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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
OR
¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-37980
 
COLONY CAPITAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
 
 
 
 
 
 
 
Maryland
 
46-4591526
 
 
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
515 South Flower Street, 44th Floor
Los Angeles, California 90071
(Address of Principal Executive Offices, Including Zip Code)
(310) 282-8820
(Registrant’s Telephone Number, Including Area Code)
Colony NorthStar, Inc.
(Former name, former address and former fiscal year, if changed since last report)

 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer
ý
 
  
Accelerated Filer
 
¨
Non-Accelerated Filer
¨
(Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
 
 
 
 
Emerging Growth Company
 
¨
If emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. Yes  ¨    No  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of August 6, 2018, 489,758,352 shares of the Registrant's class A common stock and 708,168 shares of class B common stock were outstanding.


Table of Contents

EXPLANATORY NOTE
Colony Capital, Inc. (formerly Colony NorthStar, Inc.) (the “Company”) was formed through a tri-party merger (the "Merger") which closed on January 10, 2017 (the "Closing Date"), among:
NorthStar Asset Management Group Inc. ("NSAM"), a real estate focused asset management firm which commenced operations in July 2014 upon the spin-off by NorthStar Realty Finance Corp. ("NRF") of its asset management business;
Colony Capital, Inc. ("Colony"), an internally managed real estate investment trust ("REIT") with investment management capabilities, established in June 2009; and
NRF, a diversified REIT with investments in multiple classes of commercial real estate, established in October 2004, which was externally managed by NSAM subsequent to the spin-off.
The transaction was accounted for as a reverse acquisition, with NSAM as the legal acquirer for certain legal and regulatory matters, and Colony as the accounting acquirer for purposes of financial reporting.
Effective June 25, 2018, the Company changed its name from Colony NorthStar, Inc. to Colony Capital, Inc.
The financial information for the Company as set forth in this Quarterly Report on Form 10-Q (this "Quarterly Report") represents a continuation of the financial information of Colony as the accounting acquirer. Consequently, the historical financial information included herein as of any date, or for any periods on or prior to January 10, 2017, represents the pre-merger financial information of Colony. The results of operations of NSAM and NRF were incorporated into the Company effective January 11, 2017.
As used throughout this document, the terms the "Company," "we," "our" and "us" mean:
Colony Capital, Inc. (formerly Colony NorthStar, Inc.) for all periods on or after January 11, 2017, following the closing of the Merger; and
Colony for all periods on or prior to the closing of the Merger on January 10, 2017.
Accordingly, comparisons of the period to period financial information of the Company may not be meaningful.



Table of Contents

COLONY CAPITAL, INC.
FORM 10-Q
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
Page
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



Table of Contents

PART IFINANCIAL INFORMATION
ITEM 1.
Financial Statements.
COLONY CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) 
 
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Assets
 
 
 
 
     Cash and cash equivalents
 
$
480,230

 
$
921,822

     Restricted cash
 
398,981

 
471,078

     Real estate, net
 
14,254,108

 
14,464,258

     Loans receivable, net ($0 and $45,423 at fair value, respectively)
 
1,791,889

 
3,223,762

     Investments in unconsolidated ventures ($217,098 and $363,901 at fair value, respectively)
 
2,491,342

 
1,655,239

     Securities, at fair value
 
144,421

 
383,942

     Goodwill
 
1,534,561

 
1,534,561

     Deferred leasing costs and intangible assets, net
 
610,853

 
852,872

Assets held for sale ($52,123 and $49,498 at fair value, respectively)
 
637,802

 
781,630

Other assets ($25,206 and $10,150 at fair value, respectively)
 
431,222

 
444,968

     Due from affiliates
 
44,308

 
51,518

Total assets
 
$
22,819,717

 
$
24,785,650

Liabilities
 
 
 
 
Debt, net ($0 and $44,542 at fair value, respectively)
 
$
9,994,115

 
$
10,827,810

Accrued and other liabilities ($110,513 and $212,267 at fair value, respectively)
 
679,658

 
898,161

Intangible liabilities, net
 
173,702

 
191,109

Liabilities related to assets held for sale
 
256,477

 
273,298

Due to affiliates ($0 and $20,650 at fair value, respectively)
 
9,383

 
23,534

Dividends and distributions payable
 
86,656

 
188,202

Preferred stock redemptions payable
 
200,000

 

Total liabilities
 
11,399,991

 
12,402,114

Commitments and contingencies (Note 23)
 

 

Redeemable noncontrolling interests
 
33,523

 
34,144

Equity
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value per share; $1,436,605 and $1,636,605 liquidation preference, respectively; 250,000 shares authorized; 57,464 and 65,464 shares issued and outstanding, respectively
 
1,407,495

 
1,606,966

Common stock, $0.01 par value per share
 
 
 
 
Class A, 949,000 shares authorized; 489,764 and 542,599 shares issued and outstanding, respectively
 
4,898

 
5,426

Class B, 1,000 shares authorized; 708 and 736 shares issued and outstanding, respectively
 
7

 
7

Additional paid-in capital
 
7,616,918

 
7,913,622

Distributions in excess of earnings
 
(1,443,717
)
 
(1,165,412
)
Accumulated other comprehensive income
 
23,930

 
47,316

Total stockholders’ equity
 
7,609,531

 
8,407,925

     Noncontrolling interests in investment entities
 
3,393,981

 
3,539,072

     Noncontrolling interests in Operating Company
 
382,691

 
402,395

Total equity
 
11,386,203

 
12,349,392

Total liabilities, redeemable noncontrolling interests and equity
 
$
22,819,717

 
$
24,785,650


The accompanying notes are an integral part of the consolidated financial statements.


4

Table of Contents

COLONY CAPITAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands) 

The following table presents the assets and liabilities of securitization vehicles (as of December 31, 2017 only) and an investment fund consolidated as a variable interest entity for which the Company is determined to be the primary beneficiary. At June 30, 2018, there were no consolidated securitization vehicles as our interests in these securitization vehicles have either been contributed to Colony Credit in the Combination or sold to third parties, resulting in a deconsolidation, or the underlying assets of the securitization trust has been liquidated (see Note 15).
 
 
June 30, 2018 (Unaudited)
 
December 31, 2017
Assets
 
 
 
 
Cash
 
$
7,506

 
$
10,969

Restricted cash
 

 
40,084

Loans receivable, net
 

 
546,306

Securities
 
36,649

 
250,526

Real estate, net
 

 
8,073

Other assets
 
768

 
13,671

Total assets
 
$
44,923

 
$
869,629

Liabilities
 
 
 
 
Debt, net
 
$

 
$
348,250

Other liabilities
 
152

 
31,299

Total liabilities
 
$
152

 
$
379,549


The accompanying notes are an integral part of the consolidated financial statements.


5

Table of Contents

COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
 
Property operating income
 
$
590,638

 
$
500,531

 
$
1,145,368

 
$
927,385

Interest income
 
44,183

 
111,263

 
108,037

 
226,807

Fee income ($39,634, $44,900, $76,406 and $90,688 from affiliates, respectively)
 
39,924

 
54,319

 
76,766

 
107,569

Other income ($10,094, $6,973, $16,887 and $13,676 from affiliates, respectively)
 
14,854

 
13,259

 
26,092

 
24,776

Total revenues
 
689,599

 
679,372

 
1,356,263

 
1,286,537

Expenses
 
 
 
 
 
 
 
 
Property operating expense
 
320,674

 
253,717

 
626,444

 
470,066

Interest expense
 
153,309

 
140,260

 
302,198

 
266,538

Investment, servicing and commission expense
 
25,951

 
13,740

 
44,604

 
25,547

Transaction costs
 
2,641

 
2,440

 
3,357

 
89,780

Depreciation and amortization
 
137,896

 
153,111

 
282,601

 
290,531

Provision for loan loss
 
13,933

 
1,067

 
19,308

 
7,791

Impairment loss
 
69,834

 
12,761

 
223,232

 
21,280

Compensation expense
 
55,159

 
80,759

 
104,643

 
172,577

Administrative expenses
 
25,790

 
30,145

 
50,653

 
56,059

Total expenses
 
805,187

 
688,000

 
1,657,040

 
1,400,169

Other income (loss)
 
 
 
 
 
 
 
 
     Gain on sale of real estate
 
42,702

 
15,190

 
61,146

 
24,160

     Other gain (loss), net
 
28,798

 
(23,850
)
 
104,054

 
1,531

     Earnings from investments in unconsolidated ventures
 
1,875

 
122,394

 
34,140

 
236,386

Income (loss) before income taxes
 
(42,213
)
 
105,106

 
(101,437
)
 
148,445

     Income tax benefit (expense)
 
584

 
86

 
33,392

 
(3,623
)
Income (loss) from continuing operations
 
(41,629
)
 
105,192

 
(68,045
)
 
144,822

Income (loss) from discontinued operations
 
(219
)
 

 
(102
)
 
12,560

Net income (loss)
 
(41,848
)
 
105,192

 
(68,147
)
 
157,382

Net income (loss) attributable to noncontrolling interests:
 
 
 
 
 
 
 
 
     Redeemable noncontrolling interests
 
1,873

 
720

 
1,177

 
1,337

     Investment entities
 
27,420

 
23,800

 
47,522

 
50,859

     Operating Company
 
(5,728
)
 
2,330

 
(10,106
)
 
1,247

Net income (loss) attributable to Colony Capital, Inc.
 
