Investments in Unconsolidated Ventures

6 Months Ended

Jun. 30, 2020

Equity Method Investments and Joint Ventures [Abstract]

Summary

The Company’s investments in unconsolidated ventures represent noncontrolling equity interests in various entities, as follows (dollars in thousands):


	June 30, 2020		December 31, 2019
Equity method investments	$	410,214	$	585,022

Investments under fair value option	7,093		10,283
Investments in Unconsolidated Ventures	$	417,307	$	595,305

Equity Method Investments

Investment Ventures

Certain of the Company’s equity method investments are structured as joint ventures with one or more private funds or other investment vehicles managed by Colony Capital with third party joint venture partners. These investment entities are generally capitalized through equity contributions from the members, although certain investments are leveraged through various financing arrangements.

The assets of the equity method investment entities may only be used to settle the liabilities of these entities and there is no recourse to the general credit of the Company nor the other investors for the obligations of these investment entities. Neither the Company nor the other investors are required to provide financial or other support in excess of their capital commitments. The Company’s exposure to the investment entities is limited to its equity method investment balance as of June 30, 2020 and December 31, 2019, respectively.

The Company’s investments accounted for under the equity method are summarized below (dollars in thousands):


		Carrying Value
Investments	Description	June 30, 2020		December 31, 2019
ADC investments^(1)(2)(3)	Interests in three acquisition, development and construction loans in which the Company participates in residual profits from the projects, and the risk and rewards of the arrangements are more similar to those associated with investments in joint ventures	$	57,575	$	59,576
Other investment ventures⁽¹⁾⁽⁴⁾	Interests in nine investments, each with less than $181.6 million carrying value at June 30, 2020	352,639		525,446

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(1)The Company’s ownership interest in ADC investments and other investment ventures varies and represents capital contributed to date and may not be reflective of the Company’s economic interest in the entity because of provisions in operating agreements governing various matters, such as classes of partner or member interests, allocations of profits and losses, preferential returns and guaranty of debt. Each equity method investment has been determined to be a VIE for which the Company was not deemed to be the primary beneficiary or a voting interest entity in which the Company does not have the power to control through a majority of voting interest or through other arrangements.

(2)The Company owns varying levels of stated equity interests in certain ADC investments, as well as profit participation interests in real estate ventures without a stated ownership interest in other ADC investments.

(3)Includes two investments with a carrying value of $57.6 million that were contributed to a preferred financing arrangement. See Note 13, “Noncontrolling Interests,” for further information.

(4)Includes five investments with a carrying value of $196.2 million that were contributed to a preferred financing arrangement. See Note 13, “Noncontrolling Interests,” for further information.

Impairment

Within the Company’s Legacy, Non-Strategic Portfolio:

•During 2019, the Company recognized its proportionate share of impairment loss totaling $14.7 million on one senior loan secured by a regional mall (“Southeast Regional Mall”). Southeast Regional Mall was sold during the three months ended March 31, 2020 and the Company received $13.4 million in gross sales proceeds and recognized a gain of $1.6 million.

•Also during 2019, the Company recorded its proportionate share of impairment loss totaling $16.1 million on two loans and an equity partnership interest secured by residential development projects as a result of revised property sales expectations.

Within the Company’s Core Portfolio:

During 2019 the Company recorded a $17.6 million impairment loss related to an equity participation interest in a joint venture to reflect the estimated fair value of the collateral. During the three months ended June 30, 2020 the Company sold the related preferred equity investment at par and included one-third of the Company’s equity participation in the sale and recognized a loss of $10.1 million.

The impairment recorded on each of these investments is included in equity in earnings of unconsolidated ventures on the Company’s consolidated statements of operations.

Fair Value Measurement

At January 1, 2020, for loans and preferred equity investments included in the Company’s equity method investments, the fair value option was elected. Under the fair value option, loans and preferred equity investments are measured each reporting period based on their exit values in an orderly transaction. Fair value adjustments recorded on each of these investments is included in equity in earnings of unconsolidated ventures on the Company’s consolidated statements of operations.

Within the Company’s Core Portfolio:

•The Company has a mezzanine loan and preferred equity investment in a development project in Los Angeles County which includes a hospitality and retail renovation and a new condominium tower construction (the “Mixed-use Project”). The Company’s interests are held through a joint venture which maintains total commitments to the Mixed-use Project of $574.0 million of which the Company’s proportionate share of the commitment is $189.0 million. The Mixed-use Project’s total interest income recorded for the six months ended June 30, 2020 and June 30, 2019 was $13.8 million and $18.4 million, respectively. The Company recognized its proportionate share of interest income for the six months ended June 30, 2020 and June 30, 2019 of $2.4 million and $5.8 million, respectively.

In April 2020, the senior mortgage lender notified the borrower developer that the Mixed-use Project loan funding was over budget, due to cost overruns from certain hard and soft costs and senior loan interest reserve shortfalls projected through completion. As a result, during the second quarter, the Company and its affiliates made two protective advances to the senior mortgage lender totaling $67.7 million, of which the Company’s proportionate share was $28.5 million. The Company and its affiliates have a remaining unfunded commitment of $39.3 million, of which the Company’s proportionate share is $14.5 million. The Company has placed this investment on nonaccrual status.

In June 2020, the senior mortgage lender sought a third protective advance of $15.5 million of which the Company’s proportionate share would have been $7.0 million. While the Company and its affiliates did not fund its proportionate share, the senior mortgage lender funded the full amount of the required June advances. The senior mortgage lenders funding did not relieve the Company and its affiliates from its commitment to fund. As a result during the three months ended June 30, 2020, the Mixed-use Project’s recorded fair value losses totaling $250.0 million. The Company recognized its proportionate share of fair value losses equaling $89.3 million. The Mixed-use Project’s fair value was based on a weighted average probability analysis of potential resolutions based on a number of factors which included the maturity default of the loan, cost overruns, COVID-19 related delays, lack of funding by the borrower and recent negotiations with the senior lender, the borrower and potential sources of additional mezzanine financing.

•Additionally, during the three months ended June 30, 2020, the Company recognized its proportionate share of fair value losses totaling $7.0 million on one mezzanine loan secured by a mixed-use development project (“West Mixed-use”). West Mixed-use’s decrease in fair value is a result of revised sale expectations. The Company previously placed West Mixed-use on nonaccrual status in January 2020.

Investments under Fair Value Option

Private Funds

The Company elected to account for its limited partnership interests, which range from 0.1% to 16.1%, in PE Investments under the fair value option. The Company records equity in earnings for these investments based on a change in fair value of its share of projected future cash flows.

During the six months ended June 30, 2020, the Company received the final $1.8 million in proceeds related to the sale of its PE Investments.

Investments in Unconsolidated Ventures Held for Sale

During the six months ended June 30, 2020, the Company classified one investment in an unconsolidated venture it its Legacy, Non-Strategic Portfolio with a carrying value of $11.0 million as held for sale.