NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1.
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Formation and Organization
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NorthStar Realty Europe Corp. (“NorthStar Europe” or the “Company”) (NYSE: NRE), a publicly-traded real estate investment trust (“REIT”), is a European focused commercial real estate company with predominantly prime office properties in key cities within Germany, the United Kingdom and France. The Company commenced operations on November 1, 2015 following the spin-off by NorthStar Realty Finance Corp. (“NorthStar Realty”) of its European real estate business (excluding its European healthcare properties) into a separate publicly-traded company, NorthStar Realty Europe Corp., a Maryland corporation (the “Spin-off”). The Company’s objective is to provide its stockholders with stable and recurring cash flow supplemented by capital growth over time.
The Company is externally managed and advised by an affiliate of the Manager. References to “the Manager” refer to Colony Capital, Inc. (“Colony Capital” or “CLNY”), formerly known as Colony NorthStar, Inc., before June 25, 2018.
Substantially all of the Company’s assets, directly or indirectly, are held by, and the Company conducts its operations, directly or indirectly, through NorthStar Realty Europe Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the “Operating Partnership”). The Company has elected to be taxed, and will continue to conduct its operations so as to continue to qualify, as a REIT for U.S. federal income tax purposes.
All references herein to the Company refer to NorthStar Realty Europe Corp. and its consolidated subsidiaries, including the Operating Partnership, collectively, unless the context otherwise requires.
Merger Agreement with AXA Investment Managers
In July 2019, the Company announced that it had entered into a merger agreement (the “Merger Agreement”) with certain entities managed by AXA Investment Managers - Real Assets (“AXA Investment Managers”) under which the Company will merge with and into a wholly owned subsidiary of AXA Investment Managers (“Merger Sub”) with Merger Sub as the surviving entity in the merger (the “Merger”). The surviving entity of the Merger will not be a publicly-traded company and will become a wholly owned subsidiary of a fund managed by AXA Investment Managers. The Merger has been approved by the Company’s board of directors (the “Board”) upon the recommendation of the Strategic Review Committee of the Board consisting solely of independent directors of the Company (refer to Note 14 for more information).
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2.
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Summary of Significant Accounting Policies
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Basis of Quarterly Presentation
The accompanying unaudited consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared under U.S. GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair statement of the Company’s consolidated financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
, which was filed with the U.S. Securities and Exchange Commission (the “SEC”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Operating Partnership and their consolidated subsidiaries. The Company consolidates variable interest entities (“VIE”) where the Company is the primary beneficiary and voting interest entities which are generally majority owned or otherwise controlled by the Company. All significant intercompany balances are eliminated in consolidation.
Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates and assumptions.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Reclassifications
Certain prior period amounts have been reclassified in the consolidated financial statements to conform to current period presentation. Unrealized gain (loss) on derivatives and other has been renamed to other gain (loss), net and realized gain (loss) on sales and other has been renamed to gain on sales, net for presentational purposes only. Additionally, the Company has reclassified the gain (loss) on net cash on derivatives from realized gain (loss) on sales and other to other gain (loss), net on the consolidated statements of operations for the
three and six months ended
June 30, 2018
(refer to Note 10).
Finally, in connection with the new leasing guidance under ASU 2016-02, which the Company adopted on January 1, 2019, the Company has combined the rental income and escalation income line items into one line item, lease income. Further, in connection with the new leasing guidance, the Company has reclassified below market ground lease from intangible assets, net and goodwill on the consolidated balance sheets to the operating lease right of use asset recorded in other assets, net and operating lease liability recorded in other liabilities on the consolidated balance sheets as of
June 30, 2019
(refer below for details on the new guidance).
Prior Period Adjustments
In connection with the new share-based payment guidance under ASU 2018-07, which the Company early adopted on July 1, 2018, the Company was required to retrospectively adjust compensation expense for the
three and six months ended
June 30, 2018
by
$1.6 million
and
$1.8 million
, respectively. This prior period adjustment increased the previously stated earnings per share (“EPS”) disclosed for the three months ended
June 30, 2018
by
$0.03
per basic and dilutive share, respectively, and for the six months ended
June 30, 2018
by
$0.04
per basic share and
$0.03
per dilutive share
Intangible Assets and Intangible Liabilities
The Company records acquired identified intangibles, which includes intangible assets (such as value of the above-market leases, in-place leases, goodwill and other intangibles) and intangible liabilities (such as the value of below-market leases), based on estimated fair value. The value allocated to the above or below-market leases is amortized net to rental income and in-place leases is amortized into depreciation and amortization expense, respectively, in the consolidated statements of operations on a straight-line basis over the respective remaining lease term.
Goodwill represents the excess of the purchase price over the fair value of net tangible and intangible assets acquired in a business combination and is not amortized. The Company analyzes goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be fully recoverable. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of an operating segment, related to such goodwill, is less than the carrying amount. If the carrying amount exceeds fair value an impairment is recorded for the difference.
The following table presents identified intangibles as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
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June 30, 2019
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December 31, 2018
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Gross Amount
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Accumulated Amortization
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Net
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Gross Amount
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Accumulated Amortization
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Net
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Intangible assets:
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In-place lease
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$
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40,116
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$
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(24,575
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)
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$
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15,541
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$
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40,545
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$
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(22,031
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)
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$
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18,514
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Above-market lease
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3,032
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(1,581
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)
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1,451
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3,042
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(1,401
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)
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1,641
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Below-market ground lease
(1)
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—
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—
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—
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32,552
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(1,420
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)
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31,132
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Goodwill
(2)
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6,842
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N/A
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6,842
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6,886
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N/A
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6,886
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Total
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$
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49,990
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$
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(26,156
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)
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$
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23,834
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$
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83,025
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$
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(24,852
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)
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$
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58,173
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Intangible liabilities:
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Below-market lease
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$
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16,252
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$
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(7,427
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)
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$
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8,825
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$
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16,305
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$
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(6,583
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)
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$
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9,722
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Total
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$
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16,252
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$
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(7,427
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)
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$
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8,825
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$
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16,305
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$
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(6,583
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)
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$
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9,722
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_____________________________
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(1)
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Upon adoption of the new lease standard on January 1, 2019, the Company has reclassified below market ground lease from intangible assets, net and goodwill on the consolidated balance sheets to the operating lease right of use asset recorded in other assets, net on the consolidated balance sheets as of
June 30, 2019
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(2)
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Represents goodwill associated with certain acquisitions in exchange for shares in the underlying portfolios. The goodwill and a corresponding deferred tax liability was recorded at acquisition based on tax basis differences.
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NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents annual amortization of intangible assets and liabilities (dollars in thousands):
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Intangible Assets
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Intangible Liabilities
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In-place Leases, Net
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Above-market Leases, Net
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Below-market Leases, Net
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Remaining 2019
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$
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2,588
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$
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181
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$
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834
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2020
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3,567
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362
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1,638
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2021
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2,969
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362
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1,475
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2022
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2,146
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343
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1,475
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2023
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1,373
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203
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1,475
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2024 and thereafter
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2,898
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—
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1,928
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Total
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$
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15,541
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$
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1,451
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$
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8,825
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Other Assets and Other Liabilities
The following tables present a summary of other assets and other liabilities as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
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June 30, 2019
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December 31, 2018
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Other assets:
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Prepaid expenses
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$
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1,468
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$
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581
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Deferred leasing and other costs, net
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3,786
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3,710
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Deferred tax assets, net
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241
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801
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Straight-line rent, net
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7,261
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7,479
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Operating lease right of use asset
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30,875
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—
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Other
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2,839
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1,746
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Total
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$
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46,470
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$
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14,317
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June 30, 2019
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December 31, 2018
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Other liabilities:
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Deferred tax liabilities
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$
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5,090
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$
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5,123
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Prepaid rent received and unearned revenue
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9,264
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9,867
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Tenant security deposits
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3,686
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3,914
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Prepaid escalation and other income
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—
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2,121
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Operating lease liability
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25
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—
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Other
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76
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242
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Total
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$
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18,141
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$
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21,267
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Revenue Recognition
Operating Real Estate
Lease income from operating real estate is derived from leasing of space to various types of tenants. Rental revenue recognition commences when the tenant takes possession of the leased space and the leased space is substantially ready for its intended use. The leases are for fixed terms of varying length and generally provide for annual rentals, subject to indexation, and expense reimbursements to be paid in quarterly or monthly installments. Rental income from leases is recognized on a straight-line basis over the term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in other assets, net on the consolidated balance sheets. The Company amortizes any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the lease. Lease income also represents revenue from tenant leases which provide for the recovery of all or a portion of the operating expenses and real estate taxes paid by the Company on behalf of the respective property. This revenue is accrued in the same period as the expenses are incurred.
In a situation in which a lease or leases associated with a significant tenant have been, or are expected to be, terminated early, the Company evaluates the remaining useful life of depreciable or amortizable assets in the asset group related to the lease that will be terminated (i.e., tenant improvements, above and below market lease intangibles, in-place lease value and leasing commissions). Based upon consideration of the facts and circumstances surrounding the termination, the Company may write-off or accelerate the depreciation and amortization associated with the asset group. Such amounts are included within depreciation and amortization in the consolidated statements of operations.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Rental amounts due under tenant leases are generally subject to scheduled adjustments. The following tables present approximate future rental income under noncancelable operating leases to be received over the next five years and thereafter as of
June 30, 2019
and December 31, 2018 (dollars in thousands):
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As of June 30, 2019
(1)
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Remaining 2019
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$
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27,365
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Years ending December 31:
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2020
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43,975
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2021
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40,114
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2022
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35,325
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2023
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35,602
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Thereafter
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94,031
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Total
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$
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276,412
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_________________________
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(1)
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Translated to the U.S. dollar using the currency exchange rate as of
June 30, 2019
.
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As of December 31, 2018
(1)
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Years Ending December 31:
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2019
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$
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56,237
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2020
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46,178
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2021
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42,021
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2022
|
|
35,736
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|
2023
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35,796
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Thereafter
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93,781
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Total
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$
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309,749
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_________________________
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(1)
|
Translated to the U.S. dollar using the currency exchange rate as of December 31, 2018.
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Preferred Equity Investments
Interest income is recognized on an accrual basis and any related premium, discount, origination costs and fees are amortized over the life of the investment using the effective interest method. The amortization is reflected as an adjustment to interest income in the consolidated statements of operations. The amortization of a premium or accretion of a discount is discontinued if such investment is reclassified to held for sale.
Equity-Based Compensation
Equity-classified stock awards granted to non-employees that have a service condition are measured at fair value at date of grant. For time-base awards, fair value is determined based on the closing price of the Company’s common stock at date of grant. For market-based awards, fair value is determined based on the stock price at the date of grant and an estimate of the probable achievement of such measure using a Monte Carlo analysis under a risk-neutral premise using a risk-free interest rate. The Company recognizes compensation expense on a straight-line basis over the requisite service period of the awards, with the amount of compensation expense recognized at the end of a reporting period at least equal to the fair value of the portion of the award that has vested through that date. Compensation expense is adjusted for actual forfeitures upon occurrence.