(65,413
)
 
78,342

 
(106,740
)
 
103,939

Preferred stock redemption (Note 16)
 
(3,995
)
 
5,448

 
(3,995
)
 
5,448

Preferred stock dividends
 
31,388

 
34,339

 
62,775

 
65,152

Net income (loss) attributable to common stockholders
 
$
(92,806
)
 
$
38,555

 
$
(165,520
)
 
$
33,339

Basic earnings (loss) per share
 
 
 
 
 
 
 
 
Income (loss) from continuing operations per basic common share
 
$
(0.19
)
 
$
0.07

 
$
(0.33
)
 
$
0.03

Net income (loss) per basic common share
 
$
(0.19
)
 
$
0.07

 
$
(0.33
)
 
$
0.05

Diluted earnings (loss) per share
 
 
 
 
 
 
 
 
Income (loss) from continuing operations per diluted common share
 
$
(0.19
)
 
$
0.07

 
$
(0.33
)
 
$
0.03

Net income (loss) per diluted common share
 
$
(0.19
)
 
$
0.07

 
$
(0.33
)
 
$
0.05

Weighted average number of shares
 
 
 
 
 
 
 
 
Basic
 
488,676

 
544,023

 
509,562

 
525,318

Diluted
 
488,676

 
544,023

 
509,562

 
525,318

Dividends declared per common share (Note 16)
 
$
0.11

 
$
0.27

 
$
0.22

 
$
0.54


The accompanying notes are an integral part of the consolidated financial statements.

6

Table of Contents

COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
(41,848
)
 
$
105,192

 
$
(68,147
)
 
$
157,382

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Other comprehensive income from investments in unconsolidated ventures, net
 
999

 
511

 
2,098

 
605

Net change in fair value of available-for-sale debt securities
 
1,632

 
8,652

 
(19,086
)
 
3,658

Foreign currency translation adjustments:
 
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
 
(103,050
)
 
107,000

 
(26,649
)
 
135,073

Change in fair value of net investment hedges
 
37,937

 
(37,905
)
 
13,559

 
(45,094
)
Net foreign currency translation adjustments
 
(65,113
)
 
69,095

 
(13,090
)
 
89,979

Other comprehensive income (loss)
 
(62,482
)
 
78,258

 
(30,078
)
 
94,242

Comprehensive income (loss)
 
(104,330
)
 
183,450

 
(98,225
)
 
251,624

Comprehensive income (loss) attributable to noncontrolling interests:
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests
 
1,873

 
720

 
1,177

 
1,337

Investment entities
 
(8,269
)
 
69,553

 
41,940

 
108,541

Operating Company
 
(7,286
)
 
4,178

 
(11,544
)
 
3,341

Comprehensive income (loss) attributable to stockholders
 
$
(90,648
)
 
$
108,999

 
$
(129,798
)
 
$
138,405


The accompanying notes are an integral part of the consolidated financial statements.

7

Table of Contents

COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
(Unaudited)
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interests in Investment Entities
 
Noncontrolling Interests in Operating Company
 
Total Equity
 
 
 
 
Balance at December 31, 2016
 
607,200

 
1,672

 
2,443,100

 
(246,064
)
 
(32,109
)
 
2,773,799

 
2,453,938

 
389,190

 
5,616,927

Net income
 

 

 

 
103,939

 

 
103,939

 
50,859

 
1,247

 
156,045

Other comprehensive loss
 

 

 

 

 
34,466

 
34,466

 
57,682

 
2,094

 
94,242

Merger consideration (Note 3)
 
1,010,320

 
3,891

 
5,706,243

 

 

 
6,720,454

 

 

 
6,720,454

Payment of accrued dividends on preferred stock assumed in Merger
 
(12,869
)
 

 

 

 

 
(12,869
)
 

 

 
(12,869
)
Fair value of noncontrolling interests assumed in Merger
 

 

 

 

 

 

 
506,453

 
8,162

 
514,615

Issuance of Cumulative Redeemable Perpetual Preferred Stock
 
345,000

 

 

 

 

 
345,000

 

 

 
345,000

Offering costs
 
(11,540
)
 

 

 

 

 
(11,540
)
 

 

 
(11,540
)
Redemption of preferred stock
 
(313,667
)
 

 

 

 

 
(313,667
)
 

 

 
(313,667
)
Common stock repurchases
 

 
(129
)
 
(167,856
)
 

 

 
(167,985
)
 

 

 
(167,985
)
Equity-based compensation
 

 
75

 
46,460

 

 

 
46,535

 

 
24,040

 
70,575

Redemption of OP Units for cash and class A common stock
 

 
14

 
18,796

 

 

 
18,810

 

 
(23,895
)
 
(5,085
)
Shares canceled for tax withholdings on vested stock awards
 

 
(4
)
 
(5,401
)
 

 

 
(5,405
)
 

 

 
(5,405
)
Settlement of call spread option
 

 

 
6,900

 

 

 
6,900

 

 

 
6,900

Costs of noncontrolling equity
 

 

 
(9,209
)
 

 

 
(9,209
)
 

 

 
(9,209
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 
913,308

 

 
913,308

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(357,281
)
 
(17,950
)
 
(375,231
)
Preferred stock dividends
 

 

 

 
(75,147
)
 

 
(75,147
)
 

 

 
(75,147
)
Common stock dividends declared ($0.54 per share; Note 16)
 

 

 

 
(288,282
)
 

 
(288,282
)
 

 

 
(288,282
)
Reallocation of equity (Note 2 and 17)
 

 

 
(80,161
)
 

 
4,527

 
(75,634
)
 
18,877

 
56,757

 

Balance at June 30, 2017
 
$
1,624,444

 
$
5,519

 
$
7,958,872

 
$
(505,554
)
 
$
6,884

 
$
9,090,165

 
$
3,643,836

 
$
439,645

 
$
13,173,646



8

Table of Contents

COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(In thousands, except per share data)
(Unaudited)
 
 
Preferred Stock
 
Common Stock
 
Additional Paid-in Capital
 
Distributions in Excess of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Noncontrolling Interests in Investment Entities
 
Noncontrolling Interests in Operating Company
 
Total Equity
 
 
 
 
Balance at December 31, 2017
 
$
1,606,966

 
$
5,433

 
$
7,913,622

 
$
(1,165,412
)
 
$
47,316

 
$
8,407,925

 
$
3,539,072

 
$
402,395

 
$
12,349,392

Cumulative effect of adoption of new accounting pronouncements (Note 2)
 

 

 

 
(1,018
)
 
(202
)
 
(1,220
)
 

 

 
(1,220
)
Net income (loss)
 

 

 

 
(106,740
)
 

 
(106,740
)
 
47,522

 
(10,106
)
 
(69,324
)
Other comprehensive loss
 

 

 

 

 
(23,058
)
 
(23,058
)
 
(5,582
)
 
(1,438
)
 
(30,078
)
Redemption of preferred stock (Note 16)
 
(199,471
)
 

 
(529
)
 

 

 
(200,000
)
 

 

 
(200,000
)
Common stock repurchases
 

 
(548
)
 
(318,481
)
 

 

 
(319,029
)
 

 

 
(319,029
)
Redemption of OP Units for cash and class A common stock
 

 
15

 
18,884

 

 

 
18,899

 

 
(20,995
)
 
(2,096
)
Equity-based compensation
 

 
34

 
19,915

 

 

 
19,949

 

 
1,414

 
21,363

Shares canceled for tax withholdings on vested stock awards
 

 
(29
)
 
(32,021
)
 

 

 
(32,050
)
 

 

 
(32,050
)
Reclassification of contingent consideration out of liability at end of measurement period
 

 

 
12,539

 

 

 
12,539

 

 

 
12,539

Deconsolidation of investment entities (Note 4)
 

 

 

 

 

 

 
(330,980
)
 

 
(330,980
)
Contributions from noncontrolling interests
 

 

 

 

 

 

 
384,957

 

 
384,957

Distributions to noncontrolling interests
 

 

 

 

 

 

 
(219,829
)
 
(6,895
)
 
(226,724
)
Preferred stock dividends
 

 

 

 
(60,743
)
 

 
(60,743
)
 

 

 
(60,743
)
Common stock dividends declared ($0.22 per share)
 

 

 

 
(109,804
)
 

 
(109,804
)
 

 

 
(109,804
)
Reallocation of equity (Notes 2 and 17)
 

 

 
2,989

 

 
(126
)
 
2,863

 
(21,179
)
 
18,316

 

Balance at June 30, 2018
 
$
1,407,495

 
$
4,905

 
$
7,616,918

 
$
(1,443,717
)
 
$
23,930

 
$
7,609,531

 
$
3,393,981

 
$
382,691

 
$
11,386,203


The accompanying notes are an integral part of the consolidated financial statements.

