What changed in this filing

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Item 1A. Risk Factors

2020-08-10 compared with 2020-05-11 · 65 added, 32 removed, 95 unchanged (51% of the section changed)

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The preventative measures taken to alleviate the public health crisis, including significant restrictions on travel between the United States and specific countries, and “shelter-in-place” or “stay-at-home” orders issued by local, state and federal authorities, has significantly disrupted global travel and supply chains, and has adversely impacted global commercial activity across many industries, including in particular the travel, group meeting and conference, lodging and hospitality industries, and has disrupted, and is anticipated to further disrupt, operations and businesses in the healthcare industries, as discussed further below.

Furthermore, although certain countries and U.S.

states began to ease stay-at-home restrictions towards the end of the second quarter of 2020, resurgences in the numbers of cases of COVID-19 have subsequently led to the reinstatement, or potential for reinstatement, of such restrictions.

The occupancy rates of and revenues generated by our hospitality properties depends on the ability and willingness of guests to travel to our hotels.

The spread of COVID-19 has not only decreased guests’ willingness to travel, but also prevented guests from traveling to visit or stay at our hotels as a result of federal travel, social distancing or mandated “shelter-in-place” or “stay-at-home” orders and even if such orders are lifted, demand for travel may continue to be adversely impacted.

Similarly, “shelter-in-place” or “stay-at-home” orders, as well as bans on admissions, have also begun to impact occupancy at our healthcare properties, as inquiries, tours and move-ins have all declined.

In addition, some tenants in our medical office buildings within our healthcare portfolio have and may continue to seek concessions from us for paying lease charges as a result of such restrictions.

The spread of COVID-19 has not only decreased guests’ willingness to travel, but also prevented guests from traveling to visit or stay at our hotels as a result of federal travel, social distancing or mandated “shelter-in-place” or “stay-at-home” orders and even as such orders have begun to be lifted in the United States, demand for travel has and is expected to continue to be adversely impacted.

Similarly, some tenants in our medical office buildings within our healthcare portfolio have and may continue to seek concessions from us for paying lease charges as a result of such restrictions.

In addition, COVID-19 has impacted occupancy at our healthcare properties, as inquiries, tours and move-ins have all declined.

In addition, COVID-19 has had an adverse impact on the business and financial condition of publicly-traded mortgage REITs, including CLNC, the Company’s managed mortgage REIT and in which it owns an approximate 36% interest.

The borrowers of CLNC’s real estate debt investments, including in the office, industrial, multifamily and hotel industries, have and will continue to be affected to the extent that COVID-19’s continued spread reduces occupancy, increases the cost of operation, results in limited hours or necessitates the closure of such properties.

In addition, governmental measures, such as quarantines, states of emergencies, restrictions on travel, stay-at-home orders, and other measures taken to curb the spread of the COVID-19 may negatively impact the ability of CLNC’s borrowers or tenants to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect

CLNC's loan investments and operating results.

governmental measures, such as quarantines, states of emergencies, restrictions on travel, stay-at-home orders, and other measures taken to curb the spread of the COVID-19 may negatively impact the ability of CLNC’s borrowers or tenants to continue to obtain necessary goods and services or provide adequate staffing, which may also adversely affect CLNC's loan investments and operating results.

Many mortgage REITs have suspended dividends to stockholders.

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In addition, the Company’s Core FFO is directly impacted by CLNC’s performance as a result of the Company's ownership interest in CLNC and, to the extent CLNC continues to experience operational challenges as a result of COVID-19, our Core FFO will similarly be adversely impacted.

Further, during 2020 to date, CLNC’s class A common stock traded between $2.46 and $14.01 per share , and closed at $3.94 per share on March 31, 2020.

At March 31, 2020, the carrying value of our CLNC investment was $666 million or $13.89 per share.

We have previously recognized an impairment on our CLNC investment, and if CLNC's class A common stock continues to trade below our current carrying value for a prolonged period of time, as a result of COVID-19 or otherwise, a further other-than-temporary impairment may be recognized in the future.

Furthermore, the difficult market and economic conditions created by COVID-19 are expected to adversely impact our ability to effectuate our business objectives and strategies.

A key component of our business strategy is to monetize certain non-digital, non-core assets in our other equity & debt (OED) segment.