Earnings Per Share
The Company’s basic equity per share (“EPS”) is calculated using the two-class method for each class of common stock and participating security as if all earnings had been distributed by dividing net income (loss) attributable to common stockholders by the weighted average number of common stock outstanding. Diluted EPS reflects the maximum potential dilution that could occur from the Company’s share-based compensation, consisting of unvested restricted stock awards, restricted stock units (“RSUs”), performance common stock or other contracts to issue common stock, assuming performance hurdles have been met, were converted to common stock, including limited partnership interests in the Operating Partnership owned by holders other than the Company (“Common Units”) and Common Units which are structured as profits interests (“LTIP Units” collectively referred to as Unit Holders). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period. The Company’s unvested restricted stock awards and LTIP Units contain rights to receive non-forfeitable dividends and thus are participating securities. Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
method is determined to be more dilutive. Under the two-class method, net income is first reduced for distributions declared on all classes of participating securities to arrive at undistributed earnings. Under the two-class method, net loss is reduced for distributions declared on participating securities only if such security has the right to participate in the earnings of the entity and an objectively determinable contractual obligation to share in net losses of the entity.
Foreign Currency
Assets and liabilities denominated in a foreign currency for which the functional currency is a foreign currency are translated using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are translated into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency translation adjustment (“CTA”), net, is recorded as a component of accumulated other comprehensive income (“OCI”) in the consolidated statements of equity. For the
three months ended
June 30, 2019
and
2018
, the Company reclassified
$0.1 million
and
$7.8 million
, respectively, of CTA to gain on sales, net in the consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3). For the
six months ended
June 30, 2019
and
2018
, the Company reclassified
$(1.1) million
, and
$8.1 million
, respectively, of CTA to gain on sales, net in the consolidated statements of operations due to the sale of certain real estate assets (refer to Note 3).
Assets and liabilities denominated in a foreign currency for which the functional currency is the U.S. dollar are remeasured using the currency exchange rate in effect at the end of the period presented and the results of operations for such entities are remeasured into U.S. dollars using the average currency exchange rate in effect during the period. The resulting foreign currency remeasurement adjustment is recorded in other gain (loss), net in the consolidated statements of operations.
Income Taxes
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes with the initial filing of its 2015 U.S. federal tax return and will continue to comply with the related provisions of the Internal Revenue Code of 1986, as amended, the (“Internal Revenue Code”). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to stockholders and as long as certain asset, income and share ownership tests are met. To maintain its qualification as a REIT, the Company must annually distribute at least
90%
of its REIT taxable income to its stockholders and meet certain other requirements. Under certain circumstances, federal income and excise taxes may be due on its undistributed taxable income. The Company distributes to its stockholders
100%
of its taxable income and therefore no provision for U.S. federal income taxes has been included in the accompanying consolidated financial statements for the
three and six months ended
June 30, 2019
and
2018
. Dividends distributed for the year ended December 31, 2018 were characterized, for U.S. federal income tax purposes, as capital gains.
The Company conducts its business through foreign subsidiaries which may be subject to local level income tax in the European jurisdictions it operates. The Company has also elected taxable REIT subsidiary (“TRS”) status on certain subsidiaries. This enables the Company to provide services that would otherwise be considered impermissible for REITs and participate in activities that do not qualify as “rents from real property.” The TRS is not resident in the U.S. (“foreign TRS”) and, as such, not subject to U.S. taxation but is subject to foreign income taxes only. In addition, the REIT will not generally be subject to any additional U.S. taxes on the repatriation of foreign TRS earnings.
For the Company’s foreign subsidiaries, including the Company’s foreign TRS, deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the foreign tax basis of assets and liabilities at the enacted tax rates expected to be in effect when the temporary differences reverse. The Company evaluates the realizability of its deferred tax assets (e.g. net operating loss) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Due to past and projected losses in certain local jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company recognized net cumulative valuation allowances against the Company’s deferred tax assets. The Company will continue to review its deferred tax assets in accordance with U.S. GAAP. The Company recorded an income tax expense of
$0.2 million
and an income tax benefit of
$0.1 million
for the
three months ended
June 30, 2019
and
2018
, respectively. The Company recorded an income tax expense of
$2.4 million
and an income tax benefit of
$0.1 million
for the
six months ended
June 30, 2019
and
2018
, respectively. Income tax expense recorded for the six months ended June 30, 2019 includes a
$2.0 million
capital gains tax related to assets sold in the first quarter 2019.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Recent Accounting Pronouncements: Accounting Standards Adopted in 2019
Leases -
In February 2016, the Financial Accounting Standards Board (“FASB”) issued guidance (ASU No. 2016-02) which amended lease accounting standards, along with several clarifying amendments were codified in Accounting Standards Codification (“ASC”) Topic 842. The new standard primarily requires lessees to recognize their rights and obligations under most leases on balance sheet, to be capitalized as a right of use (“ROU”) asset and a corresponding liability for future lease obligations. Targeted changes were made to lessor accounting, primarily to align to the lessee model and the new revenue recognition standard.
The Company adopted the new lease standard and related amendments on January 1, 2019 using the modified retrospective method to leases existing or commencing on or after January 1, 2019. Comparative periods have not been restated and continue to re reported under the standards in effect for those prior periods.
ASC 842 limits the definition of initial direct costs to only the incremental costs of obtaining a lease, such as leasing commissions, for both lessee and lessor accounting. Indirect costs such as allocated overhead, certain legal fees and negotiation costs are no longer capitalized under the new standard. The application of ASC 842 did not have a material impact on the statement of operations.
The Company applied the package of practical expedients, which exempts the Company from having to reassess whether any expired or expiring contracts contain leases, revisit lease classification for any expired or expiring leases and reassess initial direct costs for any existing leases. The Company also elected the practical expedient related to land easements, allowing the Company to carry forward the accounting treatment for land easements on existing agreements. The Company did not however elect the hindsight practical expedient to determine the lease terms for existing leases.
Lessee Accounting
- The Company determines if an arrangement contains a lease and determines the classification of leasing arrangements at inception. A leasing arrangement is classified by the lessee either as a finance lease, which represents a financed purchased of the leased asset, or as an operating lease. The Company's operating leases relate primarily ground leases acquired with real estate. For these ground and office leases, the Company has elected the accounting policy to combine lease and related nonlease components as a single lease component.
ROU assets and lease liabilities are recognized at the lease commencement date based upon the present value of lease payments over the lease term. The ROU assets also include capitalized initial direct costs offset by lease incentives. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. The Company made the accounting policy election to recognize lease payments from short-term leases on a straight-line basis over the lease term and will not record these leases on the balance sheet.
Lease renewal or termination options are factored into the lease asset and lease liability only if it is reasonably certain that the option to extend or the option to terminate would be exercised.
As the implicit rate is not readily determinable in most leases, the present value of the remaining lease payments was calculated for each lease using an estimated incremental borrowing rate, which is the interest rate that the Company would have to pay to borrow over the lease term on a collateralized basis.
Lease expense is recognized over the lease term based on an effective interest method for finance leases and on a straight-line basis for operating leases.
The Company recognized operating lease right of use asset of
$30.9 million
in other assets, net and a corresponding operating lease liability of
$25.0 thousand
in other liabilities for ground leases in its real estate portfolio. There was no impact to beginning equity as a result of adoption related to lessee accounting as the difference between the asset and liability balance is attributable to the derecognition of pre-existing balances, including straight-line rent, lease incentives, prepaid or deferred rent and ground lease obligation intangibles.
Lessor Accounting
- The Company determines if an arrangement contains a lease and determines the classification of leasing arrangements at inception. Therefore, such options are only recognized once they are deemed reasonably certain, typically at the time the option is exercised. Lease revenue is composed of rental income, which includes the effect of minimum rent increases and rent abatements and tenant reimbursements, such as common area maintenance costs and other costs associated to the leases.
As lessor, the Company made the accounting policy election to treat the lease and nonlease components in a contract as a single component to the extent that the timing and pattern of transfer are similar for the lease and nonlease components and the lease component qualifies as an operating lease. Nonlease components of tenant reimbursements for net leases qualify for the practical expedient to be combined with their respective lease component and accounted for as a single component under the lease standard as the lease component is predominant.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Lease revenue is recognized on a straight-line basis over the remaining lease term and is included in property operating income on the consolidated statements of operations. The Company receives variable lease revenues from tenant reimbursements.
Under the new standard, lessors are required to evaluate the collectability of all lease payments based upon the creditworthiness of the lessee. Lease revenue is recognized only to the extent collection is determined to be probable. If collection is subsequently determined to no longer be probable, any previously accrued lease revenue that has not been collected is subject to reversal. If collection is subsequently determined to be probable, lease revenue and corresponding receivable would be reestablished to an amount that would have been recognized if collection had always been deemed to be probable. Upon adoption of ASC 842, the Company determined that collection of certain lease receivables, net of allowance for bad debts, is probable based on an evaluation of the tenants' creditworthiness and no cumulative adjustment to equity was required.
Recent Accounting Pronouncements: Future Application of Accounting Standards
Financial Instruments -
In June 2016, the FASB issued guidance (ASU No. 2016-13) that changes the impairment model for most financial instruments by requiring companies to recognize an allowance for expected losses, rather than incurred losses as required currently by the other-than-temporary impairment model. The guidance will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures (e.g., loan commitments). The new guidance is effective for reporting periods beginning after December 15, 2019 and will be applied as a cumulative adjustment to retained earnings as of the effective date. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The adoption of this standard is not expected to have a material effect on the Company’s existing disclosures.
Fair Value Disclosures
- In August 2018, the FASB issued guidance (ASU No. 2018-13) that requires new disclosures of changes in unrealized gains and losses in OCI for recurring Level 3 fair value of instruments held at balance sheet date, as well as the range and weighted average or other quantitative information, if more relevant, of significant unobservable inputs for recurring and nonrecurring Level 3 fair values. Certain disclosures are now eliminated, specifically around the valuation process required for Level 3 fair values, policy for timing of transfers between levels of the fair value hierarchy, as well as amounts and reason for transfers between Levels 1 and 2. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2019. The adoption of this standard is not expected to have a material effect on the Company’s existing disclosures.
Variable Interest Entities
- In November 2018, the FASB issued guidance (ASU No. 2018-17) which amends the VIE guidance to align the evaluation of a decision maker’s or service provider’s fee in assessing a variable interest with the guidance in the primary beneficiary test. Specifically, indirect interests held by a related party that is under common control will now be considered on a proportionate basis, rather than in their entirety, when assessing whether the fee qualifies as a variable interest. The proportionate basis approach is consistent with the treatment of indirect interests held by a related party under common control when evaluating the primary beneficiary of a VIE. This effectively means that when a decision maker or service provider has an interest in a related party, regardless of whether they are under common control, it will consider that related party’s interest in a VIE on a proportionate basis throughout the VIE model, for both the assessment of a variable interest and the determination of a primary beneficiary. Transition is generally on a modified retrospective basis, with the cumulative effect adjusted to retained earnings at the beginning of the earliest period presented. The new guidance is effective for fiscal years and interim periods beginning after December 15, 2019, with early adoption permitted in an interim period for which financial statements have not been issued. The Company is currently evaluating the impact of this new guidance but does not expect the adoption of this standard to have a material effect on its financial condition or results of operations.
