SEC Form 10-Q Summary
Filing entity: Colony Credit Real Estate, Inc. (NYSE: CLNC), not Brightspire Capital, Inc. The filing covers the quarter and six months ended June 30, 2018; financial statements are unaudited.
Business Context and Reporting Period
The company is an externally managed commercial real estate credit REIT focused on senior mortgage loans, mezzanine loans, preferred equity, CMBS and net-leased and other commercial real estate. It completed the Combination with NorthStar Real Estate Income Trust I and II and contributed Colony Capital portfolios on January 31, 2018. Class A shares began trading on February 1, 2018. Because the post-Combination company is substantially larger and has a different asset mix, comparisons with 2017 are not fully meaningful.
The company intends to qualify as a REIT beginning with the taxable year ending December 31, 2018 and is managed by a Colony Capital affiliate. It had no employees and owned 97.6% of its operating partnership at June 30, 2018.
Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net interest income | $30.1 million | $60.4 million |
| Property and other income | $40.4 million | $69.4 million |
| Total expenses | $71.6 million | $150.7 million |
| Net income | $15.9 million | $13.5 million |
| Net income attributable to common stockholders | $16.0 million | $11.3 million |
| Basic and diluted EPS | $0.12 | $0.09 |
| Core Earnings per share | $0.31 | $0.73 |
| Dividends declared per share | $0.44 | $0.73 |
Six-month net income declined 79.1% from $64.3 million in the predecessor period, while six-month net interest income was broadly stable. The filing does not provide a single consolidated GAAP revenue subtotal comparable to a conventional operating company; reported income was primarily generated by net interest income, property income and equity in earnings of unconsolidated ventures.
- Assets: $8.15 billion at June 30, 2018, compared with $1.84 billion at December 31, 2017, largely reflecting the Combination and consolidation of securitization trusts.
- Equity: $3.16 billion total equity, including $2.99 billion of stockholders’ equity.
- Cash: $155.4 million of cash and cash equivalents plus $116.5 million of restricted cash.
- Loan and preferred equity investments: $2.08 billion net, with an average maturity of approximately 3.5 years; weighted-average cash coupon was 6.7% and all-in levered yield was 7.4%.
- Portfolio: 154 investments with approximately $7.7 billion of book value; real estate assets represented approximately $1.6 billion and were 91.3% occupied.
- Debt: $1.81 billion of securitization bonds, mortgage and other notes, and credit facilities, excluding the $3.01 billion of mortgage obligations issued by consolidated securitization trusts.
- Leverage: debt-to-equity ratio of 0.5x, versus 0.3x at December 31, 2017.
- Liquidity: reported corporate liquidity of $530.4 million, consisting of cash of $155.4 million and $375.0 million of availability under the bank credit facility.
- Cash flows: operating activities provided $22.3 million; investing activities provided $103.9 million; financing activities provided $3.9 million. Cash increased $130.2 million during the six months.
Material Changes Versus the Prior Comparable Period
- Second-quarter property and other income increased to $40.4 million from $6.2 million, primarily because of real estate acquired in the Combination.
- Second-quarter net interest income decreased 3.6% to $30.1 million as higher securitization-trust income was offset by higher financing costs and changes in the predecessor portfolio.
- Six-month transaction, investment and servicing expense increased to $34.6 million from $1.4 million, including $32.5 million of Combination-related costs.
- Management fee expense was $19.8 million for the six months; no comparable fee was recorded in 2017 because the management agreement began January 31, 2018.
- Depreciation and amortization rose to $42.2 million from $5.0 million, and property operating expense rose to $28.0 million from $3.5 million, primarily due to acquired real estate.
- The company issued approximately 82.5 million Class A shares in the NorthStar mergers and had 83.5 million Class A and 44.4 million Class B-3 shares outstanding at June 30, 2018.
- Master repurchase capacity increased by $250 million during the quarter to approximately $2.0 billion; total credit facilities had $800.5 million outstanding.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No formal earnings or revenue guidance was provided. Management’s stated objective is to generate risk-adjusted returns primarily through cash distributions and preservation of invested capital, with secondary potential for capital appreciation.
- The company deployed $478.3 million of capital during the second quarter and continued to pursue loan, preferred equity, real estate and joint-venture investments.
- Four New York hospitality loans with a carrying value of approximately $261.1 million were on nonaccrual status after the borrower failed to make a March 2018 interest payment. The company recognized $1.0 million of cash-basis interest in the second quarter and recorded no additional loan-loss provision because management believed collateral value was sufficient.
- A previously modified troubled debt restructuring loan and three cross-defaulted loans had aggregate carrying value of approximately $137.1 million and were subject to a forbearance agreement expiring in September 2018.
- Subsequent to quarter-end, the company foreclosed on a Dallas hotel following a $75.0 million maturity default and stated it did not expect a loss.
- Subsequent events included a $326.8 million purchase of a fully leased Norwegian office campus, assumption of $197.7 million of fixed-rate financing, and a commitment of up to $69.9 million to an Ireland development joint venture.
- Fair-value and credit risk remain significant. The company recorded a $2.2 million realized loss and a $4.2 million net unrealized gain on mortgage loans and obligations held in securitization trusts during the six months. The filing states that a hypothetical 100-basis-point increase in the applicable benchmark would increase annual loan-portfolio interest income, net of interest expense, by approximately $9.3 million.
- Key risks include interest-rate, prepayment, extension, borrower credit, commercial real estate valuation, capital-markets and financing risks; dependence on the external manager; potential inability to realize Combination synergies; REIT qualification; and Investment Company Act compliance.
- At June 30, 2018, unfunded lending commitments were approximately $146.7 million, and contractual obligations totaled approximately $2.32 billion including debt, ground leases and lending commitments.
- The company reported compliance with financial covenants under its bank and master repurchase facilities and stated that disclosure controls were effective.
Investor Verification Checklist
- Verify the filing identity: the source is for Colony Credit Real Estate, Inc., whereas the request metadata names Brightspire Capital, Inc.
- Reconcile post-Combination results with pro forma information rather than relying solely on predecessor-period comparisons.
- Review the credit status, collateral values and resolution prospects for the New York hospitality loans and other impaired or past-due exposures.
- Assess liquidity against near-term maturities, including credit-facility and secured-debt payments, margin requirements and $146.7 million of unfunded lending commitments.
- Evaluate sensitivity to LIBOR and other interest-rate changes, refinancing risk and repurchase-facility availability.
- Review related-party investments, manager fees, expense reimbursements and the external-management structure.
- Confirm the sustainability of the $0.145 monthly dividend and its relationship to GAAP earnings, Core Earnings and available cash.
- Assess fair-value assumptions for Level 3 investments and consolidated securitization trusts, including the impact of changes in expected cash flows and discount rates.