Business Context and Reporting Period
The filing is Colony Credit Real Estate, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company is a commercial real estate finance REIT focused primarily on CRE debt investments, net-leased properties and CMBS. It is externally managed by CLNC Manager, LLC, an affiliate of Colony Capital, Inc. The filing text does not identify the registrant as Brightspire Capital, Inc.; investors should verify the company identity and ticker before relying on this summary.
COVID-19 materially affected commercial real estate markets, borrowers, tenants, asset valuations, financing availability and liquidity during the reporting period.
Key Financial Metrics
| Metric | Q3 2020 | Nine months 2020 | Comparable period |
|---|---|---|---|
| Net interest income | $25.2 million | $78.0 million | $26.1 million and $72.0 million, respectively |
| Property and other income | $41.7 million | $139.0 million | $64.3 million and $192.8 million, respectively |
| Net income attributable to common stockholders | $5.0 million | $(300.8) million | $(356.0) million and $(448.5) million, respectively |
| EPS, basic and diluted | $0.04 | $(2.34) | $(2.77) and $(3.51), respectively |
| Net cash provided by operating activities | Not separately provided | $44.9 million | $113.2 million |
Q3 2020 consolidated net income was $6.4 million, compared with a $402.0 million loss in Q3 2019. Nine-month consolidated net loss was $314.3 million, compared with a $497.8 million loss in the prior-year period. Q3 Core Earnings, a non-GAAP measure, were $24.1 million, or $0.18 per share; Legacy, Non-Strategic Earnings were $15.6 million, or $0.12 per share.
Total assets were $6.5 billion at September 30, 2020, down from $7.4 billion at December 31, 2019. Stockholders’ equity was $1.7 billion, down from $2.1 billion. Cash and cash equivalents were $462.0 million, and total cash, cash equivalents and restricted cash were $535.0 million.
Loans and preferred equity held for investment, net declined to $2.1 billion from $2.6 billion. The allowance for loan losses declined to $40.5 million from $272.6 million, primarily reflecting loan sales, charge-offs and transfers to held-for-sale status, partially offset by CECL-related provisions.
Total debt carrying value was approximately $2.5 billion, consisting principally of $834.6 million of securitization bonds, $1.1 billion of mortgage and other notes, and $608.6 million of credit facilities. The debt-to-equity ratio, as defined by management, declined to 1.0x from 1.4x.
Net cash provided by investing activities was $831.3 million, primarily from loan repayments, real estate sales, loan sales and securities sales. Financing activities used $535.7 million, principally due to credit facility and mortgage repayments. Cash, cash equivalents and restricted cash increased by $339.4 million during the nine months.
Material Changes Versus the Prior Comparable Period
- Net interest income increased 8.5% for the first nine months, despite lower interest income, because financing costs declined and the portfolio was delevered.
- Property and other income declined 27.9% for the first nine months, reflecting asset sales, lower hotel revenue and the effects of COVID-19.
- Q3 2020 expenses were $70.6 million versus $473.5 million in Q3 2019; the prior-year period included substantially larger loan-loss and real estate impairment charges.
- Nine-month provision for loan losses was $80.3 million versus $220.6 million in 2019. The 2020 amount included CECL provisions and pandemic-related credit deterioration.
- Nine-month impairment of operating real estate declined to $33.5 million from $282.8 million, while nine-month equity losses from unconsolidated ventures were $69.9 million versus $18.0 million of earnings in 2019.
- CMBS holdings fell sharply to $36.3 million of available-for-sale securities from $252.8 million at year-end 2019. The company sold 32 CMBS securities for $118.5 million and recognized a net loss of $51.8 million.
- The company sold or received discounted payoffs on multiple loans and properties, including hospitality, regional mall and office exposures, to generate liquidity and reduce financing exposure.
- The monthly common-stock dividend was suspended beginning with the period ended April 30, 2020. The company declared $0.30 per share for the first quarter before the suspension.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expected to commence quarterly cash dividends in 2021, subject to taxable income, liquidity and market conditions. It also indicated that it was shifting gradually from balance-sheet defense toward selective new investments, primarily senior mortgage loans eligible for CLO securitization. No formal earnings guidance was provided.
- As of November 5, 2020, management reported approximately $438 million of cash and $171 million of available borrowing capacity under the bank facility.
- The $450 million bank credit facility was fully repaid during Q3. Its borrowing-base availability at September 30 was sufficient to support up to $195 million of borrowing, and the company reported compliance with financial covenants.
- Master repurchase facilities had $583.4 million outstanding against $2.25 billion of aggregate capacity. Temporary margin-call holidays and covenant modifications were scheduled to expire in Q4 2020 for certain facilities.
- A $200 million preferred financing from Goldman Sachs generated approximately $170 million of net liquidity after related paydowns, but resulted in a $69 million day-one reduction in stockholders’ equity and a substantial noncontrolling interest.
- At September 30, all loans and preferred equity held for investment were reported current on interest payments; however, several investments and joint-venture interests were on nonaccrual status. The portfolio’s average risk ranking was approximately 3.7 to 3.8 on a five-point scale, with 62% of core loan exposure rated risk category 4 and 7.6% rated category 5 at the company’s share.
- The Los Angeles mixed-use project remained on nonaccrual status after an $89.3 million proportionate fair-value loss in Q2. A third-party lender provided $275 million of new mezzanine financing, but further cost overruns, delays or weak hospitality, retail or condominium demand could impair the retained B-participation.
- The Dublin Project Dockland loan was placed on nonaccrual status. Its initial maturity was December 31, 2020, and management stated that the borrower was unlikely to satisfy automatic-extension conditions.
- COVID-19 continued to threaten hotel, retail, office and other real estate performance, rent collections, borrower payments, collateral values, covenant compliance, margin requirements and access to financing. Management reported 98% rent collection for the core net-leased portfolio but only 86.5% for the legacy portfolio from July through October 2020.
- A prospective sale of a core industrial asset was terminated after purchasers failed to satisfy conditions. The purchasers subsequently filed an action seeking specific performance; the company intended to seek dismissal, but the outcome was uncertain.
- Subsequent to quarter-end, the company sold additional properties and CMBS, originated a $22.8 million senior office loan, completed a $12.1 million discounted payoff of the corporate term loan and extended one repurchase facility to October 2021 while reducing its capacity.
Most Important Facts for Investors to Verify
- Confirm the registrant’s identity: the supplied filing is for Colony Credit Real Estate, Inc., ticker CLNC, not Brightspire Capital, Inc.
- Reconcile consolidated GAAP net income with Core Earnings and Legacy, Non-Strategic Earnings; the non-GAAP measures exclude significant valuation, impairment, depreciation and other items and are not measures of liquidity.
- Assess remaining exposure to hotels, retail, office, mezzanine and preferred-equity investments, including the Los Angeles mixed-use project and Dublin Project Dockland.
- Review loan-loss assumptions under CECL, the portfolio’s elevated risk rankings, nonaccrual assets and the potential for further impairments or charge-offs.
- Evaluate liquidity after asset sales, debt repayments, preferred financing obligations, margin-call holidays and upcoming facility maturities.
- Verify the status of the suspended dividend, the stated intention to resume quarterly dividends in 2021 and the company’s continuing REIT distribution requirements.
- Review the pending litigation concerning the terminated industrial-asset sale and the expiration or renewal of financing amendments and margin protections.