Business Context and Reporting Period
The filing is Colony Credit Real Estate, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2021. The request metadata identifies Brightspire Capital, Inc.; however, the filing text identifies the registrant as Colony Credit Real Estate, Inc. (NYSE: CLNC). The company is a commercial real estate mortgage REIT focused primarily on senior mortgage loans, mezzanine loans, preferred equity, net-leased properties and CRE debt securities.
The company reported through four segments: senior and mezzanine loans and preferred equity; net leased and other real estate; CRE debt securities; and corporate. The former Legacy, Non-Strategic Portfolio segment was dissolved beginning in the first quarter of 2021.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net interest income | $24.2 million | $27.9 million |
| Property and other income | $25.8 million | $61.9 million |
| Total expenses | $160.8 million | $145.8 million |
| Provision for loan losses | $3.2 million | $69.9 million |
| Net loss | $94.5 million | $80.1 million |
| Net loss attributable to common stockholders | $92.3 million | $78.8 million |
| Basic and diluted loss per share | $0.71 | $0.62 |
| Distributable Earnings | $13.8 million, or $0.10 per share | Comparable value not provided in the filing excerpt |
| Net cash provided by operating activities | $1.7 million | $57.2 million |
Net loss included $109.2 million of restructuring charges related primarily to the company’s management internalization. Excluding this and other specified adjustments, Distributable Earnings were $13.8 million, or $0.10 per share.
Balance Sheet, Portfolio and Liquidity
- Total assets were $6.18 billion at March 31, 2021, compared with $6.21 billion at December 31, 2020.
- Cash and cash equivalents were $430.3 million; cash, cash equivalents and restricted cash totaled $488.3 million.
- Loans and preferred equity held for investment, net increased to $2.58 billion from $2.18 billion, primarily reflecting $432.9 million of originations and additional funding.
- The allowance for loan losses was $40.8 million. Including the reserve for unfunded commitments, total CECL reserves were approximately $41.7 million, or 1.5% of aggregate loan commitments.
- Total equity was $1.84 billion, including $1.56 billion of stockholders’ equity. Stockholders’ equity declined from $1.67 billion at year-end 2020.
- Debt consisted primarily of $835.7 million of securitization bonds, $773.7 million of mortgage and other notes payable, and $787.9 million of credit facilities. Debt-to-equity was 1.1x, compared with 1.0x at December 31, 2020.
- At March 31, 2021, the company had approximately $3.5 billion of portfolio book value at its share, comprising 86 investments. The loan portfolio had a weighted-average cash coupon of 4.5% and all-in unlevered yield of 5.3%.
- The net leased and other real estate portfolio had approximately $699.0 million of book value at the company’s share, was 94.0% occupied and generated approximately $12.2 million of first-quarter NOI.
- Cash flows from investing activities were negative $38.3 million, reflecting $432.9 million of loan originations and funding, substantially offset by $332.0 million of real estate sale proceeds.
- As of the filing date, management reported approximately $443 million of liquidity, consisting of $330 million of cash and $113 million available under the Bank Credit Facility.
Material Changes Versus Comparable Periods
- Net interest income declined 13.0% year over year, primarily because of loan repayments and sales, reduced CRE securities income and the placement of securities on cost-recovery status.
- Property and other income declined 58.4%, primarily because of real estate dispositions during 2020 and the January 2021 sale of an industrial portfolio.
- Administrative expense increased 79.0%, driven largely by higher equity-based compensation and employee compensation.
- Provision for loan losses fell sharply from $69.9 million to $3.2 million, although the company continued to increase CECL reserves during the quarter.
- Other income improved because the company recorded an $11.8 million gain on the sale of an industrial portfolio and an $8.6 million unrealized gain on consolidated securitization trust assets and liabilities, compared with significant losses in the prior-year quarter.
- Operating cash flow declined by $55.5 million year over year to $1.7 million, principally due to lower property and interest income.
- The company originated 19 senior mortgage loans with total commitments of $583.9 million during the quarter.
Guidance, Outlook, Risks and Unusual Items
Management Internalization
On April 30, 2021, the company completed the internalization of management and operating functions and terminated its external management agreement with CLNC Manager, LLC. It paid a one-time termination fee of $102.3 million and recorded total restructuring charges of $109.2 million in the first quarter. Management expects future savings from eliminating base management and incentive fees but will assume general and administrative costs directly.
Portfolio and Credit Risks
- COVID-19 continued to affect hospitality, office, retail and development assets, with risks to borrower payments, tenant rents, property values, liquidity and financing covenants.
- One San Jose hotel senior loan and preferred equity investment was placed on nonaccrual status after the borrower closed the hotel and filed for Chapter 11 bankruptcy. The company is the sole senior secured creditor and entered into a restructuring support agreement.
- Seven investments were identified as nonaccrual in the asset-level portfolio disclosure, including the San Jose hotel, Los Angeles mixed-use project, Dublin Project Dockland and other mixed-use or hotel investments. The filing’s narrative elsewhere refers to five loans on nonaccrual status; investors should reconcile this apparent inconsistency.
- The Los Angeles mixed-use project remains a risk-five investment with a subordinate B-participation and exposure to construction costs, hotel opening and condominium sales.
- Project Dockland in Dublin remained on nonaccrual status, with development delays, unresolved permitting and leasing uncertainty. Its maturity was extended to June 2021.
- The company had $219.4 million of total unfunded commitments, including $203.0 million for senior loans, $6.5 million for mezzanine loans and $10.0 million for equity-method investments.
- A hypothetical 100-basis-point increase in applicable interest-rate benchmarks would reduce annual loan portfolio interest income, net of interest expense, by approximately $11.5 million.
- Foreign currency exposure included approximately $268.0 million of net investments in European subsidiaries; a 1% currency movement would affect translation gains or losses by approximately $2.7 million.
Subsequent Events
- The company sold retained subordinate interests in one securitization trust for $28.7 million and expects to recognize an approximately $8.8 million gain in the second quarter of 2021 while deconsolidating approximately $0.8 billion of related assets and liabilities.
- The company sold part of its West Mixed-use ownership interest for $3.5 million of gross proceeds and recognized a $3.8 million fair value loss adjustment.
- The second-quarter dividend was increased to $0.14 per share from the first-quarter dividend of $0.10 per share.
- Amendments to the Bank Credit Facility reduced lender commitments from $450 million to $300 million, reduced the minimum tangible net worth covenant from $1.5 billion to $1.35 billion following internalization, and increased borrowing availability to 100% of borrowing-base value.
- Several repurchase facility maturities were extended, including the Wells Fargo facility from November 2021 to May 2024, with two one-year extension options.
Most Important Facts to Verify
- Confirm the correct registrant: the supplied filing is for Colony Credit Real Estate, Inc., not Brightspire Capital, Inc.
- Reconcile the filing’s differing references to five versus seven nonaccrual investments and assess the related potential loss exposure.
- Evaluate whether projected internalization savings will offset the $102.3 million termination payment and newly assumed operating costs.
- Review liquidity after the internalization payment, the reduction in Bank Credit Facility commitments and upcoming debt and repurchase-facility maturities.
- Assess the adequacy of the $40.8 million loan-loss allowance and approximately $41.7 million total CECL reserve given the 3.6 average loan risk ranking and COVID-19 exposures.
- Monitor the San Jose hotel bankruptcy, Los Angeles mixed-use project, Project Dockland and other risk-five investments for additional impairments or funding requirements.
- Distinguish GAAP net loss from Distributable Earnings when evaluating dividend coverage; Distributable Earnings is a non-GAAP measure and is not a liquidity or operating cash-flow measure.