andEurope , was formerly a publicly-traded company that was taken private through the acquisition by DCP I and its co-investors. •Other FEEUM-The increase above was partially offset by a$1.8 billion decrease in non-digital FEEUM as a result of lower asset values across our non-digital investment vehicles and continued liquidation of the institutional funds. Segments The following discussion summarizes key information on our reportable segments.Digital Investment Management ("Digital IM") This business encompasses the investment and stewardship of third party capital in digital infrastructure and real estate. The Company's flagship opportunistic strategy is conducted through DCP and separately capitalized vehicles while other strategies, including digital credit and public equities, will be or are conducted through other investment vehicles. The Company earns management fees, generally based on the amount of assets or capital managed in investment vehicles, and have the potential to earn carried interest based on the performance of such investment vehicles subject to achievement of minimum return hurdles.Strategic Partnership in Our Digital Investment Management Business InJuly 2020 , we formed a strategic partnership with Wafra in which Wafra made an investment representing an approximate 31.5% interest in substantially all of our digital investment management business or the Digital IM Business, as defined for the purpose of this transaction. Wafra paid consideration of$254 million for its investment in the Digital IM Business and for warrants issued by the Company to Wafra (assuming the consideration excludes the warrants, this implies an approximately$805 million valuation of the Digital IM Business). Wafra has agreed to assume certain of the Company's existing commitments made to DCP I and to make commitments to DCP II and to the Company's initial digital credit fund, in an aggregate amount of at least$130 million . Wafra has also agreed to make commitments to the Company's future digital funds and investment vehicles on a pro rata basis with the Company based on Wafra's percentage interest in the Digital IM Business, subject to certain caps. Wafra's investment provides us with permanent capital to pursue strategic digital infrastructure investments and grow the Digital IM Business. DCP II InFebruary 2021 , we held a closing of DCP II, our second digital opportunistic fund, with total callable commitments of$4.2 billion , inclusive of$120 million of our commitments as general partner and limited partner. Fee Earning Equity Under Management We successfully raised$7.4 billion of third party capital in 2020, which increased our Digital IM FEEUM by$6.0 billion to$13 billion atDecember 31, 2020 . Refer to discussion in "-Assets Under Management and Fee Earning Equity Under Management." 73
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OperatingPerformance Results of operations of our Digital IM segment are as follows: Year Ended December 31, (In thousands) 2020 2019 Total revenues$ 84,420 $ 34,368 Net income 9,793 48,942 Net income attributable to Colony Capital, Inc. 9,196 44,808 •Prior toJuly 2019 , our Digital IM segment generated only equity method earnings from our 50% interest in DCM, the investment manager of DCP. DCM was consolidated upon acquisition of DBH inJuly 2019 and our existing interest in DCM was remeasured at fair value, resulting in a gain of$51.4 million ($39.3 million net of tax) in 2019. •Refer to "-Consolidated Results of Operations-Fee Income " for a discussion of fee income. Fee income from our Digital IM business is trending positively in 2020, with fees from new co-invest capital raised for various acquisitions during the year and the initial close of DCP II inmid-November 2020 . Operating margins, however, have seen a decline as we ramp up resources to support future investment product offerings, along with bonus accrual for the outperformance of key digital targets, particularly the successful first closing of DCP II. Digital Operating This business is composed of balance sheet equity interests in digital infrastructure and real estate operating companies, which generally earn rental income from providing use of space and/or capacity in or on digital assets through leases, services and other agreements. The Company currently owns interests in two companies: DataBank, an edge colocation data center business that acquired zColo's edge business inDecember 2020 ; and Vantage SDC. Both DataBank and Vantage are also portfolio companies, managed under Digital IM for the equity interests owned by third party capital. Significant Developments We deployed$342 million of capital into growing our data center portfolio through two new acquisitions, Vantage SDC and zColo, while simultaneously raising$1.6 billion of third party capital to co-invest alongside our balance sheet. Including DataBank that was acquired inDecember 2019 , this brings our Digital Operating balance sheet investment to$525 million to-date. We control and consolidate all three acquisitions. •Investment in Hyperscale Data Centers-InJuly 2020 and following an additional investment inOctober 2020 , the Company, alongside third party investors, including fee bearing third party capital that the Company raised, invested$1.36 billion for approximately 90% equity interest in entities that hold Vantage's portfolio of 12 stabilized hyperscale data centers inNorth America and$2.0 billion of secured indebtedness, or Vantage SDC. Our balance sheet investment is$197 million , representing a 13% equity interest. Vantage SDC is our second significant balance sheet investment in a digital operating business and achieves our transformation goals on two fronts, the rotation of our balance sheet to digital assets and growing our digital investment management business. •DataBank Strategic Investment-InDecember 2020 , our DataBank subsidiary acquired zColo, Zayo's colocation assets, composed of 39 data centers in theU.S andU.K. , for approximately$1.2 billion through a combination of debt and equity financing, including$0.5 billion of third party co-invest capital raised by us. Our balance sheet investment atDecember 31, 2020 was$188 million (decreased to approximately$145 million upon raising of additional third party capital inFebruary 2021 , which maintains our 20% equity interest in DataBank). Acquisition of zColo's remaining five data centers inFrance for$33.0 million closed inFebruary 2021 . The acquisition of zColo accelerates DataBank's edge and hybrid cloud strategy, complements its existing relationships and significantly expands its geographic footprint to a national scale in strategically important data center markets. Zayo will continue to be an anchor tenant within the zColo facilities and will become a significant customer of DataBank. With a long term agreement in place between Zayo and DataBank, the companies expect to collaborate closely in bringing colocation solutions to Zayo's fiber customers and private fiber network solutions to DataBank's colocation and cloud customers. 74
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•DataBank REIT Conversion-Our DataBank subsidiary is currently in the process of restructuring its operations in order to operate as a REIT. As such, DataBank expects to elect to be taxed as a REIT forU.S. federal income tax purposes for the taxable year beginningJanuary 1, 2021 . As a REIT, DataBank would generally not be subject toU.S. federal income taxes on its taxable income to the extent that it annually distributes such taxable income to stockholders and maintains certain asset and income requirements of a REIT. However, DataBank would be subject toU.S. federal income taxes on income earned by any of its taxable subsidiaries. Portfolio Overview Our data center portfolio has grown significantly with our new acquisitions in 2020, and now span across 21 states in theU.S , with three inCanada and one inU.K. December 31, 2020 December 31, 2019 Number of data centers Owned 25 8 Leasehold 46 12 71 20 Balance Sheet Information The following table presents key balance sheet data of our Digital Operating segment: (In thousands) December 31, 2020 December 31, 2019 Real estate$ 4,451,865 $ 846,393 Loan receivable 5,070 - Debt 3,213,240 539,155 •The significant increases in real estate and debt balances atDecember 31, 2020 reflect the acquisitions of Vantage SDC and zColo, as described above. •Loan receivable represents a loan originated by DataBank to an owner/operator of edge modular data centers. Financing AtDecember 31, 2020 , our data center business was financed by an aggregate$3.2 billion of outstanding debt principal, of which$2.1 billion is fixed rate debt and$1.1 billion is variable rate debt, bearing a combined weighted average interest rate of 3.69% per annum. InOctober 2020 andFebruary 2021 , Vantage SDC and DataBank raised$1.3 billion and$657.9 million of securitized notes at blended fixed rates of 1.8% and 2.3%, with 6 years and 5 years maturity, respectively. In both instances, the proceeds were applied principally to refinance outstanding debt, which meaningfully reduced the overall cost of debt and extended debt maturities at Vantage SDC and DataBank. OperatingPerformance Results of operations of our Digital Operating segment are as follows. Year Ended December 31, (In thousands) 2020 2019 Total revenues$ 313,283 $ 6,039 Net loss (130,818) (691) Net loss attributable toColony Capital, Inc.
