Business Context and Reporting Period
The filing is Colony Credit Real Estate, Inc.’s unaudited Form 10-Q for the three months ended March 31, 2020. The provided metadata identifies Brightspire Capital, Inc., but the filing text identifies the registrant as Colony Credit Real Estate, Inc. 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. Colony Capital affiliates owned approximately 36.5% of common equity on a fully diluted basis, and the company owned 97.7% of its operating partnership.
Results were materially affected by the emerging COVID-19 pandemic, although management stated that the first-quarter financial impact was not yet fully reflected and expected more pronounced effects beginning in the second quarter.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 / Prior Period |
|---|---|---|
| Net interest income | $27.9 million | $22.0 million |
| Property and other income | $61.9 million | $63.3 million |
| Total expenses | $145.8 million | $88.0 million |
| Provision for loan losses | $69.9 million | None reported |
| Unrealized loss on securitization-trust assets and liabilities | $19.5 million | $1.0 million unrealized gain |
| Net loss | $80.1 million | $15.0 million net income |
| Net loss attributable to common stockholders | $78.8 million | $14.9 million net income |
| Basic and diluted loss per share | $0.62 loss | $0.11 income |
| Operating cash flow | $57.2 million | $37.7 million |
| Investing cash flow | $275.4 million | $18.8 million |
| Financing cash flow | $26.5 million | $46.6 million used |
| Cash, cash equivalents and restricted cash at period end | $553.4 million | $197.4 million |
At March 31, 2020, total assets were $7.19 billion, total liabilities were $5.22 billion and total equity was $1.97 billion. Stockholders’ equity was $1.91 billion, down from $2.12 billion at December 31, 2019, primarily reflecting the quarterly loss, the CECL adoption adjustment and other comprehensive losses. The debt-to-equity ratio was 1.5x versus 1.4x at year-end 2019.
- Loans and preferred equity held for investment, net declined to $2.35 billion from $2.58 billion at December 31, 2019. The balance included a $52.2 million allowance for loan losses, compared with $272.6 million at year-end after transfers of impaired assets to held-for-sale classifications.
- Real estate securities declined to $179.6 million from $252.8 million and recorded a $75.0 million unrealized loss in other comprehensive income.
- Total credit facilities were $1.26 billion, mortgage and other notes payable were $1.15 billion, and securitization bonds payable were $833.7 million.
- Unfunded lending commitments totaled $236.7 million, with an additional $32.2 million commitment to an unconsolidated investment venture.
- The company paid $39.5 million of common stock and noncontrolling-interest distributions during the quarter and declared monthly common dividends totaling $0.30 per share. The monthly dividend was suspended beginning with the period ending April 30, 2020.
Material Changes Versus the Prior Comparable Period
- Net income attributable to common stockholders changed from $14.9 million of income to $78.8 million of loss, driven primarily by loan-loss provisions, fair-value losses and derivative losses.
- Net interest income increased 26.9% to $27.9 million, reflecting growth in loan interest income and lower interest expense on securitization obligations, partly offset by the 2019 deconsolidation of a securitization trust.
- Property and other income decreased 2.2%, while hotel operating income fell materially following asset sales and the early effects of COVID-19.
- The company recorded $69.9 million of loan-loss provision, including $39.1 million related to hospitality loans, $29.0 million from the CECL probability-of-default/loss-given-default model and $1.8 million related to discounted loan payoffs.
- CECL adoption on January 1, 2020 reduced accumulated deficit by $23.2 million, including a $21.1 million reserve on loans and a $2.1 million reserve for other liabilities.
- Other comprehensive loss was $72.7 million, compared with $13.8 million of other comprehensive income in the prior year, principally because of CMBS valuation losses and foreign-currency translation losses.
- Cash increased substantially because the company drew approximately $226.5 million on its bank facility as a precautionary liquidity measure and generated proceeds from asset sales and repayments.
- The company sold six real estate properties for gross proceeds of $172.6 million and classified additional legacy assets as held for sale.
Guidance, Outlook, Commentary and Risks
Management provided no quantitative earnings guidance. It stated that cash preservation, liquidity and portfolio management were its primary priorities and that no new investments had been closed in 2020 through the filing date.
- COVID-19 is expected to produce more material effects in future periods, particularly through lower hotel and retail cash flows, borrower defaults, rent deferrals, reduced property values, impairment charges and increased margin calls.
- Core Portfolio average loan risk ranking increased to 3.8 from 3.1, with 33 loans totaling approximately $1.7 billion moving from risk ranking 3 to 4. Approximately 69.1% of Core Portfolio loan and preferred-equity exposure was ranked 4 and 6.6% was ranked 5.
- April collections were 99.0% for Core Portfolio interest, 94.8% for Core Portfolio net leased rents and 79.9% for legacy-portfolio rents. Management cautioned that these early collection levels may not predict future performance.
- On April 30, 2020, the company funded its $12.9 million share of a $34.7 million protective advance for a Los Angeles mixed-use development. It may need to fund approximately $2.5 million more and had $32.2 million of remaining commitment. Further cost overruns, delays or weak hospitality, retail or condominium demand could impair the investment.
- On April 22, 2020, the company completed a discounted payoff of four New York hospitality loans after recording a $36.8 million first-quarter provision.
- In April 2020, the company unwound a portion of its interest-rate swaps and expected to recognize an approximately $16.4 million loss in the second quarter. This reduced a source of protection against interest-rate-related margin calls.
- On May 6, 2020, the bank facility was amended to reduce commitments from $560 million to $450 million, reduce the minimum tangible net worth covenant from $2.105 billion to $1.5 billion, restrict dividends and stock repurchases, reduce borrowing-base availability and focus new investments on senior mortgages. Similar tangible-net-worth covenant reductions were made to the master repurchase facilities on May 7.
- CMBS facilities were consolidated with one counterparty, paid down by $73.9 million and reduced to a 62% blended advance rate; $123.5 million remained outstanding as of May 7, 2020.
- Key risks include borrower and tenant defaults, hotel and retail concentration, asset valuation uncertainty, short-term repurchase financing, margin calls, covenant compliance, refinancing risk, foreign-currency exposure, interest-rate exposure and dependence on the external manager.
Most Important Facts to Verify
- Confirm the company identity and whether this Colony Credit filing corresponds to the requested Brightspire Capital entity.
- Review subsequent-quarter disclosures for additional CECL provisions, impairments, nonaccrual loans, borrower forbearances and realized losses.
- Verify liquidity after the May 2020 facility amendments, including actual cash, borrowing-base availability, margin calls and covenant compliance.
- Assess the performance and funding requirements of the Los Angeles mixed-use project and the Dublin predevelopment loan.
- Track whether the suspended dividend was reinstated and whether REIT distribution requirements affected future distributions.
- Reconcile reported Core Earnings of $46.2 million, or $0.35 per share, with the $78.8 million GAAP loss and evaluate the company’s non-GAAP adjustments.
- Review the maturity schedule, especially credit-facility obligations due in 2020 and 2021 and the ability to exercise available extensions.