Many experts predict that the outbreak will trigger, or may have already triggered, a period of global economic slowdown or a global recession.

Further, CLNC's stock price fell significantly in March and April 2020 due to the significant volatility in equity markets resulting from COVID-19.

Along with other publicly traded mortgage REITs, CLNC has seen a rebound in its stock price in May and June 2020, but its stock continues to trade below pre-COVID-19 levels.

At June 30, 2020 (prior to any impairment), the carrying value of our CLNC investment was $611 million , or $12.75 per share, which was in excess of its market value of $337 million .

With increasing uncertainty over the extent and duration of the COVID-19 pandemic, and the timeline for a recovery in the U.S economy, the Company believes that it is unlikely that the shortfall in market value relative to carrying value of its investment in CLNC would recover in the near term.

As a result, the Company recognized an $275 million other-than-temporary impairment on its CLNC investment in the second quarter 2020, which was in addition to the $228 million other-than-temporary impairment on its CLNC investment recognized in the second quarter 2019.

If the trading price of CLNC's class A common stock were to suffer further declines, to levels below our current carrying value for a prolonged period of time, as a result of COVID-19 or otherwise, an additional other-than-temporary impairment may be recognized in the future.

The difficult market and economic conditions created by COVID-19 are expected to adversely impact our ability to effectuate our business objectives and strategies.

A key component of our business strategy is to monetize certain non-digital, non-core assets in our other equity & debt segment.

Many experts predict that the outbreak will trigger, or may have already triggered, a prolonged period of global economic slowdown or a global recession.

A sustained downturn in the U.S.

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The inability to consummate asset monetizations could adversely affect our liquidity and ability to meet our debt obligations or pay dividends to stockholders.

For example, in May 2020, we announced the suspension of the second quarter of 2020 as the Company's board of directors and management believe it is prudent to conserve cash during the current period of uncertainty.

In addition, the Company has elected to defer the declaration of a dividend on its preferred stock until June 30, 2020 subject to its assessment of the effects and trajectory of COVID-19.

All distributions are made at the discretion of the Company's board of directors in accordance with Maryland law and depend on our financial condition;

For example, in May 2020, we announced the suspension of our common stock dividend for the second quarter of 2020 as the Company's board of directors and management believe it is prudent to conserve cash during the current period of uncertainty.

In addition, in connection with the recent amendment to the Company’s corporate credit facility, we are prohibited from, among other things, paying dividends, other than (i) paying dividends to maintain the Company’s REIT status, (ii) reducing the payment of income taxes and (iii) paying dividends on the Company’s preferred stock.

As a result, for the term of the corporate credit facility, the Company is prohibited from paying dividends on its common stock, subject to certain limited exceptions.

Nonetheless, all permissible distributions are made at the discretion of the Company's board of directors in accordance with Maryland law and depend on our financial condition;

debt and equity capital available to us;

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Because a substantial portion of our income is derived from these businesses as well as our proceeds from asset monetizations, our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations and our ability to pay dividends and other distributions to our stockholders has been and will continue to be adversely affected if revenues at our hospitality and healthcare properties continue to decline or we are unable to complete certain asset monetizations.

In addition, as COVID-19 has demonstrated the global economy's dependence on digital real estate and infrastructure, the Company has determined to accelerate its shift to a digitally-focused strategy.

In doing so, the Company may dispose of its legacy assets and portfolios and continue to focus on the growth of the Company's investment management business focused on digital real estate and infrastructure.

This transition may be inconsistent with the Company's status as a REIT.

If the Company ceases to qualify as a REIT, it would become subject to U.S.

federal income tax on its net taxable income and generally would no longer be required to distribute any of the Company’s

net taxable income to Colony stockholders, which may have adverse consequences on the Company’s total return to Colony stockholders.

Furthermore, our corporate credit facility requires us to maintain various financial covenants, including minimum tangible net worth, liquidity levels and financial ratios.

Based on the decline in performance in our hospitality and healthcare portfolios we are currently experiencing as a result of the COVID-19 pandemic and given the limited visibility to the future recovery of demand in the hospitality industry, there is a range of possible outcomes which may result in a breach of certain financial covenants prior to the initial maturity of January 2021.

The recent amendment to our corporate credit facility, among other things, modified certain financial covenants and reduced the aggregate amount of revolving commitments available under the corporate credit facility.