The following table presents operating real estate, net as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Land
|
|
$
|
267,465
|
|
|
$
|
269,149
|
|
Buildings and improvements
|
|
373,299
|
|
|
373,446
|
|
Building and leasehold interests
|
|
173,366
|
|
|
173,782
|
|
Tenant improvements
|
|
29,513
|
|
|
28,432
|
|
Operating real estate, gross
|
|
843,643
|
|
|
844,809
|
|
Less: accumulated depreciation
|
|
(72,033
|
)
|
|
(64,187
|
)
|
Operating real estate, net
|
|
$
|
771,610
|
|
|
$
|
780,622
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Real Estate Held for Sale
There were
no
operating real estate assets held for sale as of June 30, 2019.
The following table summarizes the Company’s operating real estate held for sale as of
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
(1)(2)
|
|
Liabilities
(1)
|
Location
|
|
Type
|
|
Properties
|
|
Operating Real Estate, Net
(2)
|
|
Intangible Assets, Net
|
|
Other Assets
|
|
Total
|
|
Other Liabilities
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bremen, Germany
(3)(6)
|
|
Other
|
|
1
|
|
$
|
1,060
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
1,078
|
|
|
$
|
—
|
|
Werl, Germany
(3)(4)
|
|
Other
|
|
1
|
|
2,866
|
|
|
—
|
|
|
4
|
|
|
2,870
|
|
|
—
|
|
Marly, France
(5)
|
|
Other
|
|
1
|
|
43,208
|
|
|
—
|
|
|
3,897
|
|
|
47,105
|
|
|
1,498
|
|
Frankfurt, Germany
(6)
|
|
Office
|
|
1
|
|
21,274
|
|
|
216
|
|
|
802
|
|
|
22,292
|
|
|
—
|
|
Total
|
|
|
|
4
|
|
$
|
68,408
|
|
|
$
|
234
|
|
|
$
|
4,703
|
|
|
$
|
73,345
|
|
|
$
|
1,498
|
|
_____________________________
|
|
(1)
|
The assets and liabilities classified as held for sale were sold as either asset sales or share sales subject to standard industry terms and conditions. The assets held-for-sale as of
December 31, 2018
contributed
$0.5 million
and
$1.1 million
of revenue and
$(0.3) million
and
$(2.1) million
of income (loss) before income tax benefit (expense) for the three months ended
June 30, 2019
and
2018
, respectively. The assets held-for-sale as of
December 31, 2018
contributed
$1.8 million
and
$1.5 million
of revenue and
$0.2 million
and
$(2.5) million
of income (loss) before income tax benefit (expense) for the
six months ended
June 30, 2019
and
2018
, respectively.
|
|
|
(2)
|
Represents operating real estate and intangible assets, net of accumulated depreciation and amortization of
$6.9 million
as of
December 31, 2018
, prior to being reclassified into held for sale.
|
|
|
(3)
|
Net of impairment loss of
$0.3 million
and
$0.5 million
, respectively, on the non-core retails assets in Bremen and Werl, Germany.
|
|
|
(4)
|
Asset was sold in February 2019.
|
|
|
(5)
|
Asset was sold in June 2019.
|
|
|
(6)
|
Assets were sold in March 2019.
|
Real Estate Sales
The following table summarizes the Company’s real estate sales for the
three and six months ended
June 30, 2019
and 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Properties
|
|
1
|
|
1
|
|
4
|
|
1
|
Carrying Value
|
|
$
|
44,587
|
|
|
$
|
156,107
|
|
|
$
|
70,590
|
|
|
$
|
156,107
|
|
Sales Price
(1)
|
|
$
|
48,190
|
|
|
$
|
188,246
|
|
|
$
|
92,533
|
|
|
$
|
188,246
|
|
Net Proceeds
(2)
|
|
$
|
47,753
|
|
|
$
|
186,064
|
|
|
$
|
91,863
|
|
|
$
|
186,064
|
|
Gain
(3)(4)
|
|
$
|
3,166
|
|
|
$
|
29,957
|
|
|
$
|
21,273
|
|
|
$
|
29,957
|
|
_____________________________
|
|
(1)
|
For the three months ended June 30, 2019 and 2018, the Company sold
one
asset for approximately
€43 million
and
one
asset for approximately
€159 million
, respectively. For the six months ended June 30, 2019 and 2018, the Company sold a total of
four
properties for approximately
€82 million
and
one
asset for approximately
€159 million
, respectively.
|
|
|
(2)
|
Represents proceeds net of sales costs prior to the repayment of the associated property debt. For the three and six months ended June 30, 2019, the Company repaid
$34.5 million
and
$51.6 million
, respectively, of associated property debt, including release premiums. For the three and six months ended June 30, 2018 the Company repaid
$102.4 million
of associated property debt and
$15.6 million
of preferred equity certificates.
|
|
|
(3)
|
For the three months ended June 30, 2019, the Company also recorded a gain on sale of
$0.4 million
related to adjustments from prior period disposals, net other gains and losses and a
$0.1 million
CTA gain. For the six months ended June 30, 2019, the Company also recorded a gain on sale of
$1.2 million
related to the release of escrow accounts and adjustments from prior period disposals, net other gains and losses offset by
$1.1 million
CTA loss.
|
|
|
(4)
|
For the three months ended June 30, 2018, the Company also recorded a gain on sale of
$0.5 million
related to adjustments from prior period disposals, net other gains and losses and a
$7.8 million
CTA gain. For the six months ended June 30, 2018, the Company also recorded a gain on sale of
$1.5 million
related to the release of escrow accounts and adjustments from prior period disposals, net other gains and losses and a
$8.1 million
CTA gain.
|
|
|
4.
|
Preferred Equity Investments
|
In December 2018, in connection with the sale of Trianon Tower, the Company retained a
$5.7 million
(
€5 million
) interest in the form of preferred equity
,
which the Company accounts for as a debt investment.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In May 2017, the Company partnered with a property developer in China to acquire 20 Gresham Street, a Class A office building in London, United Kingdom and the Company invested
$33.3 million
(
£26.2 million
) of preferred equity
,
which the Company accounts for as a debt investment.
The following table presents the Company’s preferred equity investments as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
|
Asset Type
|
|
Principal Amount
|
|
Carrying Value
|
|
Principal Amount
|
|
Carrying Value
|
Fixed Rate
|
|
Mandatory Redemption
|
Preferred equity investment
|
|
|
|
|
|
|
|
|
|
|
|
Gresham Street
(1)
|
|
$
|
33,267
|
|
|
$
|
33,267
|
|
|
$
|
33,368
|
|
|
$
|
33,368
|
|
8.00
|
%
|
|
May 2020
|
Trianon Tower
(2)
|
|
5,685
|
|
|
5,685
|
|
|
5,722
|
|
|
5,722
|
|
7.00
|
%
|
|
Dec 2023
|
Total
|
|
$
|
38,952
|
|
|
$
|
38,952
|
|
|
$
|
39,090
|
|
|
$
|
39,090
|
|
|
|
|
_____________________________
|
|
(1)
|
Denominated in U.K. Pound Sterling, and as such, the principal amount decreased from 2018 to 2019 is due to the decrease in the U.K. Pound Sterling to U.S. dollar exchange rate.
|
|
|
(2)
|
Denominated in Euro, and as such, the principal amount decreased from 2018 to 2019 is due to the decrease in the Euro to U.S. dollar exchange rate.
|
Credit Quality Monitoring
The Company’s preferred equity investments are secured by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its preferred equity investments at least quarterly and determines the relative credit quality principally based on: (i) whether each borrower is currently paying debt service in accordance with its contractual terms; and (ii) whether the Company believes each borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity. The Company categorizes a preferred equity investment for which it expects to receive full payment of contractual principal and interest payments as “performing.” The Company will categorize a weaker credit quality preferred equity investment that is currently performing, but for which it believes future collection of all or some portion of principal and interest is in doubt, into a category called “performing with a loan loss reserve.” The Company will categorize a weaker credit quality preferred equity investment that is not performing, which the Company defines as a loan in maturity default and/or past due on its contractual debt service payments and deemed not to be collectible, as a non-performing loan.
As of
June 30, 2019
, the Company’s preferred equity investments were performing in accordance with the contractual terms of their governing documents, in all material respects, and were categorized as performing loans. For the three months ended
June 30, 2019
and
2018
, the preferred equity investments contributed
$0.8 million
and
$0.7 million
, respectively, of interest income recorded on the consolidated statement of operations. For the six months ended
June 30, 2019
and
2018
, the preferred equity investments contributed
$1.6 million
and
$1.4 million
, respectively, of interest income recorded on the consolidated statement of operations. The remaining balance of interest income for the three and six months ended June 30, 2019 of
$0.8 million
and
$1.6 million
, respectively, related to the interest income from cash held in interest bearing bank accounts.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents borrowings as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Country
|
|
Final
Maturity
|
|
Contractual
Interest Rate
(2)
|
|
Principal
Amount
|
|
Carrying
Value
|
|
Principal
Amount
|
|
Carrying
Value
|
Mortgage and other notes payable:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Trias Portfolio 1
(4)(6)
|
France
|
|
Apr-22
|
|
EURIBOR + 1.65%
|
|
$
|
40,132
|
|
|
$
|
39,306
|
|
|
$
|
75,622
|
|
|
$
|
74,449
|
|
Trias Portfolio 2
(4)(6)
|
Germany
|
|
Jun-25
|
|
EURIBOR + 1.00%
|
|
69,855
|
|
|
69,432
|
|
|
87,496
|
|
|
86,720
|
|
SEB Portfolio 1
(4)
|
Germany/France
|
|
Jul-24
|
|
EURIBOR + 1.55%
|
|
201,610
|
|
|
199,383
|
|
|
202,921
|
|
|
200,459
|
|
SEB Portfolio 2
(4)
|
U.K.
|
|
Jul-24
|
|
GBP LIBOR + 1.55%
|
|
236,065
|
|
|
233,908
|
|
|
236,777
|
|
|
234,402
|
|
SEB Portfolio - Preferred
(3)
|
Germany/France/U.K.
