Business Context and Reporting Period
The filing is a Form 10-Q for Colony Credit Real Estate, Inc. (ticker: CLNC), the registrant identified in the source text; the request metadata refers to Brightspire Capital, Inc. The reporting period ended September 30, 2019. The Company is an externally managed commercial real estate credit REIT focused on senior and mezzanine loans, preferred equity, CMBS and net-leased real estate, primarily in the United States.
The Company reports a Core Portfolio and a Legacy, Non-Strategic Portfolio. The Legacy portfolio is being exited or reduced. Comparability with prior periods is limited because of the January 2018 Combination with NorthStar I and NorthStar II and related accounting changes. The Company realigned its reportable segments during the third quarter of 2019 and recast prior-period segment information.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | Comparable 2018 Period |
|---|---|---|---|
| Net interest income | $26.1 million | $72.0 million | $30.0 million; $90.4 million |
| Property and other income | $64.3 million | $192.8 million | $53.9 million; $122.9 million |
| Net loss | $(402.0) million | $(497.8) million | $(58.7) million; $(45.2) million |
| Loss attributable to common stockholders | $(356.0) million | $(448.5) million | $(52.7) million; $(41.4) million |
| Loss per common share | $(2.77) | $(3.51) | $(0.42); $(0.36) |
| Net cash provided by operating activities | Not separately provided | $113.2 million | $64.4 million |
- Total assets were $7.44 billion at September 30, 2019, down from $8.66 billion at December 31, 2018. Total equity was $2.21 billion, including $2.13 billion attributable to stockholders.
- Loans and preferred equity held for investment, net, increased to $2.52 billion from $2.02 billion. The carrying value included a $283.2 million allowance for loan losses, compared with $109.3 million at year-end 2018.
- Real estate, net, declined to $1.57 billion from $1.96 billion. Assets held for sale totaled $183.9 million.
- Cash and cash equivalents were $60.3 million, while restricted cash was $139.5 million. Total cash, cash equivalents and restricted cash were $199.9 million.
- Total secured debt, including mortgage and other notes and credit facilities, was $3.15 billion, compared with $2.54 billion at year-end 2018. The debt-to-equity ratio increased to 1.2x from 0.9x.
- Corporate liquidity comprised $60.3 million of cash and $401.5 million of availability under the bank credit facility, for total stated corporate liquidity of $461.8 million.
- Net cash used in investing activities was $459.2 million, principally reflecting $1.25 billion of loan originations, acquisitions and additional fundings, partly offset by loan repayments and distributions from unconsolidated ventures. Net cash provided by financing activities was $358.4 million.
- The Company declared quarterly dividends totaling $0.145 per share per month during the first nine months of 2019. Dividends paid on common stock were $167.5 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter net loss attributable to common stockholders increased to $356.0 million from $52.7 million; nine-month loss increased to $448.5 million from $41.4 million.
- The primary deterioration resulted from a $272.7 million third-quarter and $282.8 million nine-month impairment of operating real estate, compared with $29.4 million in each 2018 period.
- Provision for loan losses increased to $110.3 million for the quarter and $220.6 million for the nine months, compared with $35.1 million and $34.5 million, respectively, in 2018. The provisions primarily related to New York hospitality loans and retail-property loans.
- Net interest income declined 12.8% for the quarter and 20.4% for the nine months, despite growth in the loan portfolio, because financing costs increased and securitization-trust activity declined.
- Property and other income increased 19.3% for the quarter and 57.0% for the nine months, reflecting acquired and foreclosed real estate. Property operating expenses also increased materially.
- Core Portfolio net income declined to a $13.0 million loss in the quarter from $5.0 million of income, while the Legacy, Non-Strategic Portfolio generated a $389.0 million loss versus a $63.7 million loss. Management reported third-quarter Core Earnings of $44.7 million, or $0.34 per share, and Legacy, Non-Strategic Earnings of negative $120.3 million, or negative $0.91 per share. These are non-GAAP measures and are not substitutes for GAAP net income or operating cash flow.
- The Company sold its retained interests in one securitization trust for approximately $33.4 million in July 2019 and deconsolidated approximately $1.2 billion of related assets and liabilities.
Guidance, Outlook, Management Commentary, Risks and Unusual Items
- Management is pursuing a portfolio bifurcation plan focused on the Core Portfolio and the reduction or disposition of legacy assets. Several properties were classified as held for sale, and a hotel with an approximate $72 million book value was under contract for sale after quarter-end.
- After quarter-end, the Company completed a $840 million securitization of 21 senior loans at an 83.5% advance rate and a weighted average cost of funds of LIBOR plus 1.59%; it used proceeds to repay $770 million of master repurchase debt.
- The dividend policy was changed after quarter-end. The Company declared $0.10 monthly dividends for November and December 2019, compared with the prior $0.145 monthly rate, stating that the new dividend is intended to be covered by Core Earnings from the Core Portfolio.
- The Management Agreement was amended to exclude unrealized loan-loss provisions and real estate impairments from Core Earnings only if approved by a majority of independent directors. Management stated that this should reduce future management and incentive fees because of accumulated unrealized losses.
- Colony Capital submitted a non-binding proposal to explore internalizing management and transferring certain credit-management operations to the Company. No agreement was assured, and terms remained subject to negotiation and board approvals.
- Credit risks were concentrated in the Legacy portfolio, including four nonaccrual New York hospitality loans with a combined gross carrying value of approximately $258.1 million and several regional mall loans exposed to retail-market deterioration.
- The Company had $251.5 million of unfunded lending commitments for loans and preferred equity and $67.5 million of unfunded commitments to equity-method investments. Total contractual commitments, including debt, ground leases and lending commitments, were approximately $4.0 billion.
- Key risks include leverage and refinancing risk, floating-rate exposure, credit losses, real estate valuation uncertainty, retail and hospitality weakness, liquidity and asset-sale execution, foreign currency exposure, reliance on the external manager, and the ability to maintain REIT qualification and dividend coverage.
- The Company stated that it was in compliance with financial covenants and that no material legal proceedings were pending. Disclosure controls were assessed as effective.
Important Facts an Investor Should Verify
- Confirm that the filing relates to Colony Credit Real Estate, Inc. rather than Brightspire Capital, Inc., as the source text identifies Colony Credit as the registrant.
- Reconcile the sharp increase in provisions for loan losses and real estate impairments with collateral valuations, expected recovery assumptions and subsequent asset dispositions.
- Assess whether the lower dividend of $0.10 per share is sustainable from Core Portfolio earnings and how the revised Core Earnings definition affects management fees.
- Review near-term debt maturities, borrowing-base requirements, repurchase-facility terms and the Company’s ability to refinance or securitize loans.
- Evaluate the concentration of credit exposure in New York hospitality, regional malls and other legacy assets, including the $283.2 million allowance for loan losses.
- Track execution of the legacy-asset sale program, the $840 million securitization, the hotel sale and the potential management internalization.
- Distinguish non-GAAP Core Earnings from GAAP net income, cash flow and funds available for dividends.