Notwithstanding such amendment, based on the decline in performance in our hospitality and healthcare portfolios we are currently experiencing as a result of the COVID-19 pandemic and given the limited visibility to the future recovery of demand in the hospitality industry, there is a range of possible outcomes which may result in a breach of certain financial covenants prior to the initial maturity of January 2021.

In addition, if we determine to exercise our initial extension option on the corporate credit facility, the aggregate amount of revolving commitments available under the corporate credit facility will be reduced to $400 million on March 31, 2021.

To the extent that we are unable to effectuate asset monetizations in our other equity and debt segment as discussed above, we may be forced to allocate capital to repaying any outstanding balance on the corporate credit facility (either at the initial maturity, in connection with an extension on March 31, 2021, or the final maturity) that otherwise may have been used to invest in and grow the Company's digital real estate and infrastructure business.

If we anticipate a potential breach, we expect to seek an amendment or waiver from our lenders.

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The occurrence of any of the foregoing could materially and adversely impact our liquidity and business operations.

Additionally, non-recourse mortgage debt in the hospitality, healthcare and other real estate equity segment with aggregate outstanding principal of $3.54 billion as of March 31, 2020 was either in payment default or was not in compliance with certain debt and/or lease covenants, as discussed further below.

The Company is in active negotiations with the respective lenders to execute forbearances or debt modifications;

Additionally, non-recourse mortgage debt in the hospitality, healthcare and other real estate equity segment with aggregate outstanding principal of $3.28 billion as of the date of this report was either in payment default or was not in compliance with certain debt and/or lease covenants, as discussed further below.

Other than with respect to certain healthcare and hospitality portfolio described below, the Company is in active negotiations with the respective lenders to execute forbearances or debt modifications;

however, there is no assurance that our efforts to obtain forbearances or debt modifications will be successful.

For example, as of the date of this report and as further described below, we have consensually transferred certain healthcare assets to lenders in exchange for a release of $158 million in borrowings secured by such assets and receivers have started to be appointed at various assets within the Inland Hotel Portfolio.

In addition, we have entered into customary non-recourse carve-out guarantees, which provide for these otherwise non-recourse borrowings to become partially or fully recourse against certain of the Company's affiliates in connection with certain limited trigger or "bad boy" events.

Although we believe that “bad boy” carve-out guaranties are not guaranties of payment in the event of foreclosure or other actions of the foreclosing lender that are beyond the borrower’s control, some lenders in the real estate industry have recently

sought to make claims for payment under such guaranties.

In the event such a claim were made against us under a “bad boy” carve-out guaranty, following foreclosure on mortgages or related loans, and such claim were successful, our business and financial results could be materially adversely affected.

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difficulty raising capital and attracting investors at our current and any future managed investment vehicles due to the volatility and instability in global financial markets may constrain the success of our managed investment vehicles and consequently our ability to sustain and grow our investment management business;

the financial impact has and could continue to negatively impact our ability to pay dividends to our stockholders or could result in a determination to reduce the size of one or more dividends, such as is the case with (i) our decision to suspend the dividend on our common stock for the second quarter of 2020 and (ii) certain restrictions on our ability to pay dividends on our common stock pursuant to the recent amendment to our corporate credit facility;

the financial impact could negatively impact our future compliance with financial covenants of our corporate credit facility and other debt agreements and could result in a default and potentially an acceleration of indebtedness, which non-compliance could also negatively impact our ability to make additional borrowings under our revolving credit facility or otherwise pay dividends to our stockholders;

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potential impairments on our real estate assets or ceasing to own real estate assets as a result of foreclosure or otherwise may impact our ability to maintain our REIT qualification or are exemption from the 1940 Act;

CLNC's trading price and the impact on the carrying value of the Company's investment in CLNC, including whether the Company will recognize further other-than-temporary impairments on such CLNC investment;

we have and may continue to implement reductions in our workforce, which could adversely impact our ability to conduct our operations effectively;

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We cannot predict when business levels will return to normalized levels when the effects of the pandemic subside.

There also can be no guarantee that the demand for lodging, and consumer confidence in travel generally, will recover as quickly as other industries.

There also can be no guarantee that the demand for lodging, and consumer confidence in travel

generally, will recover as quickly as other industries.