|
|
Apr-60
|
|
0.90%
|
|
—
|
|
|
—
|
|
|
82,745
|
|
|
82,534
|
|
Other - Preferred
(5)
|
Germany
|
|
Oct-45
|
|
1.00%
|
|
4,320
|
|
|
4,320
|
|
|
4,348
|
|
|
4,348
|
|
Total mortgage and other notes payable
|
|
|
|
$
|
551,982
|
|
|
$
|
546,349
|
|
|
$
|
689,909
|
|
|
$
|
682,912
|
|
_____________________________
|
|
(1)
|
All mortgage notes and other notes payable are denominated in local currencies, and as such, the principal amount on debt balances generally decreased from
December 31, 2018
to
June 30, 2019
due to the decrease in the Euro and U.K. Pound Sterling to U.S. dollar exchange rate and the repayment of
$51.6 million
due to sales and
$80.9 million
due to the repayment of the SEB Portfolio - Preferred debt (based on the applicable exchange rate of when the debt was repaid). All borrowings are non-recourse and are interest-only through maturity, subject to compliance with covenants of the respective borrowing, and denominated in the same currency as the assets securing the borrowing.
|
|
|
(2)
|
All floating rate debt is subject to interest rate caps of
0.5%
for EURIBOR and
2.0%
for GBP LIBOR which are used to manage interest rate exposure.
|
|
|
(3)
|
Represents preferred equity certificates, which the Company repaid in April 2019, with a contractual interest rate of
0.90%
through May 2019, which would have increased to EURIBOR plus
12.0%
through May 2022 and subsequently to EURIBOR plus
15.0%
through final maturity. Certain prepayments prior to May 2019 were subject to the payment of the unpaid coupon on outstanding principal amount through May 2019.
|
|
|
(4)
|
Prepayment provisions include a fee based on principal amount of
0.50%
through April 2020 for the Trias Portfolio 1 borrowings,
0.35%
to
1.0%
through May 2022 for the Trias Portfolio 2 borrowings and
0.5%
through July 2019 for the SEB Portfolio borrowings.
|
|
|
(5)
|
Represents preferred equity certificates each with a fixed contractual interest rate of
1.0%
per annum plus variable interest based on specified income levels associated with the German property companies of the Trias Portfolio which can be prepaid at any time without penalty through final maturity, which is
thirty
years from the issuance date.
|
|
|
(6)
|
In February and March 2019, the Company repaid a portion of the mortgage notes on Trias 2 and in June 2019, the Company repaid a portion of the mortgage notes on Trias 1 in connection with the sales of the associated properties (refer to Note 3). In addition, the Company expensed the remaining deferred financing costs associated with these mortgage notes and paid the related prepayment penalties which are recorded in extinguishment of debt in the consolidated statements of operations.
|
The following table presents a reconciliation of principal amount to carrying value of the Company’s mortgage and other notes payable as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Principal amount
|
|
$
|
551,982
|
|
|
$
|
689,909
|
|
Deferred financing costs, net
|
|
(5,633
|
)
|
|
(6,997
|
)
|
Carrying value
|
|
$
|
546,349
|
|
|
$
|
682,912
|
|
The following table presents scheduled principal on borrowings, based on final maturity as of
June 30, 2019
(dollars in thousands):
|
|
|
|
|
|
|
|
Mortgage
and Other Notes
Payable
|
Remaining 2019
|
|
$
|
—
|
|
Years ending December 31:
|
|
|
2020
|
|
—
|
|
2021
|
|
—
|
|
2022
|
|
40,132
|
|
2023
|
|
—
|
|
2024
|
|
437,675
|
|
2025 and thereafter
|
|
74,175
|
|
Total
|
|
$
|
551,982
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of
June 30, 2019
and
December 31, 2018
, the Company was in compliance with all of its financial covenants.
Credit Facility
In March 2018, the Company amended the corporate revolving credit facility (the “Credit Facility”), increasing the size from
$35.0 million
to
$70.0 million
and extending the term until April 2020 with a
one year
extension option. The Credit Facility includes an accordion feature, providing for the ability to increase the facility to
$105.0 million
. As of
June 30, 2019
, there was
no
outstanding balance on the Credit Facility. In July 2019, the Company terminated the Credit Facility.
6. Related Party Arrangements
Colony Capital, Inc.
The Company entered into a management agreement with an affiliate of the Manager in November 2015 (the “Original Management Agreement”). On November 9, 2017, the Company entered into an amended and restated management agreement (the “Amended and Restated Management Agreement”) with an affiliate of the Manager, effective as of January 1, 2018. As asset manager, the Manager is responsible for the Company’s day-to-day operations, subject to the supervision and management of the Board. Through its global network of subsidiaries and branch offices, the Manager performs services and engages in activities relating to, among other things, investments and financing, portfolio management and other administrative services, such as accounting and investor relations, to the Company and its subsidiaries. The Amended and Restated Management Agreement with the Manager provides for a base management fee, incentive fee and expense reimbursement.
On November 7, 2018, the Company entered into Amendment No. 1 (the “Amendment”) to the Amended and Restated Management Agreement with an affiliate of the Manager. The Amendment provides for the termination of the Amended and Restated Management Agreement (the date of such termination, the “Termination Date”) upon the earlier of (i) the closing of an NRE Change of Control (as defined in the Amended and Restated Management Agreement) and (ii) the completion of an internalization of the management of the Company within
nine months
of the later of (x) April 30, 2019, if on such date there is not in place a definitive agreement for an NRE Change of Control and (y) if on April 30, 2019 there is a definitive agreement for an NRE Change of Control, such date on which such agreement is terminated, if any, if no other definitive agreement for an NRE Change of Control is entered into within
30 days
thereafter.
The Amendment provides that upon the Termination Date, the Company will be obligated to pay to the Manager a termination payment equal to (i)
$70 million
, minus (ii) the amount of any Incentive Fee (refer below) paid pursuant to the Amended and Restated Management Agreement. As of
June 30, 2019
, the termination fee that would be payable on the Termination Date was
$64.6 million
.
No
Incentive Fee will be payable to the Manager for any period following the Termination Date.
On April 23, 2019, the Company entered into Amendment No. 2 (“Amendment No. 2”) to the Amended and Restated Management Agreement with an affiliate of the Manager, extending the date used in the definition of Triggering Date (as defined in the Amended and Restated Management Agreement) from April 30, 2019 to June 30, 2019 to accommodate the ongoing strategic review process.
In addition to Amendment No.2, on April 22, 2019, the Company entered into an Employee Transition Agreement with an affiliate of the Manager (the “Employee Transition Agreement”). Pursuant to the terms of the Employee Transition Agreement, the parties agreed that certain employees of the Manager would be available for hire by the Company or an acquirer of the Company from and after the termination of the Amended and Restated Management Agreement pursuant to Amendment No. 2. The Employee Transition Agreement also (i) eliminates the Company’s obligation to reimburse the Manager for
50%
of the cash severance payments payable to Mahbod Nia, the Chief Executive Officer of the Company, if his employment is terminated in connection with an NRE Change of Control, and reduces such reimbursement obligation from
50%
to
25%
of the cash severance payments payable to Mr. Nia if such termination of employment is in connection with an Internalization and (ii) addresses a number of other topics including, minimum 2018 annual cash bonuses, continuing compensation and cash severance payable by the Manager or one of its affiliates to key personnel providing services to the Company, the structure and minimum amount of the 2018 annual equity compensation pool established by the Company under the Amended and Restated Management Agreement and the amendment of outstanding equity awards to address vesting upon an NRE Change of Control or termination of the Amended and Restated Management Agreement.
Term
The Amendment, as modified by Amendment No. 2, provides for the termination of the Amended and Restated Management Agreement upon the earlier of (i) the closing of an NRE Change of Control and (ii) the completion of an internalization of the management of the Company within
nine months
of the later of (x) June 30, 2019, if on such date there is not in place a definitive agreement for an NRE Change of Control and (y) if on June 30, 2019 there is a definitive agreement for an NRE Change of Control, such date on which such agreement is terminated, if any, if no other definitive agreement for an NRE Change of Control is entered
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
into within
30 days
thereafter. Because the Merger will qualify as an NRE Change of Control under the Amended and Restated Management Agreement, upon the closing of the Merger, the Amended and Restated Management Agreement will automatically terminate in accordance with its terms.
Assignment
The Amended and Restated Management Agreement provides that in the event of a change of control of the Manager or other event that could be deemed an assignment of the Amended and Restated Management Agreement, the Company will consider such assignment in good faith and not unreasonably withhold, condition or delay the Company’s consent. The Amended and Restated Management Agreement further provides that the Company anticipates consent would be granted for an assignment or deemed assignment to a party with expertise in commercial real estate and over
$10 billion
of assets under management.
Base Management Fee
Pursuant to the Amended and Restated Management Agreement, beginning January 1, 2018, the Company is obligated to pay quarterly, in arrears, in cash, the Manager a base management fee per annum equal to:
|
|
•
|
1.50%
of the Company’s reported EPRA NAV (as described in the Amended and Restated Management Agreement) for EPRA NAV amounts up to and including
$2.0 billion
; plus
|
|
|
•
|
1.25%
of the Company’s reported EPRA NAV on any EPRA NAV amount exceeding
$2.0 billion
.
|
EPRA NAV is based on a U.S. GAAP balance sheet adjusted based on the Company’s interpretation of the European Public Real Estate Association (“EPRA”) guidelines, and similar as prior practices, including adjustments such as fair value of operating real estate, straight-line rent and deferred taxes and additional adjustments to be determined by the Company in good faith based on any changes to U.S. GAAP, international accounting standards or EPRA guidelines. In calculating EPRA NAV, the liquidation preference of preferred securities outstanding shall not be included as a liability of the Company and shall not reduce EPRA NAV.
For the
three months ended
June 30, 2019
and
2018
, the Company incurred
$3.9 million
and
$4.2 million
, respectively, related to the base management fee. For the
six months ended
June 30, 2019 and 2018, the Company incurred
$7.7 million
and
$8.4 million
, respectively, related to the base management fee.
Incentive Fee
In addition to the base management fees, pursuant to the Amended and Restated Management Agreement, the Company is obligated to pay the Manager an incentive fee, if any (the “Incentive Fee”), with respect to each measurement period equal to twenty percent (
20%
) of: (i) the excess of (a) the Company’s Total Stockholder Return (as defined in the Amended and Restated Management Agreement, which includes stock price appreciation and dividends received and is subject to a high watermark price established when a prior incentive fee is realized) for the relevant measurement period above (b) a
10%
cumulative annual hurdle rate, multiplied by (ii) the Company’s Weighted Average Shares (as defined in the Amended and Restated Management Agreement) during the measurement period. The first measurement period for the incentive fee began January 1, 2018 (based on an initial price of
$13.68
) and ended on December 31, 2018 (at a price of
$14.97
) and subsequent measurement periods will begin on January 1 of the subsequent calendar year and end on December 31 of the applicable calendar year. Any future Incentive Fee will reduce the final termination payment payable to the Manager which, as of
June 30, 2019
, is
$64.6 million
and is payable on the Termination Date.
For the year ended December 31, 2018, the Company incurred a
$5.4 million
incentive fee which was paid in April 2019.
Costs and Expenses
Pursuant to the Amended and Restated Management Agreement, the Company is responsible to pay (or reimburse the Manager) for all of the Company’s direct, out of pocket costs and expenses of the Company as a stand alone company incurred by or on behalf of the Company and its subsidiaries, all of which must be reasonable, customary and documented. Internalized Service Costs (as defined below) are not intended to be covered costs and expenses under this provision and are subject to the limits described in the next paragraph.
The Company is obligated to reimburse the Manager for (i) all direct, reasonable, customary and documented costs and expenses incurred by the Manager for salaries, wages, bonuses, payroll taxes and employee benefits for personnel employed by the Manager: (a) who solely provide services to the Company which prior to January 1, 2018 were provided by unaffiliated third parties, including accounting and treasury services or (b) who were hired by the Manager after January 1, 2018 but who solely provide services to the Company in respect of one of the categories of services previously internalized pursuant to clause (a) and who were not hired in connection with any event which otherwise resulted in an increase to the Company’s net asset value (such costs and expenses set forth in clauses (i) and (ii), the “Internalized Service Costs”), plus (ii)
20%
of the amount calculated under clause (i) to cover
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
reasonable overhead charges with respect to such personnel, provided that the Company shall not be obligated to reimburse the Manager for such costs and expenses to the extent they exceed the following quarterly limits:
|
|
•
|
0.0375%
of the Company’s aggregate gross asset value as of the end of the prior calendar quarter (excluding cash and cash equivalents and certain other exclusions) as calculated for purposes of determining EPRA NAV (“GAV”), for GAV amounts to and including
$2.5 billion
, plus
|
|
|
•
|
0.0313%
of GAV amounts between
$2.5 billion
and
$5.0 billion
, plus
|
|
|
•
|
0.025%
of GAV amounts exceeding
$5.0 billion
.
|
If the Manager’s actual Internalized Service Costs during any quarter exceed the quarterly limit described in the preceding paragraph (the cumulative excess amounts, if any, in respect of each quarter during a calendar year, the (“Quarterly Cap Excess Amount”)), the Company is obligated to reimburse the Manager on an annual basis for an amount equal to the lesser of (i) the Quarterly Cap Excess Amount and (ii) the sum of the amounts, if any, determined for each quarter within such calendar year by which Internalized Services Costs in respect of such quarter were less than the quarterly limits described in the prior paragraph.
For the
three months ended
June 30, 2019
and
2018
, the Manager allocated
$0.2 million
and
$0.2 million
, respectively, of Internalized Service Costs to the Company, which is recorded in general and administrative expenses in the consolidated statements of operations. For the
six months ended
June 30, 2019
and
2018
, the Manager allocated
$0.4 million
and
$0.5 million
, respectively, of Internalized Service Costs to the Company, which is recorded in general and administrative expenses in the consolidated statements of operations.
Equity Based Compensation
In addition, pursuant to the Amended and Restated Management Agreement, the Company expects to make annual equity compensation grants to management of the Company and other employees of the Manager, provided that the aggregate annual grant amount, type and other terms of such equity compensation must be approved by the Company’s compensation committee. The Manager will have discretion in allocating the aggregate grant among the Company’s management and other employees of the Manager.
Beginning with the Company’s 2018 annual stockholders’ meeting, the Manager has the right to nominate one individual to be included in the slate of nominees nominated by the Company’s board of directors for election at each annual meeting. In the third quarter of 2019, for the 2019 annual stockholders’ meeting, the Manager will nominate
one
individual to the Company’s board of directors.
Colony Capital Ownership Waiver and Voting Agreement
In connection with the entry into the Amended and Restated Management Agreement, the Company provided Colony Capital with an ownership waiver under the Company’s Articles of Amendment and Restatement, allowing Colony Capital to purchase up to
45%
of the Company’s stock. The waiver provides that if the Amended and Restated Management Agreement is terminated, Colony Capital may not purchase any shares of the Company’s common stock to the extent Colony Capital owns (or would own as a result of such purchase) more than
9.8%
of the Company’s capital stock. In connection with the waiver, Colony Capital also agreed that for all matters submitted to a vote of the Company’s stockholders, to the extent Colony Capital owns more than
25%
of the Company’s common stock (such shares owned by Colony Capital in excess of the
25%
threshold, the “Excess Shares”), it will vote the Excess Shares in the same proportion that the remaining shares of the Company not owned by Colony Capital or its affiliates are voted. If the Amended and Restated Management Agreement is terminated, then beginning on the third anniversary of such termination, the threshold described in the prior sentence will be reduced from
25%
to
9.8%
.
Manager Ownership of Common Stock
As of
June 30, 2019
, Colony Capital and its subsidiaries owned
5.6 million
shares of the Company’s common stock, or approximately
11.2%
of the total outstanding common stock.
The following summarizes the equity-based compensation for the
three and six months ended
June 30, 2019
and
2018
:
For the
three months ended
June 30, 2019
and
2018
, the Company recorded
$2.0 million
and
$1.2 million
, respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statement of operations. For the
six months ended
June 30, 2019
and
2018
, the Company recorded
$3.2 million
and
$1.6 million
, respectively, of equity-based compensation expense which is recorded in compensation expenses on the consolidated statements of operations. As of
June 30,
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2019
, equity-based compensation expense to be recognized over the remaining vesting period through May 2022 is
$12.1 million
, provided there are
no
additional forfeitures.
In the third quarter 2018, the Company adopted ASU 2018-07 which required the Company to retrospectively adjust compensation expense for the
three and six months ended
June 30, 2018
by
$1.6 million
and
$1.8 million
, respectively (refer to Note 2).
2015 Omnibus Stock Incentive Plan
Pursuant to the NorthStar Realty Europe Corp. 2015 Omnibus Stock Incentive Plan (the “2015 Plan”), the Company may issue equity awards to directors, officers, employees, co-employees, consultants and advisors of the Company, the Manager or of any parent or subsidiary who provides services to the Company. The number of shares that may be issued under the 2015 Plan equals
10 million
shares of common stock, plus on January 1, 2017 and each January 1 thereafter, an additional
2%
of the number of shares of common stock issued and outstanding on the immediately preceding December 31. In addition, shares of common stock underlying any awards that are forfeited, canceled, held back upon exercise of a stock option or settlement of an award to cover the exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without the issuance of common stock or otherwise terminated (other than by exercise) will be added back to the shares of common stock available for issuance under the 2015 Plan. All of the equity awards issued by the Company since the Spin-off from NorthStar Realty on November 1, 2015 have been issued under the 2015 Plan.
As of
June 30, 2019
, under the 2015 Plan, a total of
2.1 million
shares of common stock had been issued (net of forfeitures and shares held back for tax withholding),
1.8 million
shares were reserved for issuance pursuant to outstanding equity awards (including
0.3 million
reserved for issuance upon conversion of outstanding LTIP Units and Common Units and
1.5 million
reserved for issuance pursuant to the outstanding Absolute RSUs, Relative RSUs, 2018 Absolute RSUs and 2018 Relative RSUs, as defined below) and
9.3 million
otherwise unreserved shares remained available for issuance.
In May 2019, under the 2015 Plan, the Company issued a total of
529,805
restricted shares of common stock subject to vesting based on continued service, which included the remaining
150,000
awards under the previously established retention pool, and reserved an additional
17,676
shares of common stock for issuance pursuant to previously forfeited 2018 Absolute RSUs and 2018 Relative RSUs that were reinstated.
In March 2016, as contemplated in connection with the Spin-off, the Company granted an aggregate of
995,698
restricted shares of common stock and
1,493,551
RSUs to employees of the Manager or one of its subsidiaries under the 2015 Plan. The restricted shares of common stock were subject to vesting over the approximately
four
year period ending December 31, 2019, subject to continued employment with the Manager or one of its subsidiaries and the RSUs were market-based awards subject to the achievement of performance-based vesting conditions and continued employment with the Manager or one of its subsidiaries. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return and continued employment with the Manager or one of its subsidiaries over the approximately
four
year period from the grant date through December 31, 2019 (the “Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index and continued employment with the Manager or one of its subsidiaries over the approximately
four
year period from the grant date through December 31, 2019 (the “Relative RSUs”). Award recipients may earn up to
100%
of the Absolute RSUs that were granted and up to
125%
of the Relative RSUs that were granted. Upon vesting pursuant to the terms of the Absolute RSUs and Relative RSUs, the RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted. In accordance with their terms, all of these restricted shares of common stock that remained outstanding vested in connection with the tri-party merger with NorthStar Realty Finance Corp., NorthStar Asset Management Group Inc. and Colony Capital (the “NorthStar Colony Mergers”). The Absolute and Relative RSUs were not affected by the NorthStar Colony Mergers and remain outstanding, subject to forfeitures occurring in connection with termination of employment with the Manager or one of its subsidiaries. During the three months ended March 31, 2018,
170,454
Absolute RSUs and
170,453
Relative RSUs that had previously been granted to key employees of the Manager who are no longer providing services to the Company were forfeited. In 2018, in order to assist in the retention of employees of the Manager who are continuing to provide services to the Company, the Company’s compensation committee utilized
300,000
of these forfeited RSUs to make retention grants consisting of
150,000
restricted shares of common stock that are subject to vesting based on continued service and established a retention pool consisting of an additional
150,000
shares of common stock or RSUs that were to be allocated prior to May 2019 to employees of the Manager who are providing services to the Company as designated by the compensation committee, in its discretion. In November
2018, in order to assist in the retention of employees of the Manager who are continuing to provide services to the Company, the Company’s compensation committee issued retention grants consisting of
90,000
restricted shares of common stock to non-executive officers of the Company that are subject to vesting based on continued service. In May
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2019, the Company allocated the remaining awards under the retention pool, which resulted in the Company granting
150,000
restricted shares of common stock subject to vesting based on continued service.
In March 2018, as contemplated by the Amended and Restated Management Agreement, the Company established an annual equity compensation pool under the 2015 Plan to be allocated among members of management of the Company and other employees of the Manager consisting of an aggregate of
198,000
restricted shares of common stock and
132,000
performance based RSUs. This annual equity compensation pool was then allocated to individual award recipients by the Manager, and individual grants were made. The restricted shares of common stock are subject to vesting in approximately equal annual installments over the
three
-year period ending March 16, 2021, subject to the Manager continuing to serve as the Company’s manager and the recipient’s continued employment with the Manager or Colony Capital or one of its subsidiaries. During the first quarter 2019,
98,310
shares vested, of which
44,342
were retired for tax withholdings. The RSUs are market-based awards subject to the achievement of performance-based vesting conditions. Approximately one-half of these RSUs are subject to the achievement of performance-based hurdles relating to the Company’s absolute total stockholder return over the
three
-year period from the grant date through February 28, 2021 (the “2018 Absolute RSUs”). The other approximately one-half of these RSUs are subject to the achievement of performance-based hurdles based on the Company’s total stockholder return relative to the MSCI US REIT Index over the
three
-year period from the grant date through February 28, 2021 (the “2018 Relative RSUs”). Award recipients may earn up to
200%
of the 2018 Absolute RSUs and Relative RSUs that were granted. Vesting of the 2018 Absolute and Relative RSUs are also subject to the Manager continuing to serve as the Company’s manager and the recipient’s continued employment with the Manager or Colony Capital or one of its subsidiaries through the end of the performance period. The RSUs that vest will be settled in shares of common stock and the recipients will be entitled to receive the distributions that would have been paid with respect to a share of common stock (for each share that vests) on or after the date the RSUs were initially granted. In May 2019, the Company reinstated
13,257
restricted shares of common stock and
8,838
performance-based RSUs that had been granted in March 2018 pursuant to the annual equity compensation pool, but had been previously been forfeited by an individual who has continued to provide services to the Company.