9

Table of Contents

COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
 
Net income (loss)
 
$
(68,147
)
 
$
157,382

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Amortization of discount and net origination fees on loans receivable and debt securities
 
(14,347
)
 
(32,252
)
Paid-in-kind interest added to loan principal, net of interest received
 
(16,615
)
 
(16,304
)
Straight-line rents
 
(14,754
)
 
(16,119
)
Amortization of above- and below-market lease values, net
 
(1,503
)
 
(5,597
)
Amortization of deferred financing costs and debt discount and premium
 
48,093

 
41,602

Earnings from investments in unconsolidated ventures
 
(34,140
)
 
(236,386
)
Distributions of income from equity method investments
 
34,924

 
33,971

Provision for loan losses
 
19,308

 
7,791

Allowance for doubtful accounts
 
22,104

 
6,790

Impairment of real estate and intangibles
 
223,232

 
21,280

Depreciation and amortization
 
282,601

 
290,531

Equity-based compensation
 
21,566

 
70,098

Change in fair value of contingent consideration—Internalization
 
(1,730
)
 
(8,250
)
Gain on sales of real estate, net
 
(61,146
)
 
(22,052
)
Deferred income tax benefit
 
(45,181
)
 
(5,540
)
Other (gain) loss, net
 
(102,324
)
 
6,719

Increase in other assets and due from affiliates
 
(52,562
)
 
(33,405
)
Decrease in accrued and other liabilities and due to affiliates
 
(28,918
)
 
(78,963
)
Other adjustments, net
 
919

 
254

Net cash provided by operating activities
 
211,380

 
181,550

Cash Flows from Investing Activities
 
 
 
 
Contributions to investments in unconsolidated ventures
 
(189,198
)
 
(211,671
)
Return of capital from investments in unconsolidated ventures
 
230,128

 
101,087

Acquisition of loans receivable and securities
 
(82,477
)
 
(549,659
)
Cash and restricted cash assumed in Merger, net of payments for merger-related liabilities (Note 3)
 

 
132,377

Net disbursements on originated loans
 
(88,543
)
 
(172,017
)
Repayments of loans receivable
 
57,434

 
217,302

Proceeds from sales of loans receivable and securities
 
125,733

 
139,624

Cash receipts in excess of accretion on purchased credit-impaired loans
 
44,155

 
100,382

Acquisition of and additions to real estate, related intangibles and leasing commissions
 
(542,572
)
 
(791,779
)
Proceeds from sales of real estate, net of debt assumed by buyers
 
428,562

 
973,603

Proceeds from paydown and maturity of securities
 
27,038

 
62,171

Cash and restricted cash contributed to Colony Credit (Note 4)
 
(141,153
)
 

Proceeds from sale of investments in unconsolidated ventures (Notes 7 and 22)
 
89,115

 
500,504

Proceeds from sale of equity interests in securitization trusts, net of cash and restricted cash deconsolidated (Note 15)
 
142,270

 

Acquisition of CPI, net of cash and restricted cash acquired (Note 3)
 

 
(23,111
)
Investment deposits
 
(14,224
)
 
(47,130
)
Increase in escrow deposits
 

 
10,517

Net payments on settlement of derivative instruments
 
(19,852
)
 
(6,315
)
Other investing activities, net
 
(3,059
)
 
(1,463
)
Net cash provided by investing activities
 
63,357

 
434,422


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COLONY CAPITAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2018
 
2017
Cash Flows from Financing Activities
 
 
 
 
Proceeds from issuance of preferred stock, net
 
$

 
$
333,460

Dividends paid to preferred stockholders
 
(64,208
)
 
(70,920
)
Dividends paid to common stockholders
 
(202,552
)
 
(184,874
)
Repurchase of common stock
 
(319,029
)
 
(167,985
)
Borrowings from corporate credit facility
 
504,000

 
659,000

Repayment of borrowings from corporate credit facility
 
(554,000
)
 
(1,010,600
)
Borrowings from secured debt
 
432,408

 
2,654,459

Repayments of secured debt
 
(699,178
)
 
(2,565,537
)
Change in escrow deposits related to financing arrangements
 

 
6,827

Settlement of call spread option
 

 
6,900

Costs associated with contributions from noncontrolling interests
 

 
(6,765
)
Payment of deferred financing costs
 
(8,176
)
 
(54,564
)
Contributions from noncontrolling interests
 
405,381

 
901,808

Distributions to and redemptions of noncontrolling interests
 
(242,627
)
 
(375,940
)
Redemption of preferred stock
 

 
(313,667
)
Shares canceled for tax withholdings on vested stock awards
 
(32,050
)
 
(5,405
)
Redemption of OP Units for cash
 
(2,096
)
 
(5,085
)
Payment of cash collateral on derivative
 

 
(2,010
)
Repurchase of exchangeable senior notes
 

 
(11,955
)
Other financing activities, net
 
(350
)
 
(171
)
Net cash used in financing activities
 
(782,477
)
 
(213,024
)
Effect of exchange rates on cash, cash equivalents and restricted cash
 
(4,920
)
 
8,203

Net increase (decrease) in cash, cash equivalents and restricted cash
 
(512,660
)
 
411,151

Cash, cash equivalents and restricted cash, beginning of period
 
1,393,920

 
497,886

Cash, cash equivalents and restricted cash, end of period
 
$
881,260

 
$
909,037

Reconciliation of cash, cash equivalents, and restricted cash to consolidated balance sheets
 
 
 
 
Beginning of the period
 
 
 
 
Cash and cash equivalents
 
$
921,822

 
$
376,005

Restricted cash
 
471,078

 
111,959

Restricted cash included in assets held for sale
 
1,020

 
9,922

Total cash, cash equivalents and restricted cash, beginning of period
 
$
1,393,920

 
$
497,886

 
 
 
 
 
End of the period
 
 
 
 
Cash and cash equivalents
 
$
480,230

 
$
599,920

Restricted cash
 
398,981

 
300,680

Restricted cash included in assets held for sale
 
2,049

 
8,437

Total cash, cash equivalents and restricted cash, end of period
 
$
881,260

 
$
909,037


The accompanying notes are an integral part of the consolidated financial statements.

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COLONY CAPITAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(Unaudited)
1. Business and Organization
Colony Capital, Inc. (the "Company") is a leading global investment management firm with approximately $43 billion of assets under management. The Company manages capital on behalf of its stockholders, as well as institutional and retail investors in private funds, traded and non-traded real estate investment trusts ("REITs") and registered investment companies. The Company has significant holdings in: (a) the healthcare, industrial and hospitality property sectors; (b) Colony Credit Real Estate, Inc. (NYSE: CLNC) and NorthStar Realty Europe Corp. (NYSE: NRE) which are externally managed by subsidiaries of the Company; and (c) various other equity and debt investments.
The Company was organized in May 2016 as a Maryland corporation, and intends to elect to be taxed as a REIT under the Internal Revenue Code, for U.S. federal income tax purposes beginning with its taxable year ended December 31, 2017. Effective June 25, 2018, the Company changed its name from Colony NorthStar, Inc. to Colony Capital, Inc. and its ticker symbol on the NYSE from "CLNS" to "CLNY."
The Company conducts all of its activities and holds substantially all of its assets and liabilities through its operating subsidiary, Colony Capital Operating Company, LLC (the "Operating Company" or the “OP”). At June 30, 2018, the Company owned approximately 94.2% of the OP, as its sole managing member. The remaining 5.8% is owned primarily by certain employees of the Company as noncontrolling interests.
Merger
The Merger among Colony, NSAM and NRF was completed in an all-stock exchange on January 10, 2017.
The Merger was accounted for as a reverse acquisition, with NSAM as the legal acquirer for certain legal and regulatory matters, and Colony as the accounting acquirer for purposes of financial reporting. Consequently, the historical financial information included herein as of any date or for any periods on or prior to the Closing Date represents the pre-Merger financial information of Colony. Accordingly, the year-to-date results of operations of the Company as set forth herein may not be comparable as the first ten days of 2017 reflect only the pre-Merger activity of Colony.
Details of the Merger are described more fully in Note 3 and the accounting treatment thereof in Note 2.
Colony Credit
On August 25, 2017, as amended and restated on November 20, 2017, certain subsidiaries of the Company entered into a combination agreement with NorthStar Real Estate Income Trust, Inc. (“NorthStar I”) and NorthStar Real Estate Income II, Inc. (“NorthStar II”), both publicly registered non-traded REITs sponsored and managed by a subsidiary of the Company, and certain other subsidiaries of the foregoing. Pursuant to the combination agreement, certain subsidiaries of the Company agreed to contribute the CLNY Contributed Portfolio (as defined in Note 4), represented by the Company's ownership interests ranging from 38% to 100% in certain investment entities ("CLNY Investment Entities"), to Colony Credit Real Estate, Inc. (formerly Colony NorthStar Credit Real Estate, Inc.) ("Colony Credit") and its operating company, and NorthStar I and NorthStar II agreed to merge in all-stock mergers with and into Colony Credit (collectively, the “Combination”).
On January 18, 2018, the Combination was approved by the stockholders of NorthStar I and NorthStar II. The Combination closed on January 31, 2018. On June 25, 2018, Colony Credit changed its name from Colony NorthStar Credit Real Estate, Inc. to Colony Credit Real Estate, Inc. See additional information in Note 4.
Retail Distribution Business
On April 30, 2018, the Company completed the combination of NorthStar Securities, LLC ("NorthStar Securities"), the Company's captive broker-dealer platform acquired through the Merger that raises capital in the retail market, with S2K Financial Holdings, LLC ("S2K") to form Colony S2K Holdings, LLC ("Colony S2K"). Colony S2K will distribute both the current and future investment products sponsored by the Company and S2K as well as third party sponsored products. S2K is the holding company of S2K Financial, LLC, a registered broker-dealer wholesale distributor of investment vehicles, and S2K Servicing LLC, a provider of administrative services to institutional investment managers.