As a result, the revenues from our hospitality portfolio have declined significantly and we expect this trend to continue.

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As of the date of this report, $3.03 billion in aggregate principal amount of such borrowings (representing the majority of borrowings on our hospitality properties) is in default as a result of the failure to make interest payments in light of the impact COVID-19 has had on our hospitality properties.

In addition, in May 2020, we received a notice of acceleration with respect to $780 million of such borrowings.

We are in active discussions with the lenders on our non-recourse borrowings and for certain hospitality properties, we have entered into forbearance agreements permitting us not to make interest payments for a specified period of time.

However, if we unable to restructure these borrowings or receive forbearance or other accommodations from our lenders, we may be required to repay outstanding obligations, including penalties, prior to the stated maturity, be subject to cash flow sweeps or potentially have assets foreclosed upon.

For the quarter ended March 31, 2020, we incurred $252 million in impairments on hospitality properties primarily related to assets which are anticipated to be divested or sold in the near term and have fair market values below their respective carrying values.

In addition, as of the date of this report, we received notices of acceleration with respect to an aggregate of $1.6 billion of such borrowings (including borrowings on the Inland Portfolio).

Further, we were not successful in our negotiations with the lender of the mortgage debt collateralized by a portfolio of 48 extended stay and select service hotel properties known as the Inland Portfolio, and receivers have been or are expected to be appointed for all of the assets in the Inland Portfolio.

During the period while the receivers are in place, we will no longer be in control of the operations of the Inland Portfolio even while still owning the assets.

We are in active discussions with the lenders on our other non-recourse borrowings in our hospitality portfolio and for certain hospitality properties, we have entered into forbearance agreements permitting us not to make interest payments for a specified period of time.

However, if we are unable to restructure these borrowings or receive forbearance or other accommodations from our lenders, we may be required to repay outstanding obligations, including penalties, prior to the stated maturity, be subject to cash flow sweeps or potentially have assets foreclosed upon.

For the quarter ended June 30, 2020, we incurred $728 million in impairments on hospitality properties (including the THL Hotel Portfolio) primarily related to assets which are anticipated to be divested or sold in the near term and have fair market values below their respective carrying values.

Moreover, depending on, among other factors, the status of ongoing negotiations with lenders, our anticipated holding periods for such assets and cash flow projections, we may take additional impairments on hospitality properties.

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In certain instances, such guarantee or contribution agreements may also include an obligation to pay liquidated damages to the hotel franchisor on an early termination of the applicable franchise agreement.

In the event that a lender forecloses on our hospitality properties, we may not be released from these payment guarantees or liquidated damages obligations and we may not have any control over whether a franchise agreement is terminated.

In the event that a lender forecloses on our hospitality properties (including in the case of the Inland Portfolio which is currently in or expected to be in receivership), we may not be released from these payment guarantees or liquidated damages obligations and we may not have any control over whether a franchise agreement is terminated.

Risks Related to Our Healthcare Business.

We anticipate that the impact of the COVID-19 pandemic will vary by asset class within our healthcare portfolio.

Many of the tenants in our medical office buildings have discontinued non-essential activities, and accordingly are seeking rent relief.

In our senior housing and skilled nursing facilities, occupancy, which is the primary driver of revenues, has declined and is expected to continue to decline during the pandemic as shelter-in-place restrictions and bans on admissions dramatically limit inquiries and tours and cause a significant reduction in move-ins, while COVID-19 at the same time increases the risk of resident illness and move-outs.

In addition, operating costs at our senior housing and skilled nursing facilities have begun to rise to obtain adequate staffing and personal protective equipment.

Many of the tenants in our medical office buildings suspended non-essential activities, and accordingly sought rent relief.

In our senior housing and skilled nursing facilities, occupancy, which is the primary driver of revenues, has declined and may continue to decline during the pandemic as limitations on admissions and fewer inquiries and tours have caused a significant reduction in move-ins, while COVID-19 at the same time increases the risk of resident illness and move-outs.

In addition, operating costs at our senior housing and skilled nursing facilities have increased to secure adequate staffing and personal protective equipment.

We do not know to what extent, if any, federal relief programs may alleviate these concerns.

We will be directly impacted by these factors in our RIDEA assets, or indirectly impacted in our net leased assets as these factors influence our tenants’ ability and willingness to pay rent.