In May 2019, the Company granted annual equity awards consisting of an aggregate of
366,548
restricted shares of common stock subject to vesting based on continued service, a portion of which were specifically allocated by the compensation committee of the Company and a portion of which were allocated to individual award recipients by the Manager as contemplated by the Amended and Restated Management Agreement.
Pre-Spin-off NorthStar Realty Equity Awards
In addition to equity awards issued under the 2015 Plan, the Company also had equity subject to outstanding equity-based awards granted by NorthStar Realty prior to the Spin-off. In connection with the Spin-off, holders of shares of common stock of NorthStar Realty and LTIP units of NorthStar Realty’s operating partnership subject to outstanding equity awards received one share of the Company’s common stock or one Common Unit in the Operating Partnership, respectively, for every six shares of common stock of NorthStar Realty or LTIP units of NorthStar Realty’s operating partnership held. Other equity and equity-based awards relating to NorthStar Realty’s common stock, such as RSUs, were adjusted to also relate to one-sixth of a share of the Company’s common stock, but otherwise generally remained subject to the same vesting and other terms that applied prior to the Spin-off. Performance-based vesting conditions based on total stockholder return of NorthStar Realty or NorthStar Realty and NSAM were adjusted to refer to combined total stockholder return of NorthStar Realty and the Company or NorthStar Realty, NSAM and the Company, respectively, with respect to periods after the Spin-off and references to a change of control or similar term in outstanding awards, which referred to a change of control of either NorthStar Realty or NSAM, were adjusted, to the extent such awards relate to common stock of the Company or Common Units in the Operating Partnership, to refer to a change of control of either the Company or NSAM.
Following the Spin-off, NorthStar Realty and the compensation committee of its Board continued to administer all awards granted by NorthStar Realty prior to the Spin-off, but the Company was obligated to issue shares of the Company’s common stock or other equity awards of its subsidiaries or make cash payments in lieu thereof or with respect to dividend or distribution equivalent obligations to the extent required by these awards. These awards continued to be governed by the NorthStar Realty equity plans, as applicable, and shares of the Company’s common stock issued pursuant to these awards were not be issued pursuant to, and did not reduce availability under, the 2015 Plan. In connection with the NorthStar Colony Mergers, all of these outstanding equity-based awards vested or were forfeited.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents activity related to the issuance, vesting, redemption, conversion and forfeitures of restricted stock, Common Units and performance RSUs. The balance as of
June 30, 2019
represents vested Common Units and unvested restricted stock and performance RSUs (grants in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Restricted Stock
(1)
|
|
Common Units
|
|
Performance RSUs
(2)
|
|
Total Grants
|
|
Weighted
Average
Grant Price
|
December 31, 2018
|
538
|
|
|
338
|
|
|
1,225
|
|
|
2,101
|
|
|
$
|
12.08
|
|
Granted
|
530
|
|
|
—
|
|
|
9
|
|
|
539
|
|
|
16.86
|
|
Vested/converted
|
(87
|
)
|
|
(22
|
)
|
|
—
|
|
|
(109
|
)
|
|
16.86
|
|
Withheld/retired
|
(67
|
)
|
|
—
|
|
|
—
|
|
|
(67
|
)
|
|
17.05
|
|
Forfeited
|
(3
|
)
|
|
—
|
|
|
(10
|
)
|
|
(13
|
)
|
|
16.74
|
|
June 30, 2019
|
911
|
|
|
316
|
|
|
1,224
|
|
|
2,451
|
|
|
$
|
12.87
|
|
_____________________________
|
|
(1)
|
Represents restricted stock included in common stock.
|
|
|
(2)
|
Represents outstanding Spin-off Absolute and Relative RSUs and 2018 Absolute and Relative RSUs.
|
Share Repurchase
In March 2018, the Company’s board of directors authorized the repurchase of up to
$100 million
of its outstanding common stock. The authorization expired in March 2019. For the three and
six months ended
June 30, 2019
, the Company did
no
t repurchase any shares of its common stock. For the three months ended
June 30, 2018
, the Company repurchased
4.0 million
shares of its common stock for approximately
$56.3 million
. For the
six months ended
June 30, 2018
, the Company repurchased
5.1 million
shares of its common stock for approximately
$69.6 million
. From authorization through March 2019, the Company repurchased
6.1 million
shares of its common stock for approximately
$83.4 million
.
Dividends
The following table presents dividends declared (on a per share basis) with respect to the
six months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
Common Stock
|
Declaration Date
|
|
Dividend Per Share
|
2019
|
|
|
May 1
|
|
$
|
0.15
|
|
August 2
|
|
$
|
0.15
|
|
2018
|
|
|
May 8
|
|
$
|
0.15
|
|
August 3
|
|
$
|
0.15
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Earnings Per Share
The following table presents EPS for the
three and six months ended
June 30, 2019
and
2018
(dollars and shares in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(1,434
|
)
|
|
$
|
37,876
|
|
|
$
|
9,689
|
|
|
$
|
36,808
|
|
Net (income) loss attributable to Unit Holders noncontrolling interest
|
|
6
|
|
|
(217
|
)
|
|
(56
|
)
|
|
(202
|
)
|
Net income (loss) attributable to common stockholders and Unit Holders
(1)
|
|
$
|
(1,428
|
)
|
|
$
|
37,659
|
|
|
$
|
9,633
|
|
|
$
|
36,606
|
|
Net (income) allocated to participating securities
|
|
(191
|
)
|
|
(438
|
)
|
|
(242
|
)
|
|
(371
|
)
|
Net income (loss) allocated to common stockholders—basic and dilutive
|
|
$
|
(1,619
|
)
|
|
$
|
37,221
|
|
|
$
|
9,391
|
|
|
$
|
36,235
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock - basic
|
|
49,449
|
|
|
51,859
|
|
|
49,392
|
|
|
53,456
|
|
Weighted average effect of dilutive share
(3)
|
|
—
|
|
(2)
|
2,149
|
|
|
1,358
|
|
|
1,976
|
|
Weighted average shares of common stock - dilutive
|
|
49,449
|
|
|
54,008
|
|
|
50,750
|
|
|
55,432
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.72
|
|
|
$
|
0.19
|
|
|
$
|
0.68
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.69
|
|
|
$
|
0.19
|
|
|
$
|
0.65
|
|
_____________________________
|
|
(1)
|
The EPS calculation takes into account Unit Holders, which receive non-forfeitable dividends from the date of grant, share equally in the Company’s net income (loss) and convert on a
one
-for-one basis into common stock.
|
|
|
(2)
|
For the three months ended June 30, 2019, shares in the diluted EPS calculation represents basic shares due to the net loss in that period. The shares exclude the effect of adding back
1.4 million
weighted average dilutive common shares as their inclusion would be antidilutive.
|
|
|
(3)
|
Includes the Absolute and Relative RSUs and 2018 Absolute and Relative RSUs as the performance targets would have been met if the performance period ended on
June 30, 2019
and 2018.
|
|
|
9.
|
Noncontrolling Interests
|
Operating Partnership
Noncontrolling interests include the aggregate Unit Holders’ interest in the Operating Partnership. Net income (loss) attributable to the noncontrolling interest is based on the weighted average Unit Holders’ ownership percentage of the Operating Partnership for the respective period. The issuance of additional common stock, Common Units or LTIP Units changes the percentage ownership of both the Unit Holders and the Company. Since a Common Unit or LTIP Unit is generally redeemable for cash or common stock at the option of the Company or the holder, it is deemed to be equivalent to common stock. Therefore, such transactions are treated as capital transactions and result in an allocation between stockholders’ equity and noncontrolling interests on the accompanying consolidated balance sheets to account for the change in the ownership of the underlying equity in the Operating Partnership. On a quarterly basis, the carrying value of such noncontrolling interest is reallocated based on the number of Unit Holders in total in proportion to the number of Units Holders plus the number of shares of common stock outstanding. As of
June 30, 2019
and
December 31, 2018
, the Company allocated
$0.2 million
and
$0.2 million
, respectively, from stockholders’ equity to noncontrolling interest on the consolidated balance sheets and consolidated statement of equity.
As of
June 30, 2019
,
315,434
Common Units and LTIP Units were outstanding, representing a
0.6%
ownership and noncontrolling interest in the Operating Partnership. Net income (loss) attributable to the Operating Partnership noncontrolling interest for the
three months ended
June 30, 2019
and
2018
was a net income (loss) of an immaterial amount and
$0.2 million
, respectively. Net income (loss) attributable to the Operating Partnership noncontrolling interest for the
six months ended
June 30, 2019
and
2018
was a net income (loss) of
$0.1 million
and
$0.2 million
, respectively.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
10.
|
Risk Management and Derivative Activities
|
Derivatives
The Company uses derivative instruments primarily to manage certain interest rate and currency risk and such derivatives are not considered speculative. These derivative instruments are in the form of interest cap agreements where the primary objective is to minimize interest rate risks associated with investment and financing activities and foreign currency forward agreements where the primary objective is to minimize foreign currency exchange rate risks associated with operating activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations.
The following tables present derivative instruments that were not designated as hedges under U.S. GAAP as of
June 30, 2019
and
December 31, 2018
(dollars, U.K. pound sterling and Euros in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
(1)
|
|
Notional
Amount
|
|
Fair Value
Asset (Liability)
|
|
Range of
Fixed GBP LIBOR / EURIBOR/ Strike Price
|
|
Range of Maturity
|
As of June 30, 2019 (Unaudited):
|
|
|
|
|
|
|
|
|
|
Interest rate caps (EUR)
|
28
|
|
€564,694
|
|
$
|
531
|
|
|
3 Month EURIBOR 0.5%
|
|
April 2020 - May 2025
|
Interest rate caps (GBP)
|
5
|
|
£202,645
|
|
—
|
|
|
3 Month GBP LIBOR 2.0%
|
|
April 2020
|
Foreign currency forwards
(2)
|
2
|
|
€24,480
|
|
2,757
|
|
|
1.25 EUR/USD
(3)
|
|
August 2019 - November 2019
|
Total
|
35
|
|
|
|
$
|
3,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Interest rate caps (EUR)
|
28
|
|
€564,694
|
|
$
|
2,185
|
|
|
3 Month EURIBOR 0.5%
|
|
April 2020 - May 2025
|
Interest rate caps (GBP)
|
5
|
|
£202,645
|
|
20
|
|
|
3 Month GBP LIBOR 2.0%
|
|
April 2020
|
Foreign currency forwards
(2)
|
4
|
|
€48,960
|
|
4,235
|
|
|
1.25 EUR/USD
(3)
|
|
February 2019 - November 2019
|
Total
|
37
|
|
|
|
$
|
6,440
|
|
|
|
|
|
_____________________________
(1) Represents number of transactions.