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2. Summary of Significant Accounting Policies
The significant accounting policies of the Company are described below. The accounting policies of the Company's unconsolidated ventures are substantially similar to those of the Company.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2018, or any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in, or presented as exhibits to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Merger
The Merger was accounted for under the acquisition method for a business combination as a reverse acquisition. NSAM was the legal acquirer in the Merger for certain legal and regulatory matters, however, Colony was determined to be the accounting acquirer in the Merger for financial reporting purposes. While NSAM was the legal entity which initiated the transaction and issued its shares to consummate the Merger, the fact that the senior management of the Company primarily consists of Colony senior executives, along with other qualitative considerations, resulted in Colony being designated the accounting acquirer.
The financial statements of the Company represent a continuation of the financial information of Colony as the accounting acquirer, except that the equity structure of the Company is adjusted to reflect the equity structure of the legal acquirer, including for comparative periods, by applying the Colony share exchange ratio of 1.4663. The historical financial information as of any date or for any periods on or prior to the Closing Date represents the pre-Merger financial information of Colony. The assets and liabilities of Colony are reflected by the Company at their pre-Merger carrying values while the assets and liabilities of NSAM and NRF are accounted for at their acquisition date fair value. The results of operations of NSAM and NRF were incorporated into the Company effective from January 11, 2017.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated. The portions of the equity, net income and other comprehensive income of consolidated subsidiaries that are not attributable to the parent are presented separately as amounts attributable to noncontrolling interests in the consolidated financial statements. A substantial portion of noncontrolling interests represents interests held by private investment funds or other investment vehicles managed by the Company and which invest alongside the Company and membership interests in OP primarily held by certain employees of the Company.
To the extent the Company consolidates a subsidiary that is subject to industry-specific guidance, the Company retains the industry-specific guidance applied by that subsidiary in its consolidated financial statements.
The Company consolidates entities in which it has a controlling financial interest by first considering if an entity meets the definition of a variable interest entity ("VIE") for which the Company is deemed to be the primary beneficiary, or if the Company has the power to control an entity through a majority of voting interest or through other arrangements.
Variable Interest Entities—A VIE is an entity that lacks sufficient equity to finance its activities without additional subordinated financial support from other parties, or whose equity holders lack the characteristics of a controlling financial interest. A VIE is consolidated by its primary beneficiary, which is defined as the party who has a controlling financial interest in the VIE through (a) power to direct the activities of the VIE that most significantly affect the VIE’s economic performance, and (b) obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE. The Company also considers interests held by its related parties, including de facto agents. The Company assesses whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In performing this analysis, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to the related party; the Company’s and the related party's ability to control or significantly influence key decisions of the VIE including consideration of involvement by de facto agents; the obligation or likelihood for the Company or the related party to fund operating losses of the VIE; and the similarity and significance of the VIE’s business activities to those of the

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Company and the related party. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, may involve significant judgment, including the determination of which activities most significantly affect the entities’ performance, and estimates about the current and future fair values and performance of assets held by the VIE.
Voting Interest Entities—Unlike VIEs, voting interest entities have sufficient equity to finance their activities and equity investors exhibit the characteristics of a controlling financial interest through their voting rights. The Company consolidates such entities when it has the power to control these entities through ownership of a majority of the entities' voting interests or through other arrangements.
At each reporting period, the Company reassesses whether changes in facts and circumstances cause a change in the status of an entity as a VIE or voting interest entity, and/or a change in the Company's consolidation assessment. Changes in consolidation status are applied prospectively. An entity may be consolidated as a result of this reassessment, in which case, the assets, liabilities and noncontrolling interest in the entity are recorded at fair value upon initial consolidation. Any existing equity interest held by the Company in the entity prior to the Company obtaining control will be remeasured at fair value, which may result in a gain or loss recognized upon initial consolidation. However, if the consolidation represents an asset acquisition of a voting interest entity, the Company's existing interest in the acquired assets, if any, is not remeasured to fair value but continues to be carried at historical cost. The Company may also deconsolidate a subsidiary as a result of this reassessment, which may result in a gain or loss recognized upon deconsolidation depending on the carrying values of deconsolidated assets and liabilities compared to the fair value of any interests retained.
Noncontrolling Interests
Redeemable Noncontrolling Interests—This represents noncontrolling interests in (i) a consolidated open-end fund sponsored by the Company beginning in August 2017, and (ii) an investment management subsidiary acquired through the Merger, Townsend Holdings, LLC ("Townsend"), beginning January 11, 2017 through December 29, 2017, the date the Company sold its interest in Townsend.
The limited partners in the consolidated open-end fund who represent noncontrolling interests generally have the ability to withdraw all or a portion of their interests in cash with 30 days' notice.
Redeemable noncontrolling interests is presented outside of permanent equity. Allocation of net income or loss to redeemable noncontrolling interests is based upon their ownership percentage during the period. The carrying amount of redeemable noncontrolling interests is adjusted to its redemption value at the end of each reporting period, but no less than its initial carrying value, with such adjustments recognized in additional paid-in capital.
Noncontrolling Interests in Investment Entities—This represents interests in consolidated investment entities held by private investment funds or retail companies managed by the Company or held by third party joint venture partners. Allocation of net income or loss is generally based upon relative ownership interests held by equity owners in each investment entity, or based upon contractual arrangements that may provide for disproportionate allocation of economic returns among equity interests, including using a hypothetical liquidation at book value basis, where applicable and substantive.
Noncontrolling Interests in Operating Company—This represents membership interests in OP held primarily by certain employees of the Company. Noncontrolling interests in OP are allocated a share of net income or loss in OP based on their weighted average ownership interest in OP during the period. Noncontrolling interests in OP have the right to require OP to redeem part or all of such member’s membership units in OP ("OP Units") for cash based on the market value of an equivalent number of shares of class A common stock at the time of redemption, or at the Company's election as managing member of OP, through issuance of shares of class A common stock (registered or unregistered) on a one-for-one basis. At the end of each reporting period, noncontrolling interests in OP is adjusted to reflect their ownership percentage in OP at the end of the period, through a reallocation between controlling and noncontrolling interests in OP, as applicable.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.
Investments in Unconsolidated Ventures
A noncontrolling, unconsolidated ownership interest in an entity may be accounted for using the equity method, fair value option or net asset value ("NAV") practical expedient, if elected, or for equity investments without readily

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determinable fair values, the measurement alternative to measure at cost adjusted for any impairment and observable price changes, as applicable.
The Company accounts for investments under the equity method of accounting if it has the ability to exercise significant influence over the operating and financial policies of an entity, but does not have a controlling financial interest. The equity method investment is initially recorded at cost and adjusted each period for capital contributions, distributions and the Company's share of the entity’s net income or loss as well as other comprehensive income or loss. The Company's share of net income or loss may differ from the stated ownership percentage interest in an entity if the governing documents prescribe a substantive non-pro rata earnings allocation formula or a preferred return to certain investors. This includes carried interests earned by the Company, which are incentive fees that take the form of a disproportionate allocation of returns to the Company’s capital account within the equity structure of investment vehicles sponsored by the Company as general partner and investment manager; and of which a portion of the carried interest, generally at 40% consistent with market terms, is allocated to senior management, investment professionals and certain other employees through their participation in the Company-sponsored investment vehicles. The Company's share of both proportionate and disproportionate allocation of returns from its interests in investment vehicles, which are accounted for under the equity method, may reflect fair value changes in the underlying investments if the investment vehicles qualify for investment company accounting. For certain equity method investments, the Company records its proportionate share of income on a one to three month lag. Distributions of operating profits from equity method investments are reported as operating activities, while distributions in excess of operating profits or those related to capital transactions, such as a financing transactions or sales, are reported as investing activities in the statement of cash flows.
Fair value changes for equity method investments under the fair value option are recorded in earnings from investments in unconsolidated ventures. Fair value changes on other investments under the fair value option or NAV practical expedient, as well as adjustments for observable price changes under the measurement alternative, are recorded in other gain (loss).
Impairment—Evaluation of impairment applies to equity method investments and equity investments under the measurement alternative. If indicators of impairment exist, the Company will first estimate the fair value of its investment. In assessing fair value, the Company generally considers, among others, the estimated enterprise value of the investee or fair value of the investee's underlying net assets, including net cash flows to be generated by the investee as applicable, and for equity method investees with publicly traded equity, the traded price of the equity securities in an active market.
For investments under the measurement alternative, if carrying value of the investment exceeds its fair value, an impairment is determined to have occurred.
For equity method investments, further consideration is made if a decrease in value of the investment is other-than-temporary to determine if impairment has occurred. Assessment of other-than-temporary impairment involves management judgment, including, but not limited to, consideration of the investee’s financial condition, operating results, business prospects and creditworthiness, the Company's ability and intent to hold the investment until recovery of its carrying value, or a significant and prolonged decline in traded price of the investee’s equity security. If management is unable to reasonably assert that an impairment is temporary or believes that the Company may not fully recover the carrying value of its investment, then the impairment is considered to be other-than-temporary.
Investments that are impaired are written down to their estimated fair value, recorded in earnings from investments in unconsolidated ventures for equity method investments and in impairment loss for investments under the measurement alternative.
Property Operating Income
Property operating income includes the following.
Rental Income—Rental income is recognized on a straight-line basis over the noncancelable term of the related lease which includes the effects of minimum rent increases and rent abatements under the lease. Rents received in advance are deferred.
When it is determined that the Company is the owner of tenant improvements, the cost to construct the tenant improvements, including costs paid for or reimbursed from the tenants, is capitalized. For Company-owned tenant improvements, the amount funded by or reimbursed from the tenants are recorded as deferred revenue, which is amortized on a straight-line basis as additional rental income over the term of the related lease. Rental income recognition commences when the leased space is substantially ready for its intended use and the tenant takes possession of the leased space.