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We have significant non-recourse borrowings outstanding on our healthcare properties.

As of the date of this report, $327 million in aggregate principal amount of such borrowings is in default and, as the impact of COVID-19 continues to influence performance at our healthcare properties, we expect that we will experience additional defaults and may be subject to cash flow sweeps.

As of the date of this report, we have conveyed to an affiliate of our lender a portfolio of 36 assets in a consensual transfer to obtain a release on $158 million in aggregate principal amount in borrowings (as discussed above) and have another $45 million in aggregate principal amount of such borrowings in default.

As the impact of COVID-19 continues to influence performance at our healthcare properties, we may experience additional defaults and may be subject to cash flow sweeps.

Any such defaults will negatively impact our liquidity and may increase our risk of loss associated with our healthcare properties.

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We may also be named as defendants in lawsuits arising out of our alleged actions or the alleged actions of our tenants and operators for which such tenants and operators have agreed to indemnify, defend and hold us harmless.

We may be subject to increased risk of litigation and liability claims as a result of the COVID-19 pandemic and our operating partners’ response efforts.

We may be subject to increased

risk of litigation and liability claims as a result of the COVID-19 pandemic and our operating partners’ response efforts.

Some of these claims may result in large damage awards, which may not be sufficiently covered by insurance or indemnity obligations.

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and the negative impact on our fund investors, vendors and other business partners that may indirectly adversely affect us.

We may not realize the anticipated benefits of the Wafra strategic partnership.

The strategic partnership with Wafra in our Digital IM Business is expected to result in certain benefits to us, including, among others, providing us with liquidity to pursue strategic digital investments and grow our digital assets under management as well as enhancing our ability to accelerate our digital transformation.

There can be no assurance, however, regarding when or the extent to which we will be able to realize these and any other benefits we expect from the transaction, which may be difficult, unpredictable and subject to delays.

For example, Wafra has agreed to pay contingent consideration of approximately $29.9 million if the Digital IM Business meets certain performance criteria as of December 31, 2020;

however, there can be no assurance that the Digital IM Business will satisfy such criteria in order for the additional consideration to be earned by the Company.

In addition, pursuant to the strategic partnership documentation, in the event that certain post-closing regulatory approvals are not received by July 17, 2021 (which period may be extended for up to an additional three months under certain circumstances), we will have the right to redeem the entirety of Wafra's equity investment (in which case, the carried interest participation rights acquired by Wafra will terminate), and we will have the right to cancel the warrants issued to Wafra.

Further, pursuant to the strategic partnership documentation, Wafra has certain redemption rights which, if exercised, would require the Company to repurchase Wafra's equity investment, carried interest participation rights and warrants.

Wafra's redemption rights are triggered upon the occurrence of certain events including key person or cause events under the governing documentation of certain Digital Colony investment vehicles and, for a limited period, upon Marc Ganzi, the Company's CEO and President, and Ben Jenkins, the Chairman and Chief Investment Officer of the Company's digital segment, ceasing to fulfill certain time and attention commitments to the Digital IM Business.

If such redemption rights are exercised (either by the Company in connection with the failure to obtain post-closing regulatory approvals or by Wafra in connection with a key person or cause event), Wafra will also have a redemption right with respect to any sponsor commitments previously made to the Company's funds and vehicles.

No assurance can be given that such redemption events, if triggered, would arise at a time when the Company will have the cash on hand or other available liquidity (including availability under the Company's corporate credit facility) to satisfy the redemptions, which could result in the Company being forced to allocate capital away from other potential opportunities or uses that we would otherwise consider to be the most effective use of such capital.

Additionally, under certain circumstances following such time as our Digital IM Business comprises 90% or more of the Company’s assets, we have agreed to use commercially reasonable efforts to cooperate with Wafra to facilitate the conversion of Wafra’s equity investment into the Company's Class A common stock.

There can be no assurances that such conversion would occur or on what terms and conditions such conversion would occur, including whether such conversion, if it did occur in the future, would have any adverse impact on the Company, the Company’s stock price, governance and other matters.

If any or all of the risks described above, including the risk that the redemption obligations are triggered, were to materialize, the Company’s results of operations, financial position and/or liquidity could be materially and adversely affected.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors