Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2019. The filing identifies the registrant as Colony Credit Real Estate, Inc. (NYSE: CLNC), not Brightspire Capital, Inc. The company is an externally managed commercial real estate credit REIT focused on senior mortgage loans, mezzanine loans, preferred equity, CMBS and net-leased real estate. It owns 97.7% of its operating partnership and is managed by a Colony Capital affiliate.
Comparisons with 2018 may not be fully meaningful because the January 31, 2018 Combination with NorthStar I and NorthStar II materially changed the company’s asset base and operating structure.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net interest income | $23.9 million, down 20.6% | $45.9 million, down 24.1% |
| Property and other income | $65.2 million, up 61.5% | $128.5 million, up 85.1% |
| Total expenses | $212.1 million, up 196.1% | $300.1 million, up 99.1% |
| Net income (loss) | $(110.8) million | $(95.8) million |
| Loss attributable to common stockholders | $(107.3) million | $(92.4) million |
| Basic and diluted EPS | $(0.84) | $(0.73) |
| Core Earnings, non-GAAP | $36.3 million; $0.28 per share | $48.1 million; $0.37 per share |
| Cash flow from operating activities | $63.1 million for the six months |
The loss was driven primarily by a $110.3 million provision for loan losses, a $10.1 million operating real estate impairment, $11.1 million of other net losses for the six months, and higher financing and property costs. The filing does not provide a conventional consolidated operating margin that would be directly comparable across periods.
Balance Sheet, Debt and Liquidity
- Total assets were $9.04 billion at June 30, 2019, compared with $8.66 billion at December 31, 2018.
- Total equity was $2.66 billion, including $2.53 billion attributable to stockholders; accumulated deficit was $397.4 million.
- Cash and cash equivalents were $59.8 million, with restricted cash of $114.1 million.
- Loans and preferred equity held for investment, net, increased to $2.40 billion from $2.02 billion. The allowance for loan losses increased to $172.9 million from $109.3 million.
- Total debt carrying value was approximately $3.09 billion, consisting of $1.26 billion of mortgage and other notes, $1.81 billion of credit facilities and $23.4 million of securitization bonds.
- The debt-to-equity ratio increased to 1.1x from 0.9x. Corporate liquidity was reported at $398.3 million, consisting of $59.8 million of cash and $338.5 million of available bank credit facility capacity.
- The company reported compliance with financial covenants under its bank credit facility and master repurchase facilities.
Material Changes Versus the Prior Comparable Period
- Net interest income declined despite higher interest income because financing costs increased substantially as debt-funded investments expanded.
- Property operating income rose due primarily to foreclosed properties and net lease portfolios acquired in 2018 and 2019.
- Loan-loss provisions increased from zero in the prior-year comparable period to $110.3 million, including $104.3 million related to four nonaccrual New York hospitality loans.
- Eleven operating real estate properties incurred a $10.1 million impairment, and $147.7 million of real estate assets were classified as held for sale.
- Transaction, investment and servicing expense fell to $1.6 million from $34.6 million because 2018 included substantial Combination-related costs.
- Six-month operating cash flow increased to $63.1 million from $28.9 million, while investing cash flow changed to an outflow of $421.3 million from an inflow of $171.9 million, reflecting higher loan originations and funding.
- Class B-3 common stock automatically converted into Class A common stock on February 1, 2019. Class A shares outstanding increased to approximately 128.5 million at June 30, 2019.
Guidance, Outlook, Risks and Unusual Items
No formal earnings or financial guidance is provided. Management stated that its strategy is to originate and selectively acquire CRE investments, use a diversified capital structure, and pursue cash distributions and preservation of invested capital. The company declared monthly dividends of $0.145 per share for July and August 2019, representing an annualized rate of $1.74 per share.
- The four New York hospitality loans remained on nonaccrual status with a combined carrying value before allowance of $258.1 million. Management expects repayment primarily through a sale of the underlying collateral, but revised recovery estimates downward because of deterioration in the New York hospitality market.
- The company recorded additional provisions on regional mall loans and recognized an $8.8 million proportionate impairment on a senior loan held through a joint venture.
- Subsequent to quarter-end, the company sold retained subordinate interests in one securitization trust for $33.4 million and expects to recognize an approximately $3.8 million gain in the third quarter.
- Subsequent to quarter-end, the company originated two senior loans totaling $114.5 million, one mezzanine loan totaling $31.9 million, and increased a joint-venture mezzanine commitment by $87.2 million.
- Unfunded lending and investment commitments totaled $237.6 million, including $226.1 million for loans and preferred equity and $11.4 million for equity-method investments.
- Key risks include credit deterioration, commercial real estate values, leverage and refinancing, interest-rate and LIBOR exposure, foreign currency movements, fair-value estimation, reliance on the external manager, REIT qualification, Investment Company Act status and the ability to realize expected Combination synergies.
- The company uses interest-rate and foreign-exchange derivatives. A hypothetical 100-basis-point increase in applicable benchmarks was estimated to increase annual net interest income by $5.6 million on the loan portfolio.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Colony Credit Real Estate, Inc., while the request metadata names Brightspire Capital, Inc.
- Review the quality and recovery assumptions for the New York hospitality loans and regional mall exposures, including the $172.9 million allowance for loan losses.
- Assess liquidity, borrowing-base availability, covenant compliance and near-term maturities, particularly credit-facility obligations due during the remainder of 2019 and 2021.
- Reconcile GAAP losses with non-GAAP Core Earnings and evaluate whether Core Earnings adequately reflects recurring credit costs and realized losses.
- Review the sustainability of the $0.145 monthly dividend in light of GAAP losses, leverage, required debt repayments and unfunded commitments.
- Evaluate the effect of held-for-sale classifications, pending asset sales and the expected securitization-trust gain on future earnings and asset composition.
- Consider the limitations of period-over-period comparisons resulting from the 2018 Combination and related accounting changes.