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When it is determined that the tenant is the owner of tenant improvements, the Company's contribution towards those improvements is recorded as a lease incentive, included in deferred leasing costs and intangible assets on the balance sheet, and amortized as a reduction to rental income on a straight-line basis over the term of the lease. Rental income recognition commences when the tenant takes possession of the lease space.
Tenant Reimbursements—In net lease arrangements, the tenant is generally responsible for operating expenses relating to the property, including real estate taxes, property insurance, maintenance, repairs and improvements. Costs reimbursable from tenants and other recoverable costs are recognized as revenue in the period the recoverable costs are incurred. When the Company is the primary obligor with respect to purchasing goods and services for property operations and has discretion in selecting the supplier and retains credit risk, tenant reimbursement revenue and property operating expenses are presented on a gross basis in the statements of operations. For certain triple net leases where the lessee self-manages the property, hires its own service providers and retains credit risk for routine maintenance contracts, no reimbursement revenue and expense are recognized.
Resident Fee Income—The Company earns resident fee income from senior housing operating facilities that operate through management agreements with independent third-party operators. Resident fee income related to independent living and assisted living facilities are recorded when services are rendered based on the terms of their respective lease agreements.
Hotel Operating Income—Hotel operating income includes room revenue, food and beverage sales and other ancillary services. Revenue is recognized upon occupancy of rooms, consummation of sales and provision of services.
Fee Income
Fee income consists of the following:
Base Management Fees—The Company earns base management fees for the administration of its managed private funds, and for the management of its traded and non-traded REITs and investment companies, including management of their investments, which constitute a series of distinct services satisfied over time. Base management fees are recognized over the life of the investment vehicle as services are provided.
Asset Management Fees—The Company receives a one-time asset management fee upon closing of each investment made by certain managed private funds. The underlying service of managing the investments of the private funds consist of a series of distinct services satisfied over time, in which asset management fees are recognized ratably over the life of each investment as the service is provided.
Acquisition and Disposition Fees—The Company earns fees related to acquisition and disposition of investments by certain managed non-traded REITs, which are recognized upon closing of the respective acquisition or disposition of underlying investments.
Incentive Fees—The Company may earn incentive fees from its managed private funds, traded and non-traded REITs and investment companies. Incentive fees are determined based on the performance of the investment vehicles subject to the achievement of minimum return hurdles in accordance with the terms set out in the respective governing agreements. Incentive fees that take the form of a contractual arrangement with the investment vehicle and does not represent an allocation of returns among equity holders of the investment vehicle (or “contractual incentive fees”) are recognized when fixed or determinable and related contingencies have been resolved, which is generally at the end of the incentive measurement period of the respective investment vehicles. Any contractual incentive fees received prior to that date are recorded as deferred income.
Incentive fees that take the form of a disproportionate allocation of returns to the Company’s capital account within the equity structure of the investment vehicle (or “carried interests”) are accounted for as earnings from the Company’s ownership interests in the investment vehicles under the equity method, and addressed in the Company's accounting policy for investments in unconsolidated ventures.
A portion of the incentive fees earned by the Company (generally 40%) is allocated to senior management, investment professionals and certain other employees of the Company through their participation in the Company-sponsored investment vehicles.
Selling Commission and Dealer Manager Fees—These fees are earned by the Company for selling equity in the non-traded REITs and investment companies, and are recognized on trade date.
Accounting Standards Adopted in 2018
Revenue Recognition—In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which amends existing revenue

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recognition standards by establishing principles for a single comprehensive model for revenue measurement and recognition, along with enhanced disclosure requirements. Key provisions include, but are not limited to, determining which goods or services are capable of being distinct in a contract to be accounted for separately as a performance obligation and recognizing variable consideration only to the extent that it is probable a significant revenue reversal would not occur. The FASB has subsequently issued several amendments to the standard, including clarifying the guidance on assessing principal versus agent based on the notion of control, which affects recognition of revenue on a gross or net basis. The Company adopted the standard on January 1, 2018 using the modified retrospective approach, applied to contracts not yet completed as of January 1, 2018, with cumulative effect recognized in retained earnings.
The Company evaluated the principal versus agent considerations under the guidance and determined that certain cost reimbursement arrangements with investment vehicles managed by the Company that were previously reported net on the statement of operations would be reported on a gross basis as reimbursement income and expenses on the statement of operations. Such reimbursements include travel and entertainment costs, third party due diligence costs, asset management costs, and other shared costs for which the Company is deemed to the primary obligor, whether or not the payment is made directly by the investment vehicles or initially by the Company on behalf of the investment vehicles. The gross presentation has no impact on the Company's net income to the extent the expense incurred and corresponding cost reimbursement income are recognized in the same period (see Note 22).
The standard excludes from its scope accounting for financial instruments and leases, but is applicable to certain property operating income and fee income streams of the Company, as discussed below.
Resident Fee Income—The Company earns resident fee income from senior housing operating facilities and in 2017, from skilled nursing facilities that operate through management agreements with independent third-party operators. The Company has determined that independent living and assisted living agreements are leases subject to the leasing standard, while certain agreements within skilled nursing facilities, which entitle residents to reside in the community rather than an explicitly or implicitly identified unit, are not leases. Revenue for services provided within skilled nursing facilities, whether they are routine services such as room and bed maintenance, nursing, dietary services, and resident activities or programs, or separately covered services such as those ordered by physicians, are satisfied over the duration of care. These services are a series of distinct services satisfied over time, and revenue is recognized over time as services are provided. The Company determined that there is no change to revenue recognition for such services provided within the skilled nursing facilities in 2017. In 2018, all of the Company's skilled nursing facilities are structured under net leases to healthcare operators and the Company no longer earns resident fee income from skilled nursing facilities, only rental income.
Hotel Operating Income—Revenue is recognized upon occupancy of rooms, consummation of sales and provision of services. The Company determined that there is no change to revenue recognized under the new guidance as revenue is recognized over time based on the transaction price.
Base Management Fees—The Company earns base management fees for the day-to-day operations and administration of its managed private funds, traded and non-traded REITs and investment companies. The Company determined that there is no change to revenue recognition for base management fees as the underlying services consist of a series of distinct services satisfied over time, for which revenue is recognized over the life of the fund as services are provided.
Asset Management Fees—The Company receives a one-time asset management fee upon closing of each investment made by certain managed private funds. Prior to the adoption of the revenue standard, a portion of asset management fees was recognized upon closing of an investment, with remaining fees deferred and recognized over the estimated life of each investment. Under the new guidance, the Company determined that the underlying service of managing the investments of the funds consists of a series of distinct services satisfied over time, for which revenue should be recognized ratably over the estimated life of each investment. As a result of the change in revenue recognition under the new standard, the Company recorded a cumulative impact of approximately $1.6 million as a decrease to retained earnings and an increase to deferred income liability on January 1, 2018. The impact of the change in revenue recognition for the three and six months ended June 30, 2018 was an increase to asset management fees of $0.2 million and $0.4 million, respectively.
Acquisition and Disposition Fees—The Company receives fees related to acquisition and disposition of investments by certain managed non-traded REITs. The Company determined that there is no change to revenue recognition as acquisition and disposition fees are earned at a point in time upon closing of the respective acquisition or disposition of underlying investments.

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Incentive Fees—The Company may earn incentive fees from its managed private funds, traded and non-traded REITs. Incentive fees are determined based on the performance of the investment vehicles subject to the achievement of certain return hurdles.
Incentive fees that take the form of a contractual arrangement with the investment vehicle and do not represent an allocation of returns among equity holders of the investment vehicle (or “contractual incentive fees”) are within the scope of the new revenue standard. The Company currently recognizes contractual incentive fees when it is fixed or determinable and related contingencies have been resolved, which is generally at the end of the incentive measurement period of the respective investment vehicles. Under the new revenue guidance, contractual incentive fees are a form of variable consideration and will be recognized when it is probable that a significant reversal of the cumulative revenue recognized will not occur, which may result in earlier recognition of revenue relative to the Company’s existing policy. There was no cumulative impact as of January 1, 2018.
Incentive fees that take the form of a disproportionate allocation of returns to the Company’s capital account within the equity structure of the investment vehicle (or “carried interests”) are outside the scope of the new revenue standard. Carried interests are financial instruments and accounted for as earnings from the Company’s ownership interests in the investment vehicles under the equity method. As carried interest represents income from equity method investments, it is presented, along with other proportionate allocation of returns based on the Company’s ownership interests in the investment vehicles, in earnings from unconsolidated investment ventures on the statement of operations. Adoption of the new standard did not have an impact to the Company's recognition of carried interests.
Derecognition and Partial Sales of Nonfinancial Assets—In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of Accounting Standards Codification ("ASC") 610-20, Other IncomeGains and Losses from Derecognition of Nonfinancial Assets, and defines in substance nonfinancial assets. ASC 610-20 applies to derecognition of all nonfinancial assets which are not contracts with customers or revenue transactions under ASC 606, Revenue from Contracts with Customers. Derecognition of a business is governed by ASC 810, Consolidation, while derecognition of financial assets, including equity method investments, even if the investee holds predominantly nonfinancial assets, is governed by ASC 860, Transfers and Servicing. The ASU also aligns the accounting for partial sales of nonfinancial assets to be more consistent with accounting for sale of a business. Specifically, in a partial sale to a noncustomer, when a noncontrolling interest is received or retained, the latter is considered a noncash consideration and measured at fair value in accordance with ASC 606, which would result in full gain or loss recognized upon sale. This ASU removes guidance on partial exchanges of nonfinancial assets in ASC 845, Nonmonetary Transactions, and eliminates the real estate sales guidance in ASC 360-20, Property, Plant and EquipmentReal Estate Sales.
The Company adopted this standard on January 1, 2018, concurrent with the adoption of the new revenue standard, using the modified retrospective approach. Under the new standard, if the Company sells a partial interest in its real estate assets to noncustomers or contributes real estate assets to unconsolidated ventures, and the Company retains a noncontrolling interest in the asset, such transactions could result in a larger gain on sale. The adoption of this standard did not have an impact on the Company's financial statements. There were no sales of partial interests in real estate assets in the six months ended June 30, 2018 or for the year ended December 31, 2017.
Financial Instruments—In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which affects accounting for investments in equity securities, financial liabilities under the fair value option, as well as for presentation and disclosures, but does not affect accounting for investments in debt securities and loans. Investments in equity securities, other than equity method investments, will be measured at fair value through earnings, except for equity securities without readily determinable fair values which may be measured at cost less impairment and adjusted for observable price changes, unless these equity securities qualify for the NAV practical expedient. This provision eliminates cost method accounting and recognition of unrealized holding gains or losses on equity investments in other comprehensive income. For financial liabilities under the fair value option, changes in fair value resulting from the Company's own instrument-specific credit risk will be recorded separately in other comprehensive income. Fair value disclosures of financial instruments measured at amortized cost will be based on exit price and corresponding disclosures of valuation methodology and significant inputs will no longer be required. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments, Recognition and Measurement of Financial Assets and Financial Liabilities, which provided several clarifications and amendments to the standard. These include specifying that for equity instruments without readily determinable fair values for which the measurement alternative is applied: (i) adjustments made when an observable transaction occurs for a similar security are intended to reflect the fair value as of the observable transaction date, not as of current reporting date; (ii) the measurement alternative may be discontinued upon an irrevocable election to change to a fair value measurement approach under fair value guidance, which would apply to all identical and similar investments of the same issuer; and (iii) the prospective transition approach for equity securities without readily determinable fair values is applicable only when

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the measurement alternative is applied. ASU No. 2016-01 and ASU No. 2018-03 are to be applied retrospectively with cumulative effect as of the beginning of the first reporting period adopted recognized in retained earnings, except for provisions related to equity investments without readily determinable fair values and exit price fair value disclosures for financial instruments measured at amortized cost, which are to be applied prospectively.
The Company adopted ASU No. 2016-01 and ASU No. 2018-03 on January 1, 2018, and recorded a cumulative adjustment to increase retained earnings by approximately $0.6 million. This includes $0.2 million of unrealized gains on available for sale equity securities held by an equity method investee that was reclassified from accumulated other comprehensive income. In connection with the adoption, the Company elected the NAV practical expedient to measure its previous cost method investments in non-traded REITs and limited partnership interest in a third party private fund based on their respective NAV per share. The new standard does not affect equity securities held by the Company's consolidated fund for which the Company has retained investment company accounting applied by the fund, and limited partnership interests in third party private funds for which the Company has elected the fair value option, as in both instances, unrealized fair value gains and losses are currently recorded in earnings. The Company's remaining cost method investments do not have readily determinable fair values. To the extent the Company becomes aware of observable price changes in the future, the Company will adjust the carrying value of these investments through earnings.
Cash Flow Classifications—In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in certain classifications on the statement of cash flows. This guidance addresses eight types of cash flows, which includes clarifying how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows, as well as requiring an accounting policy election for classification of distributions received from equity method investees using either the cumulative earnings or nature of distributions approach, among others. The Company adopted this guidance on January 1, 2018 on a retrospective basis and made an accounting policy election for classification of distributions from its equity method investees using the cumulative earnings approach, which is largely consistent with its previous accounting policy. The adoption of this standard did not have a material effect on the presentation of the Company's statement of cash flows.
Restricted Cash—In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows: Restricted Cash, which requires that cash and cash equivalent balances in the statement of cash flows include restricted cash and restricted cash equivalent amounts, and therefore, changes in restricted cash and restricted cash equivalents be presented in the statement of cash flows. This will eliminate the presentation of transfers between cash and cash equivalents with restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the ASU requires a reconciliation between the totals in the statement of cash flows and the related captions on the balance sheet. The new guidance also requires disclosure of the nature of restricted cash and restricted cash equivalents, similar to existing requirements under Regulation S-X; however, it does not define restricted cash and restricted cash equivalents. The Company adopted ASU 2016-18 on January 1, 2018. The required retrospective application of this new standard resulted in changes to the previously reported statement of cash flows as follows:
 
 
Six Months Ended June 30, 2017
(In thousands)
 
As Previously Reported
 
After Adoption of ASU 2016-18
Net cash provided by operating activities
 
$
184,937

 
$
181,550

Net cash provided by investing activities
 
254,167

 
434,422

Net cash used in financing activities
 
(213,765
)
 
(213,024
)
The increase in net cash provided by investing activities is primarily due to restricted cash assumed in the Merger and the CPI restructuring which was previously reported as noncash investing activities.
Future Application of Accounting Standards
Leases—In February 2016, the FASB issued ASU No. 2016-02, Leases, which amends existing lease accounting standards, primarily requiring lessees to recognize most leases on balance sheet, as well as making targeted changes to lessor accounting. ASU No. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted. The new leases standard requires adoption using a modified retrospective approach for all leases existing at, or entered into after, the date of initial application. Full retrospective application is prohibited. In applying the modified retrospective approach, the standard provides the option to elect a package of practical expedients that exempts an entity 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.

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In July 2018, the FASB issued ASU No. 2018-11, Targeted Improvement to Topic 842, Leases, which provides the option of (i) applying the effective date of the new lease standard as the date of initial application in transition instead of the earliest comparative period presented; as well as (ii) electing as practical expedient by class of underlying asset, not to segregate lease and non-lease components in a contract but to account for it as a single component in accordance with either the new lease standard or the revenue recognition standard depending on whether the lease or non-lease component is predominant.
The Company will adopt the new lease standard on its effective date of January 1, 2019 and will adopt the package of practical expedients as well as the transition option. As a result, the Company will apply the new lease standard prospectively to leases existing or commencing on or after January 1, 2019. Comparative periods presented will not be restated upon adoption. Similarly, new disclosures under the standard will be made for periods beginning January 1, 2019, and not for prior comparative periods. In addition, the Company will make an accounting policy election to treat the lease and non-lease components in a contract as a single performance obligation to the extent that the timing and pattern of transfer are similar for the lease and non-lease components and the lease component qualifies as an operating lease.
As the new lease standard requires congruous accounting treatment between lessor and lessee in a sale-leaseback transaction, if the seller/lessee does not achieve sale accounting, it would be considered a financing transaction to the Company, as the buyer/lessor. As lessee, the Company will recognize a right of use asset and corresponding liability for future obligations under its leasing arrangements, such as ground leases and office leases. As of December 31, 2017, the Company had future contractual lease payment obligations of $74.2 million on office leases and $172.2 million on ground leases, excluding leases related to net lease properties contributed to Colony Credit on January 31, 2018. Additionally, under the new lease standard, only incremental initial direct costs incurred in the execution of a lease can be capitalized by the lessor and lessee. The Company continues to evaluate the impact of this guidance on its financial statements.
Credit Losses—In June 2016, the FASB issued ASU No. 2016-13, Financial InstrumentsCredit Losses, which amends the credit impairment model for financial instruments. The existing incurred loss model will be replaced with a lifetime current expected credit loss ("CECL") model for financial instruments carried at amortized cost and off-balance sheet credit exposures, such as loans, loan commitments, held-to-maturity ("HTM") debt securities, financial guarantees, net investment in leases, reinsurance and trade receivables, which will generally result in earlier recognition of allowance for losses. For available-for-sale ("AFS") debt securities, unrealized credit losses will be recognized as allowances rather than reductions in amortized cost basis and elimination of the other than temporary impairment ("OTTI") concept will result in more frequent estimation of credit losses. The accounting model for purchased credit-impaired loans and debt securities will be simplified, including elimination of some of the asymmetrical treatment between credit losses and credit recoveries, to be consistent with the CECL model for originated and purchased non-credit-impaired assets. The existing model for beneficial interests that are not of high credit quality will be amended to conform to the new impairment models for HTM and AFS debt securities. Expanded disclosures on credit risk include credit quality indicators by vintage for financing receivables and net investment in leases. Transition will generally be on a modified retrospective basis, with prospective application for other than temporarily impaired debt securities and purchased credit-impaired assets. ASU No. 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company expects that recognition of credit losses will generally be accelerated under the CECL model. Evaluation of the impact of this new guidance is ongoing.
Hedge Accounting—In August 2017, the FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, which simplifies and expands the application of hedge accounting. This standard amends hedge accounting recognition and presentation, including eliminating the requirement to separately measure and present hedge ineffectiveness as well as presenting the entire fair value change of a hedging instrument in the same income statement line as the hedged item. The new guidance also provides alternatives for applying hedge accounting to additional hedging strategies, and easing requirements for effectiveness testing and hedging documentation, although the "highly effective" threshold for a qualifying hedging relationship has not changed. Revised disclosures include tabular disclosures that focus on the effect of hedge accounting by income statement line item. Transition will generally be on a modified retrospective basis applied to existing hedging relationships as of date of adoption, with prospective application for income statement presentation and disclosure, and specific transition elections are available to modify existing hedge documentation. ASU 2017-12 is effective for fiscal years and interim periods beginning after December 15, 2019. Early adoption is permitted, with adjustments to be reflected as of the beginning of the fiscal year of adoption if early adopted in an interim period.
The Company plans to adopt the standard on its effective date. Upon adoption, as it relates to the Company’s cash flow and net investment hedges, the Company will record the entire change in fair value of the hedging instrument (other than amounts excluded from assessment of hedge effectiveness for net investment hedges) in other comprehensive income and there will be no hedge ineffectiveness recorded in earnings. Additionally, subsequent to initial quantitative hedge assessment, the Company may elect to perform effectiveness testing qualitatively so long as the Company can reasonably support an expectation that the hedge is highly effective now and in subsequent periods. As the standard