(19,784) (124)
•Operating results in 2020 include a full year of results for DataBank and partial year results from the acquisitions of Vantage SDC inJuly 2020 and zColo inmid-December 2020 , while 2019 reflects operating results for DataBank subsequent to its acquisition in lateDecember 2019 . •Net loss includes the effects depreciation and amortization expense and interest expense, including prepayment penalties related to a Vantage SDC refinancing inOctober 2020 as discussed in "-Consolidated Results of Operations-Interest Expense." 75
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Earnings Before Interest, Tax, Depreciation and Amortization for Real Estate
("EBITDAre")
EBITDAre generated by our Digital Operating segment in 2020 is as follows. A
reconciliation of the most directly comparable GAAP measure to EBITDAre is
presented in "-Non-GAAP Supplemental Financial Measures." EBITDAre for
DataBank's 12 days of operations in 2019 was immaterial.
(In thousands) Year Ended December 31, 2020
Total revenues $ 313,283
Property operating expenses (119,729)
Transaction, investment and servicing costs (6,224)
Compensation and administrative expense (51,125) EBITDAre-Digital Operating $ 136,205 Digital Other This segment is composed of equity interests in digital investment vehicles, the largest of which is the Company's investment and commitment to the DCP flagship funds. This segment also includes the Company's investment and commitment to the digital liquid strategies and seed investments for future digital investment vehicles. Balance Sheet Information The following table presents key balance sheet data of our Digital Other segment: (In thousands) December 31, 2020 December 31, 2019 Loan receivable $ 31,727 $ - Equity investments DCP I 153,872 46,832 Digital liquid securities strategy 223,176
-
•Loan receivable represents the origination of a senior term loan to aU.K. broadband provider that is warehoused on our balance sheet for a future digital credit vehicle. •Equity investments represent primarily: ?our equity method interest in DCP I with additional fundings in 2020; ?interests in previous OED investment vehicles that were reclassified into our digital liquid securities strategy effectiveMarch 31, 2020 (of which$102.7 million was liquidated inJanuary 2021 ); and ?marketable equity securities held by two consolidated open-end funds in our digital liquid securities strategy, which raised additional third party capital in 2020 (our interests in the consolidated funds range between 24% and 55%). •As ofDecember 31, 2020 , we have funded$140 million of our$190 million commitment to DCP I (including our$1.8 million investment as general partner that is reflected as an equity method investment in the Digital IM segment). No capital has been called by DCP II to-date. OperatingPerformance Results of operations of our Digital Other segment are as follows: Year Ended December 31, (In thousands) 2020 2019 Interest income$ 1,355 $ - Equity method earnings (losses) 22,548 (4,465) Other gain, net 12,211 - Net income (loss) 35,922 (4,465) Net income (loss) attributable to Colony Capital, Inc. 23,261 (4,026) •Operating results of our Digital Other segment in 2019 represent only our interest in DCP I. •In 2020, the operating results include unrealized fair value increases in i) investments held by DCP I as it ramps up its investing activities, notably its investment in Zayo (reflected in equity method earnings); and ii) marketable equity securities held by consolidated funds in the new digital liquid securities strategy (reflected in other gain). 76
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Wellness Infrastructure This segment is composed of a diverse portfolio of senior housing, skilled nursing facilities, medical office buildings, and hospitals. The Company earns rental income from senior housing, skilled nursing facilities and hospital assets that are under net leases to single tenants/operators and from medical office buildings which are both single tenant and multi-tenant. In addition, certain of the Company's senior housing properties are managed by operators under a RIDEA (REIT Investment Diversification and Empowerment Act) structure, which allows the Company to gain financial exposure to underlying operations of the facility in a tax efficient manner versus receiving contractual rent under a net lease arrangement. We own between 69.6% and 81.3% of the various portfolios within our Wellness Infrastructure segment. Portfolio Overview Our wellness infrastructure portfolio is located across 30 states domestically and in theU.K. (representing 17% of our portfolio based upon NOI for the fourth quarter of 2020). The following table presents key balance sheet data of our Wellness Infrastructure segment: (In thousands) December 31, 2020 December 31, 2019 Real estate Held for investment$ 3,338,085 $ 4,433,825 Held for disposition 162,952 57,664 Debt 2,700,806 2,910,032 The following table presents selected operating metrics of our Wellness Infrastructure segment: Average Remaining Number of Properties Capacity Average Occupancy(1) Lease Term (Years) December 31, 2020 Senior housing-operating (2) 53 4,756 units 72.8 %
N/A
Medical office buildings 106 3.8 million sq. ft. 82.4 %
4.7
Net lease-senior housing (2) 65 3,534 units 76.1 %
11.5
Net lease-skilled nursing facilities 83 9,713 beds 70.5 % 4.0 Net lease-hospitals 9 456 beds 64.9 % 9.8 Total 316 December 31, 2019 Senior housing-operating 83 6,388 units 86.5 %
N/A
Medical office buildings 106 3.8 million sq. ft. 82.2 %
4.8
Net lease-senior housing 71 4,039 units 80.7 %
11.5
Net lease-skilled nursing facilities 89 10,601 beds 82.7 % 5.8 Net lease-hospitals 9 456 beds 58.0 % 10.3 Total 358 __________ (1) Occupancy represents the property operator's patient occupancy for all types except medical office buildings. Average occupancy is based upon the number of units, beds or square footage by type of facility. Occupancy percentages are presented as follows: (i) as of the last day of the quarter for medical office buildings; (ii) average for the quarter for senior housing-operating; and (iii) average of the prior quarter for net lease properties as our operators report on a quarter lag. (2) A portfolio of six senior housing properties were transitioned from net leases to operating properties inApril 2020 . Conveyance to Lender InAugust 2020 , we indirectly conveyed the equity of certain of our wellness infrastructure borrower subsidiaries, comprising 36 properties in the senior housing operating portfolio with a carrying value of$161.6 million and$157.5 million of outstanding principal on previously defaulted debt, to an affiliate of the lender, which released us from all rights and obligations with respect to those assets and corresponding debt. Dispositions We sold two portfolios of net lease skilled nursing facilities, totaling six properties with 909 beds, and a land parcel in 2020, resulting in repayment of$51.5 million of associated debt. 77
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A portfolio of skilled nursing facilities, composed of 11 properties totaling 1,515 beds, is currently held for disposition, with a carrying value of$152.7 million and encumbered with$75.2 million of outstanding debt principal. The Company expects to apply proceeds from the sale to repay the debt. Financing Our wellness infrastructure portfolio is financed by$2.7 billion of outstanding debt principal, of which$0.4 billion is fixed rate debt and$2.3 billion is variable rate debt, bearing a combined weighted average interest rate of 4.04% per annum atDecember 31, 2020 . As of the date of this filing, debt with outstanding principal of$45.0 million was in default. OperatingPerformance Results of operations of our Wellness Infrastructure segment are as follows: Year Ended December 31, (In thousands) 2020 2019 Total revenues$ 527,176 $ 582,139 Net loss (754,709) (243,688) Net loss attributable toColony Capital, Inc.
(503,925) (183,510)
Operating results at the property level are discussed under NOI below. Results summarized above include the effects of interest expense from mortgage financing, impairment charges and depreciation and amortization expense on our wellness infrastructure portfolio, which are discussed in "-Results of Operations." There was a loss of earnings in 2020 from sales of net lease properties in 2019 and also as a result of the effects of COVID-19. Additionally, the operating results of our wellness infrastructure portfolio were affected by significant real estate impairment charges of$716.5 million in 2020 and$187.3 million in 2019, resulting in significant net losses during these periods. Net Operating Income NOI for our Wellness Infrastructure segment is derived as follows and reconciled to the most directly comparable GAAP measure in "-Non-GAAP Supplemental Financial Measures." Year Ended December 31, (In thousands) 2020 2019 Total revenues
(22,018) (20,179)
Interest income (100) (31)
Other income - (336)
Property operating expenses (249,357) (260,374)
NOI-Wellness Infrastructure
NOI by type of wellness infrastructure portfolio is as follows:
Year Ended December 31, Change 2020 vs. 2019
($ in thousands) 2020 2019 $ %
Senior housing-operating $ 47,823 $ 65,077 $ (17,254) (26.5) %
Medical office buildings 52,258 52,681 (423) (0.8) %
Net lease
Senior housing 54,066 60,859 (6,793) (11.2) %
Skilled nursing facilities 93,366 102,527 (9,161) (8.9) %
Hospitals 8,188 20,075 (11,887) (59.2) %
NOI-Wellness Infrastructure $ 255,701 $ 301,219 (45,518) (15.1) %
NOI decreased $45.5 million in 2020, of which $29.8 million was attributed to
the conveyance of 36 properties in a senior housing operating portfolio to the
lender in August 2020 , and sales of 25 net lease properties in 2019 and six in
2020. The remaining decrease in NOI is attributed primarily to (i) the effects
of COVID-19 on our senior housing operating portfolio as resident fee income
decreased due to a decline in occupancy while incremental operating costs were
incurred,
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partially offset by government stimulus funding, as discussed further below; (ii) lower rental income from unfavorable restructuring of leases; and (iii) less recovery of previously recognized uncollectable rents and lease termination fees based on assessment of collectability. Effects of COVID-19 on our Wellness Infrastructure Segment Our first priority has been, and continues to be, the health and safety of the residents and staff at our communities. We remain focused on supporting our operating partners during this challenging time. Concurrently, we are actively managing capital needs and liquidity to mitigate the financial impact of COVID-19 on our wellness infrastructure business. At this time, we understand from our operators and managers that our communities as a whole continue to experience a moderate level of confirmed COVID-19 cases. The incidence of confirmed cases in our portfolio will continue and could accelerate depending on the duration, scope and depth of COVID-19. The COVID-19 vaccine rollout began in earlyJanuary 2021 . Our operators and tenants have coordinated, and continue to coordinate with the respective states and administering agents to set up on-site clinics at our communities to provide the vaccine to both residents and staff. Many states have classified independent living, assisted living, skilled nursing and memory care facilities as prioritized long-term care eligible for the vaccine. The rollout has been slower than expected. To date, the resident acceptance rate has been high. Staff acceptance, however, has been lower than many of our operators and tenants would have liked and they are implementing programs to support improving those efforts. The effect of COVID-19 varies by asset class in the Company's wellness infrastructure portfolio. Specifically, efforts to address COVID-19 have in some cases forced temporary closures of medical offices, restricted the admission of new residents to senior housing facilities, especially in communities that have experienced infections, and caused incurrence of unanticipated costs and other business disruptions. The Company is directly impacted by these factors in its RIDEA assets, and indirectly impacted in its net leased assets as these factors influence tenants' ability to pay rent. •In our medical office portfolio, beginning inApril 2020 , a number of tenants failed to make rent payments or make timely payments, and some sought more flexible payment terms or rent concessions as a result of the COVID-19 crisis. Local governments in certain jurisdictions have implemented or are considering implementing programs that permit or require forbearance of rent payments by tenants affected by COVID-19. The Company is currently engaged with affected tenants on a case-by-case basis to evaluate and respond to the current environment. The Company has agreed to provide the affected tenants with deferral of rent, generally for two to three months, with deferred rent to be repaid in monthly installments over periods of three to 18 months. This resulted in an increase in lease income receivable totaling approximately$0.2 million as ofDecember 31, 2020 . All lease income receivable, including straight-line rents, are subject to the Company's policy for evaluation of collectability based upon creditworthiness of the lessee. •In our senior housing operating portfolio, statutory or self-imposed restrictions began to limit admission of new residents into our communities starting inMarch 2020 in an effort to contain COVID-19. Also, we continue to face challenges from existing communities that have experienced infections, heightened risk of resident and staff illness and resident move-outs, particularly in those communities that have experienced infections. There is typically a period of time where restrictions on admissions continue to be imposed in communities that have experienced infections until such time that infections are no longer detected. As a result, we anticipate a decline in occupancy to continue as the rate of resident move-outs continue to outpace new resident admissions. In addition, there have been other factors impacting our operators' ability to move in new residents, including: health and safety concerns of prospective new residents and their loved ones; restricted access to community dining, amenities and other lifestyle benefits; inability to tour communities in person; quarantine requirements upon initial move-in to a community; and limitations on families' ability to visit their loved ones. •Operating costs in our senior housing operating portfolio have risen as our healthcare operators take action to protect their residents and staff, specifically higher labor costs, as well as higher usage and cost of personal protective equipment, and medical and sanitation supplies. We incurred$12.2 million of such incremental costs, of which$6.0 million was abated through income received from government stimulus funding under theCARES Act Provider Relief Fund . •Our senior housing net leased portfolio and skilled nursing net leased portfolio have experienced similar challenges. In addition, for our skilled nursing portfolio, the deferral of elective surgeries has also impacted occupancy. However, we generally have continued to collect rent from our operators, in part due to the benefits of various federal relief programs. The challenges faced by our healthcare operators and our tenants as a result of COVID-19 will continue to put pressure on future revenues and operating margins in our Wellness Infrastructure segment. 79
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As necessary, we will engage in discussions with our lenders on the deferral of
payment obligations, and/or waiver of defaults for any potential failure in the
future to satisfy certain financial or other covenants.
Given the ongoing nature of the pandemic, the extent of the financial effects
and how prolonged the effects will be to our wellness infrastructure business is
uncertain at this time, and largely dependent on the duration and severity of
the COVID-19 crisis.
Other
This segment is composed of our other equity and debt or OED investments and
non-digital investment management or Other IM business.
OED encompasses a diversified group of non-digital real estate and real
estate-related equity and debt investments, including investments for which the
Company acts as a general partner and/or manager ("GP co-investments") and
receives various forms of investment management economics on related third-party
capital on such investments, which includes our investment in CLNC, among other
holdings. The Company has monetized a substantial portion of its OED portfolio
and will continue to monetize the remainder as it completes its digital
evolution.