(2) Includes Euro currency forwards.
(3) The strike prices for the foreign currency forwards represent the average price.
The following table presents the fair value of derivative instruments, as well as their classification on the consolidated balance sheets, as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet
|
|
June 30, 2019
|
|
December 31,
2018
|
|
Location
|
|
|
Interest rate caps
|
Derivative assets
|
|
$
|
531
|
|
|
$
|
2,205
|
|
Foreign currency forwards
|
Derivative assets
|
|
$
|
2,757
|
|
|
$
|
4,235
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table presents the effect of derivative instruments in the consolidated statements of operations for the
three and six months ended
June 30, 2019
and
2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amount of gain (loss) recognized in earnings:
|
Statements of operations location:
|
|
|
|
|
|
|
|
|
Adjustment to fair value of interest caps held at the end of the reporting period
|
Other gain (loss), net
|
|
$
|
(375
|
)
|
|
$
|
(1,880
|
)
|
|
$
|
(1,652
|
)
|
|
$
|
(1,999
|
)
|
Adjustment to fair value of foreign currency forwards held at the end of the reporting period
|
Other gain (loss), net
|
|
(1,596
|
)
|
|
7,566
|
|
|
(1,477
|
)
|
|
6,494
|
|
Net cash receipt (payment) on derivatives
|
Other gain (loss), net
(1)
|
|
1,416
|
|
|
(2,631
|
)
|
|
2,562
|
|
|
(4,371
|
)
|
_____________________________
|
|
(1)
|
Excludes the gain (loss) relating to foreign currency transactions for the three months ended
June 30, 2019
and
2018
of
$0.6 million
and
$0.4 million
, respectively and for the
six months ended
June 30, 2019
and
2018
of
$(1.9) million
and
$0.4 million
, respectively.
|
The Company’s counterparties held
no
cash margin as collateral against the Company’s derivative contracts as of
June 30, 2019
and
December 31, 2018
. The Company had
no
derivative financial instruments that were designated as hedges in qualifying hedging relationships as of
June 30, 2019
and
December 31, 2018
.
Fair Value Measurement
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities are recorded at fair value on the consolidated balance sheets and are categorized based on the inputs to the valuation techniques as follows:
|
|
Level 1.
|
Quoted prices for identical assets or liabilities in an active market.
|
|
|
Level 2.
|
Financial assets and liabilities whose values are based on the following:
|
|
|
(a)
|
Quoted prices for similar assets or liabilities in active markets.
|
|
|
(b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets.
|
|
|
(c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability.
|
|
|
(d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market data for substantially the full term of the asset or liability.
|
|
|
Level 3.
|
Prices or valuation techniques based on inputs that are both unobservable and significant to the overall fair value measurement.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of the valuation techniques used to measure fair value of assets and liabilities accounted for at fair value on a recurring basis and the general classification of these instruments pursuant to the fair value hierarchy.
Derivative Instruments
Derivative instruments consist of interest rate caps and foreign currency exchange contracts that are traded over-the-counter, and are valued using a third-party service provider. These quotations are not adjusted and are generally based on valuation models with observable inputs such as contractual cash flow, yield curve, foreign currency rates and credit spreads and as such, are classified as Level 2 of the fair value hierarchy. Derivative instruments are also assessed for credit valuation adjustments due to the risk of non-performance by the Company and derivative counterparties.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of Financial Instruments
In addition to the above disclosures regarding financial assets or liabilities which are recorded at fair value, U.S. GAAP requires disclosure of fair value about all financial instruments. The following disclosure of estimated fair value of financial instruments was determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value.
The following table presents the principal amount, carrying value and fair value of certain financial assets and liabilities as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Principal/Notional
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
|
Principal/Notional
Amount
|
|
Carrying
Value
|
|
Fair
Value
|
Financial assets:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
927,254
|
|
|
$
|
3,288
|
|
|
$
|
3,288
|
|
|
$
|
960,401
|
|
|
$
|
6,440
|
|
|
$
|
6,440
|
|
Preferred equity investment
|
38,952
|
|
|
38,952
|
|
|
39,363
|
|
|
39,090
|
|
|
39,090
|
|
|
39,501
|
|
Financial liabilities:
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage and other notes payable, net
|
$
|
551,982
|
|
|
$
|
546,349
|
|
|
$
|
546,349
|
|
|
$
|
689,909
|
|
|
$
|
682,912
|
|
|
$
|
686,891
|
|
_____________________________
|
|
(1)
|
The fair value of other financial instruments not included in this table is estimated to approximate their carrying value.
|
Disclosure about fair value of financial instruments is based on pertinent information available to management as of the reporting date. Although management is not aware of any factors that would significantly affect fair value, such amounts have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.
Mortgage and Other Notes Payable
For mortgage and other notes payable, the Company primarily uses rates currently available with similar terms and remaining maturities to estimate fair value. These measurements are determined using rates as of the end of the reporting period or market credit spreads over the rate payable on fixed rate of like maturities. These fair value measurements are based on observable inputs, and as such, are classified as Level 2 of the fair value hierarchy.
Preferred Equity Investments
For preferred equity investments, fair value was computed by comparing the current yield to the estimated yield for newly originated loans with similar credit risk or the market yield at which a third party might expect to purchase such investment. Fair value was determined assuming fully-extended maturities regardless of structural or economic tests required to achieve such extended maturities. These fair value measurements are generally based on unobservable inputs and, as such, are classified as Level 3 of the fair value hierarchy.
|
|
12.
|
Commitments and Contingencies
|
The Company is involved in various litigation matters arising in the ordinary course of its business. Although the Company is unable to predict with certainty the eventual outcome of any litigation, in the opinion of management, the current legal proceedings are not expected to have a material adverse effect on the Company’s financial position or results of operations.
The Company engages third-party service providers for its portfolio who are remunerated based on either a fixed fee or a percentage of rental income. The contract terms vary by party and are subject to termination options. These costs are recorded in properties - operating expense and other expenses in the consolidated statements of operations.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As part of the terms of agreements relating to certain assets the Company disposed, as is customary for such transactions in Europe, the Company agreed to provide certain warranties to the buyer.
Obligations Under Ground Leases
The Company has
one
ground lease on the Portman Square asset with an expiry in 2101. The annual rent is
£1000
per year for the lease term and is not recoverable from the tenants (refer to Note 2).
Risk Management
Concentrations of credit risk arise when a number of tenants related to the Company’s investments are engaged in similar business activities or located in the same geographic region to be similarly affected by changes in economic conditions. The Company monitors its portfolios to identify potential concentrations of credit risks. For the
three and six months ended
June 30, 2019
,
one
tenant, BNP Paribas RE, accounted for more than 10% of the Company’s total revenues. This tenant has
0.6
years remaining on its lease. Otherwise, the Company has no other tenant that generates 10% or more of its total revenues. Additionally, for the
three and six months ended
June 30, 2019
, Germany, France and the United Kingdom each accounted for more than 10% of the Company’s total revenues. The Company believes its portfolio is well diversified and does not contain any unusual concentrations of credit risks.
Guarantee
In connection with the sale of the Trianon Tower in December 2018, the Company pledged its
$5.7 million
(
€5 million
) preferred equity certificates to secure certain of the seller representations and warranties made to the buyer in the definitive purchase agreement. The maximum exposure of this guarantee is the
$5.7 million
(
€5 million
) preferred equity certificates. To date, we have not experienced any significant losses related to this guarantee. We establish reserves when a loss is probable and the amount can be reasonably estimated.
The Company currently conducts its business through the following
three
segments, based on how management reviews and manages its business:
|
|
•
|
Real Estate Equity -
Focused on European prime office properties located in key cities within Germany, the United Kingdom and France.
|
|
|
•
|
Preferred Equity
- Represents the Company’s preferred equity investments secured by interest in prime office properties.
|
|
|
•
|
Corporate
- The corporate segment significantly includes corporate level interest expense, management fee, compensation expense, foreign currency derivatives and general and administrative expenses.
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following tables present segment reporting for the
three and six months ended
June 30, 2019
and
2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
Statement of Operations:
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
Revenues
|
|
|
|
|
|
|
|
Lease income
|
$
|
16,499
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,499
|
|
Interest income
|
—
|
|
|
761
|
|
|
793
|
|
|
1,554
|
|
Expenses
|
|
|
|
|
|
|
|
Interest expense
(1)
|
3,237
|
|
|
—
|
|
|
176
|
|
|
3,413
|
|
Management fee, related party
|
—
|
|
|
—
|
|
|
3,848
|
|
|
3,848
|
|
Transaction costs
(2)
|
—
|
|
|
—
|
|
|
1,827
|
|
|
1,827
|
|
Depreciation and amortization
|
5,908
|
|
|
—
|
|
|
—
|
|
|
5,908
|
|
Gain on sales, net
|
(3,671
|
)
|
|
—
|
|
|
—
|
|
|
(3,671
|
)
|
Other expense (income)
|
4,815
|
|
(3)
|
—
|
|
|
3,098
|
|
(4)
|
7,913
|
|
Income (loss) before income tax benefit (expense)
|
6,210
|
|
|
761
|
|
|
(8,156
|
)
|
|
(1,185
|
)
|
Income tax benefit (expense)
|
(249
|
)
|
|
—
|
|
|
—
|
|
|
(249
|
)
|
Net income (loss)
|
$
|
5,961
|
|
|
$
|
761
|
|
|
$
|
(8,156
|
)
|
|
$
|
(1,434
|
)
|
_____________________________
|
|
(1)
|
Includes
$0.3 million
and
$0.1 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(2)
|
Represents costs associated with the continual work of the strategic review committee in the corporate segment.
|
|
|
(3)
|
Primarily relates to properties - operating expenses, loss on interest rate caps, other expenses and extinguishment of debt in the real estate equity segment.
|
|
|
(4)
|
Primarily relates to general and administrative expenses and compensation expense offset by a net gain on foreign currency derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
Statement of Operations:
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
Revenues
|
|
|
|
|
|
|
|
Lease income
|
$
|
30,162
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,162
|
|
Interest income
|
—
|
|
|
706
|
|
|
—
|
|
|
706
|
|
Expenses
|
|
|
|
|
|
|
|
Interest expense
(1)
|
5,601
|
|
|
—
|
|
|
254
|
|
|
5,855
|
|
Management fee, related party
|
—
|
|
|
—
|
|
|
4,223
|
|
|
4,223
|
|
Transaction costs
|
—
|
|
|
—
|
|
|
376
|
|
|
376
|
|
Depreciation and amortization
|
11,976
|
|
|
—
|
|
|
—
|
|
|
11,976
|
|
Gain on sale, net
|
(38,319
|
)
|
|
—
|
|
|
—
|
|
|
(38,319
|
)
|
Other expense (income)
|
11,455
|
|
(2)
|
—
|
|
|
(2,498
|
)
|
(3)
|
8,957
|
|
Income (loss) before income tax benefit (expense)
|
39,449
|
|
|
706
|
|
|
(2,355
|
)
|
|
37,800
|
|
Income tax benefit (expense)
|
76
|
|
|
—
|
|
|
—
|
|
|
76
|
|
Net income (loss)
|
$
|
39,525
|
|
|
$
|
706
|
|
|
$
|
(2,355
|
)
|
|
$
|
37,876
|
|
_____________________________
|
|
(1)
|
Includes
$0.7 million
and
$0.2 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(2)
|
Primarily relates to properties - operating expenses and loss on interest rate caps.
|
|
|
(3)
|
Primarily relates to the net gain on foreign currency derivatives offset by general and administrative expenses and compensation expense.
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
Statement of Operations:
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
Revenues
|
|
|
|
|
|
|
|
Lease income
|
$
|
33,583
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,583
|
|
Interest income
|
—
|
|
|
1,538
|
|
|
1,627
|
|
|
3,165
|
|
Expenses
|
|
|
|
|
|
|
—
|
|
Interest expense
(1)
|
6,691
|
|
|
—
|
|
|
402
|
|
|
7,093
|
|
Management fee, related party
|
—
|
|
|
—
|
|
|
7,736
|
|
|
7,736
|
|
Transaction costs
(2)
|
—
|
|
|
—
|
|
|
2,589
|
|
|
2,589
|
|
Depreciation and amortization
|
11,821
|
|
|
—
|
|
|
—
|
|
|
11,821
|
|
Gain on sales, net
|
(21,396
|
)
|
|
—
|
|
|
—
|
|
|
(21,396
|
)
|
Other expense (income)
|
8,483
|
|
(3)
|
—
|
|
|
8,332
|
|
(4)
|
16,815
|
|
Income (loss) before income tax benefit (expense)
|
27,984
|
|
|
1,538
|
|
|
(17,432
|
)
|
|
12,090
|
|
Income tax benefit (expense)
|
(2,401
|
)
|
|
—
|
|
|
—
|
|
|
(2,401
|
)
|
Net income (loss)
|
$
|
25,583
|
|
|
$
|
1,538
|
|
|
$
|
(17,432
|
)
|
|
$
|
9,689
|
|
_____________________________
|
|
(1)
|
Includes
$0.7 million
and
$0.2 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(2)
|
Represents costs associated with the continual work of the strategic review committee in the corporate segment.
|
|
|
(3)
|
Primarily relates to properties - operating expenses, loss on interest rate caps, other expenses and extinguishment of debt in the real estate equity segment.
|
|
|
(4)
|
Primarily relates to general and administrative expenses and compensation expense offset by a net gain on foreign currency derivatives.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
Statement of Operations:
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
Revenues
|
|
|
|
|
|
|
|
Lease income
|
$
|
62,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62,727
|
|
Interest income
|
—
|
|
|
1,435
|
|
|
—
|
|
|
1,435
|
|
Expenses
|
|
|
|
|
|
|
|
Interest expense
(1)
|
11,556
|
|
|
—
|
|
|
406
|
|
|
11,962
|
|
Management fee, related party
|
—
|
|
|
—
|
|
|
8,380
|
|
|
8,380
|
|
Transaction costs
|
—
|
|
|
—
|
|
|
857
|
|
|
857
|
|
Depreciation and amortization
|
23,627
|
|
|
—
|
|
|
—
|
|
|
23,627
|
|
Gain on sale, net
|
(39,585
|
)
|
|
—
|
|
|
—
|
|
|
(39,585
|
)
|
Other expense (income)
|
19,910
|
|
(2)
|
—
|
|
|
2,240
|
|
(3)
|
22,150
|
|
Income (loss) before income tax benefit (expense)
|
47,219
|
|
|
1,435
|
|
|
(11,883
|
)
|
|
36,771
|
|
Income tax benefit (expense)
|
37
|
|
|
—
|
|
|
—
|
|
|
37
|
|
Net income (loss)
|
$
|
47,256
|
|
|
$
|
1,435
|
|
|
$
|
(11,883
|
)
|
|
$
|
36,808
|
|
_____________________________
|
|
(1)
|
Includes
$1.3 million
and
$0.3 million
of amortization of deferred financing costs in the real estate equity and corporate segments, respectively.
|
|
|
(2)
|
Primarily relates to properties - operating expenses and the loss on interest rate caps.
|
|
|
(3)
|
Primarily relates to the net gain on foreign currency derivatives offset by general and administrative expenses and compensation expense.
|
The following table presents total assets by segment as of
June 30, 2019
and
December 31, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
Real Estate Equity
|
|
Preferred Equity
|
|
Corporate
|
|
Total
|
June 30, 2019
|
$
|
953,007
|
|
|
$
|
41,629
|
|
|
$
|
277,590
|
|
|
$
|
1,272,226
|
|
December 31, 2018
|
1,362,679
|
|
|
40,568
|
|
|
22,252
|
|
|
1,425,499
|
|
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Geography
The following table presents geographic information about the Company’s total lease income for the
six months ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Properties
(1)
|
|
14
|
|
24
|
|
14
|
|
24
|
|
Office
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
3,847
|
|
|
$
|
14,437
|
|
|
$
|
8,037
|
|
(4)
|
$
|
29,224
|
|
|
United Kingdom
|
|
6,309
|
|
|
7,780
|
|
|
12,633
|
|
|
15,273
|
|
|
France
|
|
5,110
|
|
|
5,346
|
|
|
10,323
|
|
|
10,830
|
|
|
Other office
|
|
—
|
|
|
1,313
|
|
(2)
|
—
|
|
|
4,733
|
|
(2)
|
Subtotal
|
|
15,266
|
|
|
28,876
|
|
|
30,993
|
|
|
60,060
|
|
|
Other Property Types
|
|
|
|
|
|
|
|
|
|
France/Germany
(5)
|
|
1,233
|
|
(3)
|
1,286
|
|
(5)
|
2,590
|
|
(4)
|
2,667
|
|
(5)
|
Total
|
|
$
|
16,499
|
|
|
$
|
30,162
|
|
|
$
|
33,583
|
|
|
$
|
62,727
|
|
|
_____________________________
|
|
(1)
|
Represents the number of properties owned as of
June 30, 2019
and
2018
, respectively, including assets held-for-sale as of the respective period.
|
|
|
(2)
|
Includes an asset in Portugal which is classified as held-for-sale as of June 30, 2018 and partial period rental income from the Maastoren property which was sold in April 2018.
|
|
|
(3)
|
Represents income from
two
hotel (net lease) assets in Germany and partial period rental income from one industrial asset in France sold in the second quarter 2019.
|
|
|
(4)
|
Represents income from
two
hotel (net lease) assets in Germany and partial period rental income from one industrial asset in France sold in the second quarter 2019 and one office asset in Germany and two retail assets in Germany sold in the first quarter 2019.
|
|
|
(5)
|
Represents income from
five
assets including
two
retail in Germany,
one
industrial in France and
two
hotel (net lease) assets in Germany.
|
Dividends
On
August 2, 2019
, the Company declared a dividend of
$0.15
per share of common stock. The common stock dividend is expected to be paid on
August 23, 2019
to stockholders of record as of the close of business on
August 19, 2019
.
Credit Facility
On July 17, 2019 (the “Credit Facility Termination Date”) the Company terminated the Credit Facility. As of such date,
no
amounts were drawn under the Credit Facility and
no
fees or penalties were incurred as a result of the termination, other than the payment of an immaterial accrued commitment fee. The Company voluntarily terminated the Credit Facility to eliminate the obligation to pay the commitment fee with respect to undrawn lender commitments thereunder.
NORTHSTAR REALTY EUROPE CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Merger Agreement with AXA Investment Managers
In July 2019, the Company announced the Merger. The surviving entity of the Merger will not be a publicly-traded company and will become a wholly owned subsidiary of a fund managed by AXA Investment Managers. The Merger has been approved by the Board upon the recommendation of the Strategic Review Committee of the Board consisting solely of independent directors of the Company.
Under the terms of the Merger Agreement, upon the consummation of the Merger, each share of the Company’s common stock will be converted into the right to receive cash in U.S. dollars equal to the sum of
$1.68
plus the U.S. dollar equivalent of
€9.26
and
£3.82
(the “Per Share Consideration”), without interest. The Company has entered into six-month forward contracts for the purchase of U.S. dollars for
€482 million
and
£199 million
, the approximate aggregate amount of the merger consideration denominated in euros and U.K Pound Sterling. In connection with the closing of the Mergers (as defined below), these forward contracts will be settled and the portion of the merger consideration denominated in euros and pound sterling will be paid to security holders of the Company in U.S. dollars reflecting the final exchange rates received in settlement of the forward contracts (which may be at rates greater or less than the currently estimated exchange rates, depending on the closing date of the Mergers). To the extent that the closing occurs prior to the end of the settlement period on the forward contracts, these contracts will be settled at the time of closing. An early settlement, prior to January 6, 2020, may reduce the U.S. dollars per share received by stockholders due to a shorter duration of the hedge. The Company currently estimates a closing in approximately three months, which would result in stockholders receiving approximately
$17.03
per share in U.S. dollars. The settlement amount would be determined by the movement in the forward points from the date of closing to the final settlement date at the end of the six month period. There may also be an adjustment to present value the hedge settlement amount if the closing occurs before January 6, 2020. The settlement of the forward contracts is not contingent upon the consummation of the Mergers. Therefore, even if the Mergers are not competed, the hedges pursuant to the forward contract will remain in place and the Company will be required to settle the forward contracts at maturity of the hedges, which may result in a loss or gain to the Company. AXA Investment Managers will finance the Mergers and the other transactions contemplated by the Merger Agreement through the arrangement of equity financing and the Company’s available cash at closing. The closing of the Mergers is not subject to any financing condition.
The Merger is expected to close in the fourth quarter of 2019, subject to, among other things, the receipt of approval of the Company’s stockholders.
In addition, conditional upon, immediately prior to and in connection with the Merger, Nighthawk Partnership Merger Sub LLC (“Partnership Merger Sub”), a wholly owned subsidiary of the Company formed solely for the purposes of facilitating the transaction contemplated by the Merger Agreement, will merge with and into the Operating Partnership, with the Operating Partnership as the surviving entity (together with the Merger, the “Mergers”).