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allows more flexibility in hedging interest rate risk in cash flow hedges beyond a specified benchmark rate, the Company may be able to designate in the future other contractually specified variable interest rate as the hedged risk, which if effective, could decrease fluctuations in earnings. The Company continues to evaluate the impact of this new guidance but at this time, does not expect the adoption of this standard to have a material effect on its financial condition or results of operations.
Share-Based Payments—In June 2018, the FASB issued ASU No. 2018-07 Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by generally aligning it with the accounting for share-based payments to employees, with certain exceptions. The new guidance applies to nonemployee awards issued in exchange for goods or services used in an entity’s own operations and to awards granted by an investor to an equity method investee, but does not apply to equity instruments issued to a lender or investor in a financing transaction or equity instruments issued when selling goods or services to customers, which is under the revenue recognition model. Key changes in the guidance include measuring nonemployee awards based on fair value of the equity instrument issued, rather than on fair value of goods or services received or equity instrument issued, whichever is more reliably measured. In terms of timing, equity-classified nonemployee awards that were previously remeasured through performance completion date will now have a fixed measurement on grant date, which will reduce volatility on the income statement. For nonemployee awards with performance conditions, compensation cost will be recognized when achievement of the performance condition is probable, rather than upon actual achievement of the performance condition. Similar to employee awards, forfeitures may be recognized as they occur or based on an estimate under an accounting policy election, but the guidance allows separate elections for employee and nonemployee awards. The accounting model for nonemployee awards, however, remains different for attribution of share-based payment costs over the vesting period, in which compensation cost for nonemployee awards continues to be recognized in the same period and in the same manner (i.e., capitalize or expense) as if the grantor had paid cash for the goods or services. No changes to disclosure requirements were prescribed. Transition is on a modified retrospective basis, with a remeasurement at fair value as of the adoption date through a cumulative effect adjustment to opening retained earnings, applied to all equity-classified nonemployee awards where a measurement date has not been established by the adoption date and unsettled liability-classified nonemployee awards. If the cost of a nonemployee award has been included in completed assets (such as finished goods inventory or fixed assets that have begun to be depreciated), the cost basis of those assets will not be remeasured. The transition provisions eliminate the need to retrospectively determine fair values at historical grant dates. ASU No. 2018-07 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption is permitted in an interim period for which financial statements have not been issued, with adjustments to be reflected as of the beginning of the fiscal year of adoption. The adoption of this standard is not expected to have a material effect on the Company's financial condition or results of operations.
3. Business Combinations
Merger with NSAM and NRF
The Company was created through the Merger of NSAM, Colony and NRF in an all-stock exchange on the Closing Date.
The Merger was accomplished through a series of transactions. On the Closing Date, NSAM merged with and into the Company in order to redomesticate NSAM as a Maryland corporation, followed by a series of internal reorganization transactions with subsidiaries of NRF resulting in NRF becoming a subsidiary of the Company, and the merger of Colony into the Company, with the Company surviving as the combined entity.
Upon the closing of the Merger, NSAM outstanding common stock was converted into the Company's common stock, and the outstanding common stock and preferred stock of NRF and Colony were converted into the right to receive shares of common stock and preferred stock of the Company at pre-determined exchange ratios.
The specific exchanges of common stock and preferred stock as a result of the Merger were as follows:
Each share of NSAM common stock and performance common stock issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into one share of the Company's class A common stock and performance common stock, respectively;
Each share of class A and class B common stock of Colony issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into the right to receive 1.4663 shares of the Company's class A and class B common stock for each share of Colony's class A and class B common stock;

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Each share of common stock of NRF issued and outstanding prior to the effective time of the Merger was canceled and converted into the right to receive 1.0996 shares of the Company's class A common stock for each share of NRF common stock;
Each share of each series of the preferred stock of Colony and of NRF issued and outstanding immediately prior to the effective time of the Merger was canceled and converted into the right to receive one share of a corresponding series of the Company's preferred stock with substantially identical preferences, conversion and other rights, voting powers, restrictions, limitations as to dividend, qualification and terms and conditions of redemption; and
Concurrently, the OP issued OP Units to equal the number of OP membership units outstanding on the day prior to the closing of the Merger multiplied by the exchange ratio of 1.4663.
Upon consummation of the Merger, the former stockholders of Colony, NSAM and NRF owned, or had the right to own, approximately 33.25%, 32.85% and 33.90%, respectively, of the Company, on a fully diluted basis, excluding the effect of certain equity-based awards issued in 2017 in connection with the Merger.
The Merger was accounted for as a reverse acquisition, with NSAM as the legal acquirer for certain legal and regulatory matters and Colony as the accounting acquirer for purposes of the financial information set forth herein. See Note 2 for further discussion on the accounting treatment of the Merger.
Merger Consideration
As the Merger was accounted for as a reverse acquisition, the fair value of the consideration transferred in common stock was measured based upon the number of shares of common stock that Colony, as the accounting acquirer, would theoretically have issued to the shareholders of NSAM and NRF to achieve the same ratio of ownership in the Company upon completion of the Merger, multiplied by the closing price of Colony class A common stock of $21.52 on the Closing Date. As a result, the implied shares of Colony common stock issued in consideration was computed as the number of outstanding shares of NSAM and NRF common stock prior to the Closing Date divided by the exchange ratios of 1.4663 and 1.3335, respectively.
Substantially all NSAM and NRF equity awards outstanding on the Closing Date vested upon consummation of the Merger. As the Company issued its common stock upon consummation of the Merger and settlement of these equity awards relate to pre-Merger services, these equity awards were included in the outstanding shares of NSAM and NRF common stock used to determine the merger consideration.
NSAM and NRF equity awards outstanding on the Closing Date that did not vest upon consummation of the Merger were assumed by the Company through the conversion of such equity awards into comparable equity awards of the Company with substantially the same vesting terms pre-Merger. The portion of the replacement awards attributable to pre-Merger services was deemed part of the merger consideration, while the portion attributable to post-Merger services is recognized prospectively as compensation expense of the Company in the post-Merger period.
The Company's preferred stock issued as merger consideration upon the closing of the Merger to the holders of NRF preferred stock was on a one-for-one basis.
The Company assumed certain liabilities of NSAM and NRF which arose as a result of the Merger and were settled shortly after the Closing Date. These amounts included approximately $226.1 million which was paid to former NSAM stockholders, representing a one-time special dividend, and approximately $78.9 million in payroll taxes representing shares that were canceled and remitted to taxing authorities on behalf of employees whose equity-based compensation was accelerated and fully vested on the Closing Date. Cash and restricted cash assumed of $437.4 million is presented net of these payments as an investing cash inflow in the consolidated statement of cash flows.

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Fair value of the merger consideration was determined as follows:
(In thousands, except price per share)
 
NSAM
 
NRF
 
Total
Outstanding shares of common stock prior to closing of the Merger
 
190,202

 
183,147

 
 
Replacement equity-based awards attributable to pre-combination services(i)
 
300

 
150

 
 
 
 
190,502

 
183,297

 
 
Exchange ratio(ii)
 
1.4663

 
1.3335

 
 
Implied shares of Colony common stock issued in consideration
 
129,920

 
137,456

 
267,376

Price per share of Colony class A common stock
 
$
21.52

 
$
21.52

 
$
21.52

Fair value of implied shares of Colony common stock issued in consideration
 
$
2,795,890

 
$
2,958,039

 
$
5,753,929

Fair value of the Company's preferred stock issued(iii)
 

 
1,010,320

 
1,010,320

Fair value of NRF stock owned by NSAM (iv)
 
(43,795
)
 

 
(43,795
)
Total merger consideration
 
$
2,752,095

 
$
3,968,359

 
$
6,720,454

__________
(i)
Represents the portion of non-employee restricted stock unit awards that did not vest upon consummation of the Merger and pertains to services rendered prior to the Merger.
(ii)
Represents (a) the pre-determined exchange ratio of one share of Colony common stock for 1.4663 shares of the Company's common stock; and (b) the derived exchange ratio of one share of Colony common stock for 1.3335 shares of NRF common stock based on the pre-determined exchange ratio of one NRF share of common stock for 1.0996 shares of the Company's common stock.
(iii)
Fair value of the Company's preferred stock issued was measured based on the shares of NRF preferred stock outstanding at the Closing Date and the closing traded price of the respective series of NRF preferred stock on the Closing Date, including accrued dividends, as follows:
(In thousands, except price per share)
 
Number of Shares Outstanding
 
Price Per Share
 
Fair Value
NRF preferred stock
 
 
 
 
 
 
Series A 8.75%
 
2,467

 
$
25.61

 
$
63,182

Series B 8.25%
 
13,999

 
25.15

 
352,004

Series C 8.875%
 
5,000

 
25.80

 
128,995

Series D 8.50%
 
8,000

 
25.82

 
206,597

Series E 8.75%
 
10,000

 
25.95

 
259,542

Fair value of the Company's preferred stock issued
 
39,466

 
 
 
$
1,010,320

(iv)
Represents 2.7 million shares of NRF common stock owned by NSAM prior to the Merger and canceled upon consummation of the Merger, valued at the closing price of NRF common stock of $16.13 on the Closing Date.
The following table presents the final allocation of the merger consideration to assets acquired, liabilities assumed and noncontrolling interests of NSAM and NRF based on their respective fair values as of the Closing Date. The resulting goodwill represents the value expected from the economies of scale and synergies created through combining the operations of the merged entities, and is assigned to the investment management segment.

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Final Amounts at December 31, 2017
(In thousands)
 
NSAM
 
NRF
 
Total
Assets
 
 
 
 
 
 
Cash and cash equivalents
 
$
152,858

 
$
107,751

 
$
260,609

Restricted cash
 
18,052

 
158,762

 
176,814

Real estate
 

 
9,874,406

 
9,874,406

Loans receivable
 
28,485

 
331,056

 
359,541

Investments in unconsolidated ventures
 
76,671

 
544,111

 
620,782

Securities
 
3,065

 
427,560

 
430,625

Identifiable intangible assets
 
661,556

 
352,551

 
1,014,107

Management agreement between NSAM and NRF
 
1,514,085

 

 
1,514,085

Assets held for sale
 

 
2,096,671

 
2,096,671

Other assets
 
93,455

 
681,003

 
774,458

Total assets
 
2,548,227

 
14,573,871

 
17,122,098

Liabilities
 
 
 
 
 
 
Debt
 

 
6,723,222

 
6,723,222

Intangible liabilities
 

 
213,218

 
213,218

Management agreement between NSAM and NRF
 

 
1,514,085

 
1,514,085

Liabilities related to assets held for sale
 

 
1,281,406

 
1,281,406

Tax liabilities
 
169,387

 
60,446

 
229,833

Accrued and other liabilities
 
979,969

 
307,450

 
1,287,419

Total liabilities
 
1,149,356

 
10,099,827

 
11,249,183

Redeemable noncontrolling interests
 
78,843

 

 
78,843

Noncontrolling interests—investment entities
 

 
505,685

 
505,685

Noncontrolling interests—Operating Company
 
8,162

 

 
8,162

Fair value of net assets acquired
 
$
1,311,866

 
$
3,968,359

 
$
5,280,225

 
 
 
 
 
 
 
Merger consideration
 
2,752,095

 
3,968,359

 
6,720,454

Goodwill
 
$
1,440,229

 
$

 
$
1,440,229

The Merger effectively resulted in the settlement of the pre-merger management agreement between NSAM and NRF. The terms of the management agreement were determined to be off-market when compared to the terms of similar management agreements of other externally managed mortgage and equity REITs. The off-market component was valued at $1.5 billion based on a discounted cash flow analysis using a discount rate of 10%, and recorded as an intangible asset attributed to NSAM and a corresponding intangible liability attributed to NRF, in each case as of the Closing Date. Upon settlement of the management agreement, the intangible asset and the corresponding intangible liability were eliminated. No net gain or loss was recognized by the Company from the settlement.
Certain deferred tax liabilities were recognized in connection with the Merger, related primarily to NSAM's investment management contract intangible assets and basis differences in NRF's real estate assets in the United Kingdom arising from recording those assets at fair value on the Closing Date.
Fair value of other assets acquired, liabilities assumed and noncontrolling interests were measured as follows:
Real Estate and Related Intangibles—Fair value is based on the income approach which includes a direct capitalization method, applying overall capitalization rates ranging between 4.4% and 12.5%. For real estate held for sale, fair value was determined based on contracted sale price or a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangible assets such as land, building and leaseholds, tenant and land improvements as well as identified intangible assets and liabilities such as above- and below-market leases, below-market ground lease obligations and in-place lease value. Useful lives of the intangibles acquired range from 6 to 90 years for ground lease obligations and 1 to 17 years for all other real estate related intangibles.
Loans Receivable—Fair value is determined 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; or based on discounted cash flow projections of principal and interest expected to be collected, which include consideration of borrower or sponsor credit, as well as operating results of the underlying collateral. For certain loans receivable considered to be impaired, their carrying value approximated fair value.

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Investments in Unconsolidated Ventures—Fair value is based on timing and amount of expected future cash flows for income as well as realization events of the underlying assets of the investees, and for certain investments in funds, a proportionate share of its most recent net asset value.
Securities—Fair value is based on quotations from brokers or financial institutions that act as underwriters of the debt securities, third-party pricing service or discounted cash flows depending on the type of debt securities. Fair value of NorthStar Realty Europe Corp ("NRE") common stock is based on the closing stock price on the Closing Date.
Investment Management Related Intangible Assets—These consist primarily of management contracts, customer relationships, trade names and the broker-dealer license, including those related to an 84% interest acquired by NSAM in January 2016 in Townsend, which provides real estate investment management and advisory services. The fair value of management contracts represents the discounted excess earnings attributable to the future management fee income from in-place management contracts, with discount rates ranging between 8% and 10%. The management contracts have useful lives ranging from 2 years to 18 years. The fair value of customer relationships represents the potential fee income from repeat customers through future sponsored investment vehicles, with the useful lives of such vehicles ranging from 20 to 30 years. The trade names of NSAM and Townsend were valued as the discounted savings of royalty fees by applying a royalty rate of 1.5% and 2%, respectively, against expected fee income, and have useful lives of 20 years and 30 years, respectively. The fair value of NSAM's broker-dealer license represents the estimated cost of obtaining a license. On December 29, 2017, the Company sold its 84% interest in Townsend.
Debt—Fair value of exchangeable notes was determined based on unadjusted quoted prices in a non-active market. Fair value of mortgage and other notes payable was estimated by reviewing rates currently available with similar terms and remaining maturities. Fair value of securitization bonds payable was based on quotations from brokers or financial institutions that act as underwriters of the securitized bonds. Fair value of junior subordinated debt was based on unadjusted quotations from a third party valuation firm, with such quotes derived using a combination of internal valuation models, comparable trades in non-active markets and other market data.
Noncontrolling Interests—Fair value of noncontrolling interests in investment entities was estimated as their share of fair values of the net assets of the underlying investment entities, including any incentive distributions. The fair value of noncontrolling interests in Operating Company was determined based upon the closing price of Colony class A common stock multiplied by the number of OP Units assumed in the Merger, after applying the exchange ratio.
Restructuring of Real Estate Loans into Equity Ownership
In the normal course of business, the Company may foreclose on the underlying asset in settlement of its loan receivable or otherwise undertake various restructuring measures in connection with its investments.
CPI Group
On January 25, 2017, the Company and its joint venture partners, through a consolidated investment venture of the Company, acquired a controlling equity interest in a defaulted borrower, a real estate investment group in Europe ("CPI") in connection with a restructuring of the CPI group. Certain entities within the CPI group were in receivership proceedings at the time of the restructuring. The Company acquired CPI's real estate portfolio, consisting of hotels, offices and mixed-use properties, and assumed the underlying mortgage debt, some of which were in payment default, including maturity default. Certain CPI employees responsible for asset and property management became employees of the Company. As a result of the acquisition, the Company's outstanding loans receivable to CPI were deemed to be effectively settled at their carrying value and formed part of the consideration transferred.
The following table summarizes the consideration and allocation to assets acquired and liabilities assumed.

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(In thousands)
 
Final Amounts at December 31, 2017
Consideration
 
 
Carrying value of loans receivable outstanding at the time of restructuring
 
$
182,644

Cash
 
49,537

Total consideration
 
$
232,181

Identifiable assets acquired and liabilities assumed
 
 
Cash
 
$
303

Real estate
 
543,649

Real estate held for sale
 
21,605

Lease intangibles and other assets
 
40,285

Debt
 
(277,590
)
Tax liabilities
 
(32,078
)
Lease intangibles and other liabilities
 
(61,205
)
Liabilities related to assets held for sale
 
(2,788
)
Fair value of net assets acquired
 
$
232,181

Fair value of assets acquired and liabilities assumed were measured as follows:
Real Estate and Related Intangibles—Fair value of real estate was based upon a direct capitalization analysis or a discounted cash flow analysis with weighted average capitalization rate of 6.6%. For real estate held for sale, fair value was determined based upon a sales comparison approach, adjusted for estimated selling costs. Real estate fair value was allocated to tangible assets of land, building and tenant and site improvements and identified intangibles, such as above- and below-market leases and in-place lease values.
Debt—Fair value of debt is estimated by discounting expected future cash outlays at interest rates currently available for instruments with similar terms and remaining maturities, applying discount rates ranging between 1.25% and 3.6%, with such debt fair values not exceeding the fair value of their underlying collateral, or estimated based upon expected payoff amounts.
THL Hotel Portfolio
In May 2013, the Company and certain investment vehicles managed by the Company participated in the refinancing of a limited service hospitality portfolio, primarily located across the Southwest and Midwest U.S. (the "THL Hotel Portfolio"), through the origination of a junior and senior mezzanine loan. On July 1, 2017, the Company and certain investment vehicles managed by the Company took control of the THL Hotel Portfolio of 148 limited service hotels through a consensual foreclosure following a maturity default by the borrower on the Company's outstanding junior mezzanine loan. Through the consensual foreclosure, the Company assumed the borrower's in-place hotel management contracts with third party operators, which were determined to be at market, the borrower's in-place franchise obligations, primarily with Marriott, as well as the borrower's outstanding senior mortgage debt and senior mezzanine debt.
The consideration for the consensual foreclosure consisted of the following:
Carrying value of the Company’s junior mezzanine loan to the borrower which is considered to be effectively settled upon the consensual foreclosure;
Cash to pay down principal and accrued interest on the borrower’s senior mortgage and senior mezzanine debt to achieve a compliant debt yield, and payment of an extension fee to exercise an extension option on the senior mortgage debt; and
In consideration of the former preferred equity holder of the borrower providing certain releases, waivers and covenants to and in favor of the Company and certain investment vehicles managed by the Company in executing the consensual foreclosure, the former preferred equity holder is entitled to an amount up to $13.0 million based on the performance of the THL Hotel Portfolio, subject to meeting certain repayment and return thresholds to the Company (and certain investment vehicles managed by the Company).
The following table summarizes the consideration and the final allocation to assets acquired and liabilities assumed. The estimated fair values and allocation were subject to retrospective adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of acquisition. During the six months ended June 30, 2018, adjustments were made to the allocation of values among real estate held for sale, real estate held for investment, intangible assets and intangible liabilities. Included in the consolidated

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statement of operations for the six months ended June 30, 2018 was a $1.8 million decrease to depreciation expense and an immaterial increase to ground lease expense to reflect the effects of the measurement period adjustments as of the acquisition date on July 1, 2017.
(In thousands)
 
As Reported at March 31, 2018
 
Measurement Period Adjustments
 
Final Amounts
at June 30, 2018
Consideration
 
 
 
 
 
 
Carrying value of the Company's junior mezzanine loan receivable at the time of foreclosure
 
$
310,932

 
$

 
$
310,932

Cash
 
43,643

 

 
43,643

Contingent consideration (Note 14)
 
6,771

 

 
6,771

Total consideration
 
$
361,346

 
$

 
$
361,346

Identifiable assets acquired and liabilities assumed
 
 
 
 
 
 
Cash
 
$
16,188

 
$

 
$
16,188

Real estate
 
1,193,075

 
(8,628
)
 
1,184,447

Real estate held for sale
 
68,625

 
1,051

 
69,676

Intangible and other assets
 
37,975

 
7,215

 
45,190

Debt
 
(907,867
)