Other IM, which is separate from Digital IM, encompasses the Company's
management of private real estate credit funds and related co-investment
vehicles, CLNC, and NorthStar Healthcare. Many of the investments underlying
these vehicles are co-owned by the Company's balance sheet and categorized under
OED. The Company earns management fees, generally based on the amount of assets
or capital managed, and contractual incentive fees or potential carried interest
based on the performance of the investment vehicles managed subject to
achievement of minimum return hurdles.
Balance Sheet Information
Investments and debt financing in our Other segment, excluding the THL Hotel
Portfolio which is classified as discontinued operations, are summarized below:
December 31, December 31,
(In thousands) 2020 2019
Real estate
Held for investment $ 937,970 $ 937,978
Held for disposition 235,768 353,724
Equity and debt investments
CLNC 385,193 725,443
Interests in our sponsored and co-sponsored funds 41,361 67,164
Other equity investments (1) 882,392 1,411,974
CRE debt securities 28,576 57,591
Loans receivable (2) 1,211,308 1,518,058 Debt (3) 1,103,131 1,218,417 _________ (1) Significant investments include acquisition, development and construction loans accounted for as equity method investments totaling$491.0 million atDecember 31, 2020 and$543.3 million atDecember 31, 2019 . (2) Carried at fair value upon adoption of fair value option onJanuary 1, 2020 . (3) Includes debt carrying value of$155.4 million atDecember 31, 2020 and$200.6 million atDecember 31, 2019 related to real estate held for disposition. 80
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Operating Performance
Our Other segment generated the following results of operations:
Year Ended December 31, 2020 Year Ended December 31, 2019
(In thousands) OED Other IM Total OED Other IM Total
Property operating income $ 106,046 $ - $ 106,046 $ 153,657 $ - $ 153,657
Interest income 69,330 42 69,372 158,703 1,241 159,944
Fee income - 94,399 94,399 - 190,820 190,820
Other income 7,901 15,820 23,721 11,183 54,438 65,621
Total revenues 183,277 110,261 293,538 323,543 246,499 570,042
Equity method earnings
(losses) (577,198) 77,745 (499,453) (125,429) (5,920) (131,349)
Net income (loss) (1,130,521) (469,209) (1,599,730) (152,852) (739,208) (892,060)
Net income (loss) attributable
to Colony Capital, Inc. (606,426) (422,510) (1,028,936) (224,717) (643,631) (868,348)
OED
•Earnings from our real estate investments, loans receivable and equity method
investments in the OED portfolio have declined over time as we continue to
monetize our investments. The decrease also reflects the effects of COVID-19 and
the acceleration of our digital transformation in 2020. The large net losses in
both years, however, resulted primarily from significant write-down in asset
values, namely (i) impairment of our equity investment in CLNC in both years and
our acquisition, development and construction ("ADC") loans in 2020; (ii)
unrealized losses on loans receivable and equity method investments carried at
fair value in 2020; and (iii) real estate impairment in both years. Refer to
further discussion in "-Results of Operations."
•The OED portfolio represents a meaningful source of liquidity from our ongoing
efforts to monetize these investments. In 2020, we have monetized a substantial
portion of our OED portfolio totaling approximately $700 million , achieving the
high end of our target for 2020. This includes equity investments in the Other
IM business as discussed below, and our 51% interest in the bulk industrial
portfolio. We will continue to monetize the remaining assets in our Other
segment as we complete our digital evolution.
Other IM
•Similar to monetization of the OED portfolio, we sold our equity interest in
RXR Realty in February 2020 for proceeds of $179 million (net of tax), recording
a gain of $97 million (net of tax). This represents one of two equity
investments in third party real estate asset managers held in the Other IM
business.
•The above gain was offset by significant goodwill impairment and a reversal of
carried interest allocation in 2020. 2019 was also affected by significant
impairment charges, notably goodwill impairment. Fee income from the Other IM
business has continued to decline over time, with the higher fees in 2019
attributed to a large one time incentive and termination payment from NRE. Other
income in the Other IM segment represents primarily cost reimbursement income
from affiliates which has a corresponding gross-up in expenses, with no effect
on net loss. Refer to further discussion in "-Results of Operations."
•The Other IM business is expected to run off over time as limited life
investment vehicles are in the liquidation phase and no new third party capital
is expected to be raised in the non-digital business.
Non-GAAP Supplemental Financial Measures
The Company reports funds from operations ("FFO") as an overall non-GAAP
supplemental financial measure. The Company also reports EBITDAre for the
Digital Operating segment and NOI for the Wellness Infrastructure segment, which
are supplemental non-GAAP financial measures widely used in the equity REIT
industry. These non-GAAP measures should not be considered alternatives to GAAP
net income as indications of operating performance, or to cash flows from
operating activities as measures of liquidity, nor as indications of the
availability of funds for our cash needs, including funds available to make
distributions. Our calculation of FFO, EBITDAre and NOI may differ from
methodologies utilized by other REITs for similar performance measurements, and,
accordingly, may not be comparable to those of other REITs.
Funds from Operations
We calculate FFO in accordance with standards established by the National
Association of Real Estate Investment Trusts ("NAREIT"), which defines FFO as
net income or loss calculated in accordance with GAAP, excluding (i)
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extraordinary items, as defined by GAAP; (ii) gains and losses from sales of depreciable real estate; (iii) impairment write-downs associated with depreciable real estate; and (iv) gains and losses from a change in control in connection with interests in depreciable real estate or in-substance real estate; plus (v) real estate-related depreciation and amortization; and (vi) including similar adjustments for equity method investments. Included in FFO are gains and losses from sales of assets which are not depreciable real estate such as loans receivable, equity method investments, and equity and debt securities, as applicable. We believe that FFO is a meaningful supplemental measure of the operating performance of our business because historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time, as reflected through depreciation. Because real estate values fluctuate with market conditions, management considers FFO an appropriate supplemental performance measure by excluding historical cost depreciation, gains related to sales of previously depreciated real estate, and impairment of previously depreciated real estate which is an early recognition of loss on sale. The following table presents a reconciliation of net income attributable to common stockholders to FFO attributable to common interests inOperating Company and common stockholders. Amounts in the table include our share of activity in unconsolidated ventures. Year Ended December 31, (In thousands) 2020 2019 Net loss attributable to common stockholders$ (2,750,782) $ (1,152,207) Adjustments for FFO attributable to common interests inOperating Company and common stockholders: Net loss attributable to noncontrolling common interests in Operating Company (302,720) (93,027) Real estate depreciation and amortization 561,195 548,766 Impairment of real estate 1,956,662 351,395 Gain on sales of real estate (41,912) (1,524,290)
Less: Adjustments attributable to noncontrolling interests in investment entities(1)
(638,709) 719,225
FFO attributable to common interests in Operating Company and
common stockholders $ (1,216,266) $ (1,150,138)
__________(1) The components of adjustments attributable to noncontrolling interests in investment entities for FFO are as follows:
Year Ended
December 31,
(In thousands) 2020 2019FFO adjustments attributable to noncontrolling interests in investment entities: Real estate depreciation and amortization
$ 259,543 $ 170,024 Impairment of real estate 403,770 111,231 Gain on sales of real estate (24,604) (1,000,480)$ 638,709 $ (719,225) EBITDAre We calculate EBITDAre for our Digital Operating segment in accordance with standards established by NAREIT, which defines EBITDAre as net income or loss calculated in accordance with GAAP, excluding (i) interest expense; (ii) income tax benefit (expense); (iii) depreciation and amortization; (iv) gains on disposition of depreciated real estate, including gains or losses on change of control; (v) impairment of depreciated real estate and of investments in unconsolidated affiliates, if any, caused by a decrease in value of depreciated real estate in the affiliate; and (vi) including similar adjustments for equity method investments, if any, to reflect the Company's share of EBITDAre of unconsolidated affiliates EBITDAre represents a widely known supplemental measure of performance, EBITDA, but for real estate entities, which we believe is particularly helpful for generalist investors in REITs. EBITDAre depicts the operating performance of a real estate business independent of its capital structure, leverage and noncash items, which allows for comparability across real estate entities with different capital structure, tax rates and depreciation or amortization policies. Additionally, exclusion of gains on disposition and impairment of depreciated real estate, similar to FFO, also provides a reflection of ongoing operating performance and allows for period-over-period comparability. As with other non-GAAP measures, the usefulness of EBITDAre may be limited. For example, EBITDAre focuses on profitability from operations, and does not take into account financing costs, and capital expenditures needed to maintain operating real estate. 82
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NOI
NOI for our Wellness Infrastructure segment represents total property and
related income less property operating expenses, adjusted primarily for the
effects of (i) straight-line rental income adjustments; and (ii) amortization of
acquired above- and below-market lease adjustments to rental income, where
applicable.
