Business Context and Reporting Period
The provided filing is a Form 10-Q for the quarter ended March 31, 2019, filed May 9, 2019, by Colony Credit Real Estate, Inc. (NYSE: CLNC), not Brightspire Capital, Inc. The company is an externally managed commercial real estate credit REIT focused on CRE loans, preferred equity, CMBS and net-leased real estate. The company owned 97.7% of its operating partnership and had 128.5 million Class A shares outstanding as of May 7, 2019.
Comparisons with the first quarter of 2018 are not fully comparable because the January 31, 2018 Combination with NorthStar I, NorthStar II and contributed Colony Capital portfolios affected the reporting entity and operating scale.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net interest income | $22.0 million | $30.3 million |
| Property and other income | $63.3 million | $29.1 million |
| Total expenses | $88.0 million | $79.1 million |
| Equity in earnings of unconsolidated ventures | $21.3 million | $15.8 million |
| Net income | $15.0 million | $(2.4) million |
| Net income attributable to common stockholders | $14.9 million | $(4.7) million |
| Basic and diluted EPS | $0.11 | $(0.05) |
| Core earnings per share, non-GAAP | $0.09 | $0.44 |
| Net cash provided by operating activities | $37.7 million | $18.2 million |
Net income attributable to common stockholders improved to $14.9 million from a $4.7 million loss, while Core Earnings declined sharply to $11.8 million from $44.4 million, largely because the 2018 period included significant adjustments related to the Combination and 2019 included losses and other portfolio adjustments.
- Total assets were $8.70 billion at March 31, 2019, compared with $8.66 billion at December 31, 2018.
- Total equity was $2.82 billion, including $2.68 billion of stockholders’ equity.
- Cash and cash equivalents were $89.9 million; restricted cash was $107.4 million.
- Loans and preferred equity held for investment, net, were $2.00 billion, after a $77.6 million allowance for loan losses.
- Real estate, net, was $2.05 billion; the real estate portfolio was 92% leased or occupied based on the portfolio disclosures.
- Total debt carrying value was approximately $2.63 billion, consisting principally of $1.19 billion of mortgage and other notes, $1.39 billion of credit facilities and $53.7 million of securitization bonds.
- Reported debt-to-equity ratio was 0.9x, defined as secured debt less cash divided by total equity.
- Corporate liquidity was $435.9 million, comprising $89.9 million of cash and $346.0 million of bank credit facility availability.
Material Changes Versus the Prior Comparable Period
- Property operating income more than doubled to $63.1 million, primarily due to foreclosed properties, a full quarter of assets acquired in the Combination and net-lease portfolio acquisitions.
- Net interest income fell 27.6% because interest expense increased substantially as leverage and financing activity expanded, despite higher interest income.
- Transaction, investment and servicing expense fell to $0.5 million from $30.9 million, principally because Q1 2018 included $30.2 million of Combination-related costs.
- Management fees increased 42.0% to $11.4 million, and depreciation and amortization increased 47.2% to $27.7 million.
- Equity in earnings of unconsolidated ventures increased 35.0% to $21.3 million.
- Loans and preferred equity held for investment declined modestly from $2.02 billion to $2.00 billion after originations, repayments, foreclosures and allowance activity.
- The allowance for loan losses declined from $109.3 million to $77.6 million, primarily reflecting a $31.7 million charge-off associated with foreclosed loans.
- The Class B-3 common stock automatically converted into Class A common stock on February 1, 2019.
- The company originated or committed to originate eight senior mortgage loans totaling $277.9 million during the quarter and subsequently originated three additional senior loans totaling $206.0 million.
Guidance, Outlook, Commentary, Risks and Unusual Items
No formal earnings or financial guidance was provided. Management described a strategy of originating and selectively acquiring CRE debt investments, CMBS and net-leased properties while using secured financing, repurchase facilities and securitizations. The company declared monthly dividends of $0.145 per Class A share, equivalent to an annualized rate of $1.74 per share.
- Credit quality remains a key concern. Four New York hospitality loans with a combined carrying value before allowance of approximately $258.1 million were on nonaccrual status. Two regional mall loans with a combined unpaid principal balance of $36.9 million were subject to foreclosure proceedings.
- The company completed foreclosure proceedings on 28 properties in January 2019 and assumed management responsibilities for those assets.
- Unfunded lending commitments totaled $149.9 million for loans and preferred equity, plus $12.0 million for equity-method investments.
- Contractual obligations included approximately $3.15 billion of debt and ground-lease payments, excluding future lending commitments; total commitments including those lending commitments were approximately $3.31 billion.
- Interest-rate exposure is material. Management estimated that a 100-basis-point increase in applicable benchmarks would increase annual loan portfolio interest income, net of interest expense, by approximately $5.9 million.
- Foreign-currency exposure included approximately $311.4 million of net investments in European subsidiaries; a 1% currency movement was estimated to change translation gains or losses by approximately $3.1 million.
- The company recorded a $4.1 million unrealized loss on non-designated interest-rate swaps in other loss, net.
- Investments in unconsolidated ventures declined to $795.3 million from $903.0 million, reflecting sales and distributions. The company had contracts to sell $83.9 million of remaining private-equity investments at quarter-end.
- The company adopted new lease accounting guidance in 2019, recording approximately $17.0 million of right-of-use assets and $16.9 million of operating lease liabilities; management reported no material income-statement impact.
- Principal risks include CRE market deterioration, borrower and tenant defaults, leverage and refinancing risk, interest-rate and foreign-currency volatility, fair-value uncertainty, dependence on the external manager, related-party transactions, REIT qualification and maintaining an exemption from Investment Company Act registration.
- Management reported compliance with applicable credit facility and repurchase facility financial covenants and stated that no material legal proceedings were pending.
Important Facts for Investors to Verify
- Confirm the correct issuer: the supplied filing is for Colony Credit Real Estate, Inc., whereas the request identifies Brightspire Capital, Inc.
- Reconcile GAAP net income of $14.9 million with Core Earnings of $11.8 million and assess which measure best supports the $0.145 monthly dividend.
- Review the performance, collateral values and resolution strategy for the nonaccrual New York hospitality loans and regional mall exposures.
- Assess refinancing and margin-call risk given $2.63 billion of debt, floating-rate financing and substantial maturities or expected repayments in 2019 through 2023.
- Evaluate the quality and liquidity of Level 3 assets, including approximately $3.14 billion of securitization-trust mortgage loans and fair-value private-equity investments.
- Review unfunded commitments, foreclosure-related operating costs and the ability to fund distributions while maintaining REIT and covenant compliance.
- Examine external-management fees, related-party investments and the company’s dependence on Colony Capital and its affiliates.