We believe that NOI is a useful measure of operating performance of our wellness
infrastructure portfolio as it is more closely linked to the direct results of
operations at the property level. NOI also reflects actual rents received during
the period after adjusting for the effects of straight-line rents and
amortization of above- and below-market leases; therefore, a comparison of NOI
across periods better reflects the trend in occupancy rates and rental rates at
our properties.
NOI excludes historical cost depreciation and amortization, which are based upon
different useful life estimates depending on the age of the properties, as well
as adjust for the effects of real estate impairment and gains on sales of
depreciated properties, which eliminate differences arising from investment and
disposition decisions. This allows for comparability of operating performance of
our properties period over period and also against the results of other equity
REITs in the same sector.
Additionally, by excluding corporate level expenses or benefits such as interest
expense, any gain or loss on early extinguishment of debt, and income taxes,
which are incurred by the parent entity and are not directly linked to the
operating performance of our properties, NOI provides a measure of operating
performance independent of our capital structure and indebtedness.
However, the exclusion of these items as well as others, such as capital
expenditures and leasing costs, which are necessary to maintain the operating
performance of our properties, and transaction costs and administrative costs,
may limit the usefulness of NOI.
Reconciliation of Non-GAAP Financial Measures
The following tables present reconciliations of net loss of the Digital
Operating segment to EBITDAre, and net loss of the Wellness Infrastructure
segment to NOI.
Digital
Operating Wellness Infrastructure
Year Ended Year Ended December 31,
December 31,
(In thousands) 2020 2020 2019
Net loss $ (130,818) $ (754,709) $ (243,688)
Adjustments:
Straight-line rent and amortization of above- and
below-market lease intangibles and ground lease ROU
assets - (22,018) (20,179)
Interest income - (100) (31)
Other income - - (336)
Interest expense 77,976 138,182 192,621
Transaction, investment and servicing costs - 7,131 16,351
Depreciation and amortization 210,263 138,312 161,115
Provision for loan losses - - -
Impairment loss - 716,501 187,341
Compensation and administrative expense - 16,210 12,773
Gain on sale of real estate - (175) (1,384)
Other (gain) loss, net 245 (3,351) (2,752)
Income tax (benefit) expense (21,461) 19,718 (612)
EBITDAre / NOI $ 136,205 $ 255,701 $ 301,219
Liquidity and Capital Resources
Overview
We believe that our capital resources are sufficient to meet our short-term and
long-term capital requirements.
We have substantially addressed our near-term corporate maturity obligations and
enhanced our long-term capital structure and liquidity profile through the
following:
•amendment and extension of our corporate credit facility, which reduced our
borrowing capacity and provided enhanced financial flexibility;
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•issuance of new exchangeable notes and repayment of convertible notes due inJanuary 2021 , which allowed us to reduce our near term maturity obligations; and •strategic investment by Wafra of over$400 million , including over$250 million for a 31.5% ownership interest in our Digital IM business. Wafra has also assumed certain of our existing commitments to DCP I and agreed to make commitments to our future digital funds and investment vehicles on a pro rata basis with us based on Wafra's percentage interest in the Digital IM Business, subject to certain caps. As ofFebruary 22, 2021 , our liquidity position was$700 million , composed of cash on hand and availability under our corporate credit facility. We have also completed a new cost reduction program in 2020 with cost savings, mostly from headcount and compensation related cost reductions, of approximately$55 million on an annual run-rate basis, with$30 million incurred in related charges. We regularly evaluate our liquidity position, debt obligations, and anticipated cash needs to fund our operating and investing activities, based upon our projected financial and operating performance, and investment opportunities as we divest non-digital assets and complete our digital transformation. Our evaluation of future liquidity requirements is regularly reviewed and updated for changes in internal projections, economic conditions, competitive landscape and other factors. At this time, while we are in compliance with all of our corporate debt covenants and have sufficient liquidity to meet our operational needs, we continue to evaluate alternatives to manage our capital structure and market opportunities to strengthen our liquidity and provide further operational and strategic flexibility. Stabilizing our capital structure and liquidity has put us in a stronger position to execute our digital transformation. Liquidity Needs and Sources of Liquidity Our current primary liquidity needs are to fund: •our general partner and co-investment commitments to our investment vehicles; •acquisitions of target digital assets for our balance sheet and related ongoing commitments; •principal and interest payments on our debt; •our operations, including compensation, administrative and overhead costs; •obligation for lease payments, principally leasehold data centers and corporate offices; •capital expenditures for our real estate investments; •distributions to our common and preferred stockholders (to the extent distributions have not been suspended); and •income tax liabilities of taxable REIT subsidiaries and of the Company subject to limitations as a REIT. Our current primary sources of liquidity are: •cash on hand; •our corporate revolving credit facility; •cash flow generated from our investments, both from operations and return of capital; •fees received from our investment management business, including incentive or carried interest payments, if any; •proceeds from full or partial realization of investments and/or businesses, particularly from investments in the Other segment; •investment-level financing; •proceeds from public or private equity and debt offerings; and •third party co-investors in our consolidated investments and/or businesses. Liquidity Needs Investment Commitments Our investment commitments as ofDecember 31, 2020 include primarily$192 million of unfunded capital commitments to Company-sponsored and third-party sponsored funds, of which$141 million is for DCP I and DCP II, after assumption by Wafra of$60 million of our DCP I commitments. Separately, Wafra has also acquired a participation interest and is responsible for$17 million of our remaining$50 million unfunded commitments to DCP I. We expect to fund our remaining investment commitments through cash on hand and/or proceeds from future asset monetization. 84
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Lease Obligations AtDecember 31, 2020 , we have$216.6 million and$591.0 million of finance and operating lease obligations, respectively, that were assumed through acquisitions, primarily leasehold data centers and to a lesser extent, ground leases on certain investment properties, and$60.2 million of operating lease obligations on corporate offices. These amounts represent fixed lease payments on an undiscounted basis, excluding any contingent or other variable lease payments, and factor in lease renewal or termination options only if it is reasonably certain that such options would be exercised. Certain lease payments under ground leases are recoverable from our tenants. These lease obligations will be funded through operating cash generated by the investment properties and corporate operating cash, respectively. Our lease obligations, including future fixed lease payments, is described further in Note 22 to the consolidated financial statements in "Item 15. Exhibits and Financial Statement Schedules" of this Annual Report. DividendsU.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. These distribution requirements may constrain our ability to accumulate operating cash flows. We intend to pay regular quarterly dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service, including complying with any restrictions imposed by our lenders. If our cash available for distribution is less than our net taxable income, we may be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.Common Stock-The Company paid a first quarter 2020 dividend of$0.11 per share of common stock, totaling$52.9 million . The Company suspended dividends on its class A common stock beginning with the second quarter of 2020. Under the terms of the Company's amended credit facility, the Company is restricted from paying common dividends other than to maintain the Company's status as a REIT or to reduce income tax payments. The Company will continue to monitor its financial performance and liquidity position, and as economic conditions improve, the Company will reevaluate its dividend policy in consultation with its revolver lending group. Preferred Stock-AtDecember 31, 2020 , the Company's outstanding preferred stock, totaling$1.03 billion in liquidation preference, bears a weighted average dividend rate of 7.165% per annum, with aggregate cash distributions of$18.5 million per quarter. Sources of Liquidity Cash From Operations Our investments generate cash, either from operations or as a return of our invested capital. We primarily generate revenue from net operating income of our real estate properties, and expect such earnings to be increasingly sourced from our Digital Operating segment as we complete our digital transformation. We also generate interest income from commercial real estate related loans and securities as well as receive periodic distributions from our equity investments, including our GP co-investments. Such income is offset by interest expense associated with non-recourse borrowings on our investments. Additionally, we generate fee revenue from our investment management business, with increasing contribution of fees from our digital investment management business following the significant growth in digital FEEUM in 2020. Management fee income is generally a predictable and stable revenue stream, while carried interest and contractual incentive fees are by nature less predictable in amount and timing. Our ability to establish new investment vehicles and raise investor capital depends on general market conditions and availability of attractive investment opportunities as well as availability of debt capital. Following the onset of COVID-19, our hotel properties, as a whole, generated negative operating cash flows in April andMay 2020 , having recovered to slightly positive operating cash flows sinceJune 2020 . We have since taken various steps to minimize operating expenses, as appropriate, in order to minimize cash needs, as we continue to operate these hotels prior to finalizing the sale of these assets, which is expected to close in the first half of 2021. Any cash flows generated from hotel assets that are in receivership, however, are controlled by the receivers and applied to service the underlying debt. 85
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Asset Monetization We periodically monetize our investments through asset sales that are opportunistic in nature or to recycle capital from non-core assets. In 2020, we have monetized a substantial portion of our OED portfolio totaling approximately$700 million , achieving the high end of our target for 2020. This includes equity investments in the Other IM business and our 51% interest in the bulk industrial portfolio. We will continue to monetize the remaining assets in our Other segment as we complete our digital evolution. Debt Descriptions of our debt and future scheduled debt principal payments are included in "Item 15. Exhibits and Financial Statement Schedules" of this Annual Report, specifically in Note 10 to the consolidated financial statements (and Note 8 for debt related to assets held for disposition). Summary of Indebtedness Our indebtedness atDecember 31, 2020 is summarized as follows: Weighted Average Weighted Average Outstanding Interest Rate (Per Years Remaining to ($ in thousands) Principal Annum) Maturity (1) Corporate credit facility $ - - % 1.0 Convertible and exchangeable senior notes 545,107 5.36 % 3.6 Junior subordinated debt 280,117 3.10 % 15.4 Other secured debt (2) 32,815 5.02 % - Non-recourse investment level financing Fixed rate 2,823,973 3.20 % 4.3 Variable rate 4,249,446 4.33 % 3.4 7,073,419 Total debt (excluding amounts related to assets held for disposition)$ 7,931,458
Debt related to assets held for disposition-Hotels (3)
$ 3,529,026
__________
(1) Calculated based upon initial maturity dates, or extended maturity dates if extension criteria are met and extension is available at the Company's option (2) Debt secured by corporate aircraft was repaid inJanuary 2021 upon sale of the aircraft. (3) Composed of$2.7 billion of debt expected to be assumed by the buyer upon sale of hotel assets and$780 million of hotel debt that is currently under receivership. Recent Developments Corporate Credit Facility •We amended our Credit Agreement inJune 2020 , which reduced aggregate revolving commitments and increased the borrowing rate. The amended terms provide for greater financial covenant flexibility and more borrowing base credit for digital investments. We exercised our first 6-month extension option inDecember 2020 . At this time, we expect to either exercise our second extension option or otherwise replace the existing credit facility. Key terms and current status of our corporate credit facility are as follows: ?Maximum principal amount of$450 million (which will be reduced to$400 million onMarch 31, 2021 ) ?Maturity ofJuly 2021 , with one remaining six-month extension option ?Interest rate of LIBOR + 2.75% ?Full$450 million available to be drawn as of the date of this filing Convertible and Exchangeable Senior Notes •InJuly 2020 , we issued$300 million of exchangeable senior notes maturing inJuly 2025 , bearing interest at 5.75% per annum, and repaid$402.5 million of convertible notes due inJanuary 2021 , which allowed us to reduce our near term maturity obligations while also preserving$300 million of liquidity. As a result, we have no corporate debt maturities (other than our corporate credit facility) until 2023. Non-Recourse Investment-Level Financing 86
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Investment level financing is non-recourse to us, and secured by the respective underlying commercial real estate or mortgage loans receivable. •Digital Operating-2020 includes$2.0 billion of debt assumed from the acquisition of Vantage SDC in July and$550 million of debt obtained by DataBank to finance its acquisition of zColo in December. Subsequently, inOctober 2020 andFebruary 2021 , Vantage SDC and DataBank raised$1.3 billion and$657.9 million of securitized notes at blended fixed rates of 1.8% and 2.3%, with 6 years and 5 years maturity, respectively. In both instances, the proceeds were applied principally to refinance outstanding debt, which meaningfully reduced the overall cost of debt and extended debt maturities at Vantage SDC and DataBank. •Hotels-Upon closing of the sale of our hotel assets which is anticipated in the first half of 2021,$2.7 billion of the underlying debt is expected to be assumed by the acquirer, which would result in a significant deleveraging of our balance sheet. Public Offerings We may offer and sell various types of securities under our shelf registration statement. These securities may be issued from time to time at our discretion based on our needs and depending upon market conditions and available pricing. Cash Flows The following table summarizes the activities from our statements of cash flows. Year Ended December 31, (In thousands) 2020 2019 Net cash provided by (used in): Operating activities$ 89,893 $ 170,868 Investing activities (1,931,980) 4,198,938 Financing activities 1,373,027 (3,779,586) Operating Activities Cash inflows from operating activities are generated primarily through property operating income from our real estate investments, interest received from our loans and securities portfolio, distributions of earnings received from equity investments, and fee income from our investment management business. This is partially offset by payment of operating expenses supporting our various lines of business, including property management and operations, loan servicing and workout of loans in default, investment transaction costs, as well as compensation and general administrative costs. Our operating activities generated net cash inflows of$89.9 million in 2020 and$170.9 million in 2019. Notable items affecting operating cash flows included the following: 2020 •contribution of operating cash flows from our Digital Operating segment in 2020, specifically the DataBank business that was acquired inDecember 2019 using proceeds from sale of the light industrial business, and Vantage SDC acquired inJuly 2020 ; and •the negative effects on operating cash flows from the economic fallout of COVID-19, particularly in our hotel business, as noted below. 2019 •prior to the sale of the entire light industrial business inDecember 2019 , our industrial business contributed$158.7 million of operating cash inflows following the acquisition of a large portfolio inFebruary 2019 ; •incentive and termination fees of$64.6 million were received upon termination of our management agreement concurrent with the sale of NRE inSeptember 2019 ; and •significantly higher operating cash flows were generated from our hotel business in 2019 of$157.7 million compared to$8.7 million in 2020 post COVID-19; all of which were partially offset by •payment of$365.1 million for settlement of the$2.0 billion notional amount on the forward starting interest rate swap assumed through the Merger. 87
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Investing Activities Investing activities include primarily cash outlays for acquisition of real estate, disbursements on new and/or existing loans, and contributions to unconsolidated ventures, which are partially offset by repayments and sales of loans receivable, distributions of capital received from unconsolidated ventures, and proceeds from sale of real estate and equity investments. Our investing activities generated net cash outflows of$1.9 billion in 2020 compared to net cash inflows of$4.2 billion in 2019. •Real estate investments-Real estate acquisitions and sales were the biggest driver of investing cash flows in 2020 and 2019, respectively. 2020 saw net cash outflows of$2.1 billion , with the acquisitions of Vantage SDC inJuly 2020 and zColo inDecember 2020 . In contrast, there was$4.2 billion of net cash inflows in 2019 with the receipt of$6.1 billion of proceeds from real estate sales, offset by payments of$1.9 billion for real estate acquisitions. We had acquired a large portfolio in our industrial segment for$1.1 billion inFebruary 2019 and inDecember 2019 , we received proceeds from the sale of our entire light industrial portfolio of$5.1 billion , net of$0.3 billion of debt assumed by the buyer, closing costs and other prorations. •Equity investments-In 2020, the investing cash outflows for real estate acquisitions were partially offset by net cash inflows from our equity investments of$152.3 million . In particular, we received$179.1 million of net proceeds from sale of our investment inRXR Realty and$87.4 million from recapitalization of our joint venture investment in Albertsons, representing amounts recognized as a return of investment. Both of these inflows were partially offset by contributions to DCP I of$130.2 million and additional draws on ADC loans that are accounted for as equity method investments. In 2019, our equity investments also contributed net cash inflows of$142.5 million , which included$96.0 million of proceeds from sale of our interest in NRE . •Debt investments-Our loan and securities portfolio generated immaterial net cash inflows in 2020 compared to$168.8 million in 2019 as loan repayments largely outpaced disbursements in 2019. •Business acquisition-In 2019, the investing net cash inflows were partially offset by cash paid for business acquisitions, specifically$184.2 million for DBH and$172.4 million for DataBank, net of cash assumed. Financing Activities We finance our investing activities largely through investment-level secured debt along with capital from third party or affiliated co-investors. We also draw upon our corporate credit facility to finance our investing and operating activities, as well as have the ability to raise capital in the public markets through issuances of preferred stock, common stock and debt such as our convertible notes. Accordingly, we incur cash outlays for payments on our investment-level and corporate debt, dividends to our preferred and common stockholders, as well as distributions to our noncontrolling interests. Financing activities generated net cash inflows of$1.4 billion in 2020 compared to net cash outflows of$3.8 billion in 2019. 2020 •The financing cash inflows in 2020 were driven primarily by$1.8 billion of net contributions from noncontrolling interests, of which$1.5 billion represents third party investors in Vantage SDC and zColo, primarily fee bearing capital that we raised, and$253.6 million was an investment by Wafra in our digital investment management business. •Additionally, borrowings on our investment level debt exceeded repayments for a net cash inflow of$278.1 million , which included$550.0 million of debt drawn to finance our acquisition of zColo. •However, the financing cash inflows in 2020 were partially offset by: (i) cash outflow of$402.9 million inJanuary 2020 for settlement of theDecember 2019 redemption of our Series B and E preferred stock using proceeds from our industrial sale; (ii) dividends paid on our preferred and common stock of$185.8 million which, in comparison to 2019, have been significantly reduced as a result of the preferred stock redemption inDecember 2019 and suspension of common stock dividends beginning the second quarter of 2020; and (iii) partial repurchase of our convertible senior notes for$81.3 million through a tender offer inSeptember 2020 . An additional repurchase of 88
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our convertible senior notes for$289.7 million was made through a concurrent application of all of the net proceeds from our issuance of$300.0 million of new exchangeable senior notes inJuly 2020 . 2019 •In contrast, the financing cash outflows in 2019 were driven by net distributions to noncontrolling interests of$2.3 billion , principally the distributions of net proceeds from the sale of our light industrial portfolio inDecember 2019 . •Additionally, debt repayments exceeded borrowings by$1.2 billion , driven by repayment of$1.7 billion of debt in our light industrial portfolio upon disposition, of which$952.0 million had been borrowed during the year. •Further contributing to financing cash outflows in 2019 were dividends paid on our preferred and common stock totaling$322.7 million , which were significantly higher compared to 2020, as noted above. Guarantees and Off-Balance Sheet Arrangements In connection with financing arrangements for certain unconsolidated ventures, we provided customary non-recourse carve-out guarantees. In addition, we have entered into guarantee or contribution agreements with certain hotel franchisors or operating partners, pursuant to which we guaranteed or agreed to contribute to the franchisees' obligations, including payments of franchise fees and marketing fees, for the term of the agreements. However, we believe that the likelihood of making any payments under the guarantees is remote. Critical Accounting Policies and Estimates Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Our critical accounting policies and estimates are integral to understanding and evaluating our reported financial results as they require subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable. Highlighted below are accounting policies and estimates that we believe to be critical based on the nature of our business and/or require significant management judgment and assumptions. With respect to all critical estimates discussed below, we have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. We believe that all of the decisions and assessments applied were reasonable at the time made, based upon information available to us at that time. Due to the inherently judgmental nature of the various projections and assumptions used, unpredictability of economic and market conditions, uncertainty as to the timing and the manner by which the assets in our Other segment would be monetized and the recoverable values upon monetization, and uncertainties over the duration and severity of the resulting economic effects of COVID-19, actual results may differ from estimates, and changes in estimates and assumptions could have a material effect on our financial statements in the future. Impairment In connection with our review and preparation of the financial statements, prior to and subsequent to each quarter end, we evaluate if prevailing events or changes in circumstances indicate that carrying values of the following assets may not be recoverable, in which case, an impairment analysis is performed. Real Estate Held for Investment Triggering events that may indicate potential impairment of our real estate held for investment include, but are not limited to, the Company's shortened hold period assumptions, which in 2020, was attributed to the Company's accelerated digital transformation or in contemplation of underlying mortgage debt that is in default or was at risk of default; deterioration in current and/or projected net operating income; significant near-term lease expirations; decline in occupancy; or other tenant, operator or market conditions that would negatively affect property operating cash flows. The carrying amount of real estate held for investment is not recoverable if it exceeds the undiscounted future net cash flows expected to be generated by the property, including any estimated proceeds from eventual disposition of the property. If multiple outcomes are under consideration, the Company may apply either a probability-weighted cash flows approach or the single-most-likely estimate of cash flows approach, whichever is more appropriate under the circumstances. Impairment is recognized to reduce the carrying value of the property to its estimated fair value, generally based upon a discounted net cash flow analysis which applies a terminal capitalization rate at the end of the projection 89
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period to derive an exit value, or a direct capitalization approach which applies an overall capitalization rate to expected net operating income to estimate current property value. Estimation of future net cash flows involves significant judgment and assumptions, including, but not limited to, the Company's anticipated hold period; probability-weighting to different cash flow scenarios or the determination of the single-most-likely cash flow scenario, where applicable; available market information such as competition levels, leasing trends, occupancy trends, lease or room rates, and market prices of similar properties recently sold or currently being offered for sale; and capitalization rates. Refer to Note 4 of the consolidated financial statements for a discussion of impairment recorded on real estate held for investment, including triggering events, and methodology and inputs applied in estimating the fair value of impaired properties. Equity Method Investments Significant equity method investments that are subject to periodic impairment assessment include the Company's investment in CLNC and ADC loans. Indicators of impairment on equity method investments generally include the Company's shortened hold period assumptions, which in 2020, was attributed to the Company's accelerated digital transformation; significant deterioration in earnings performance, asset quality, or business prospects of the investee; or significant adverse change in the industry, economic, or market environment of the investee. If indicators of impairment exist, the Company estimates the fair value of its equity method investment, which considers factors such as the estimated enterprise value of the investee, fair value of the investee's underlying net assets, or net cash flows to be generated by the investee, and for equity method investees with publicly-traded equity, the traded price of the equity securities in an active market. Further consideration is made if a decrease in the fair value of equity method investments is other-than-temporary to determine if impairment loss should be recognized. Assessment of other-than-temporary impairment may involve significant management judgment, including, but not limited to, consideration of the investee's current and projected financial condition and earnings, business prospects and creditworthiness; significant and prolonged decline in traded price of the investee's equity security; or the Company's ability and intent to hold the investment until recovery of its carrying value. If management is unable to reasonably assert that an impairment is temporary or believes that the Company may not fully recover the carrying value of its investment, then the impairment is considered to be other-than-temporary. Refer to Note 6 of the consolidated financial statements for a discussion of impairment recorded on equity method investments, including assessment of other-than-temporary impairment of our investment in CLNC, and methodology and inputs applied in estimating the fair value of impaired equity method investments.Goodwill The Company's goodwill is associated with its investment management and digital operating real estate businesses.Goodwill is tested for impairment at the reporting unit to which it is assigned, which can be an operating segment or one level below an operating segment. The assessment of goodwill for impairment may initially be performed based on qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value, including goodwill. If so, a quantitative assessment is performed, and to the extent the carrying value of the reporting unit exceeds its fair value, impairment is recognized for the excess up to the amount of goodwill assigned to the reporting unit. Alternatively, the Company may bypass a qualitative assessment and proceed directly to a quantitative assessment. A qualitative assessment considers various factors such as macroeconomic, industry and market conditions to the extent they affect the earnings performance of the reporting unit, changes in business strategy and/or management of the reporting unit, changes in composition or mix of revenues and/or cost structure of the reporting unit, financial performance and business prospects of the reporting unit, among other factors. In a quantitative assessment, significant judgment, assumptions and estimates are applied in determining the fair value of reporting units. The Company generally uses the income approach to estimate fair value by discounting the projected net cash flows of the reporting unit, and may corroborate with market-based data where available and appropriate. Projection of future cash flows is based upon various factors, including, but not limited to, our strategic plans in regard to our business and operations, internal forecasts, terminal year residual revenue multiples, operating profit margins, pricing of similar businesses and comparable transactions where applicable, and risk-adjusted discount rates to 90
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present value future cash flows. Given the level of sensitivity in the inputs, a change in the value of any one input, in isolation or in combination, could significantly affect the overall estimation of fair value of the reporting unit. Refer to Note 7 of the consolidated financial statements for a discussion of impairment recorded on the Other IM goodwill, including triggering events, and methodology and inputs applied in estimating fair value of the Other IM reporting unit. Fair Value The Company carries certain assets at fair value on a recurring basis or at the time of initial acquisition. The Company has elected the fair value option for all loans receivable effectiveJanuary 1, 2020 . In a business combination or asset acquisition, all assets acquired and liabilities assumed are initially measured at fair value upon acquisition. Loans Receivable We typically classify loans receivable under Level 3 of the fair value hierarchy, with the measurement of fair value using at least one unobservable input that is significant and requiring management judgment. Level 3 fair value for loans receivable are generally estimated based upon the income approach, applying a discounted cash flow model. This involves a projection of principal and interest that are expected to be collected, and includes consideration of factors such as the financial standing and credit risk of the borrower or sponsor, operating results and/or value of the underlying collateral, and market yields for loans with similar credit risk and other characteristics. In times of adverse economic conditions, the judgment applied in estimating unobservable inputs is subject to a greater degree of uncertainty. Refer to Note 12 of the consolidated financial statements for additional information on the inputs applied in estimating fair value of loans receivable. Allocation of Purchase Consideration In a business combination, the Company measures the assets acquired, liabilities assumed and any noncontrolling interests of the acquiree at their acquisition date fair values, with the excess of purchase consideration over the fair value of net assets acquired and the fair value of any previously held interest in the acquiree, recognized as goodwill. In an asset acquisition, the Company allocates the purchase consideration to the assets acquired and liabilities assumed based upon their relative fair values, which does not give rise to goodwill. The estimation of fair value of the assets acquired and liabilities assumed involves significant judgment and assumptions. Acquired assets are generally composed of real estate, lease right-of-use ("ROU") asset, lease-related intangibles, investment management related intangibles, and other identifiable intangibles such as customer contracts, customer relationships and trade names. The Company generally values real estate based upon their replacement cost for buildings (in an as-vacant state), improvements and data center infrastructure, and based upon comparable sales or current listings for land. Lease ROU assets are measured based upon future lease payments over the lease term, adjusted for any lease incentives and capitalized direct leasing costs, and discounted at the incremental borrowing rate. Identifiable intangible assets are typically valued using the income approach based upon net cash flows expected to be generated by the assets, discounted to present value. Estimates applied include, but are not limited to: (i) construction costs for buildings and improvements; (ii) cost per kilowatt and costs of design, engineering, construction and installation for data center infrastructure; and (iii) for intangible assets, expected future cash flows, reinvestment rates by existing investors in our investment management business, lease renewal rates, customer attrition rates, discount rates, and useful lives. These estimates are based upon assumptions that management believes a market participant would apply in valuing the assets. These estimates and assumptions are forward-looking and are subject to uncertainties in future economic, market and industry conditions. Refer to Note 3 of the consolidated financial statements for additional discussion of the methodology and inputs applied in estimating fair value of assets upon acquisition. Recent Accounting Updates The effects of accounting standards adopted in 2020 and the potential effects of accounting standards to be adopted in the future are described in Note 2 to our consolidated financial statements in Item 15. "Exhibits, Financial Statement Schedules" of this Annual Report. 91
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