Business Context and Reporting Period
This summary is based on the provided Form 10-Q for Colony Credit Real Estate, Inc., not Brightspire Capital, Inc. The report covers the quarter and nine months ended September 30, 2018, and was filed November 9, 2018. Colony Credit was a newly public commercial real estate credit REIT following the January 31, 2018 Combination with NorthStar Real Estate Income Trust I and II and contributed portfolios from Colony Capital affiliates. Its strategy focuses on CRE mortgage loans, mezzanine loans, preferred equity, CMBS and net-leased and other real estate. The company is externally managed and had no employees.
Comparisons with 2017 are not fully comparable because 2017 reflects the accounting predecessor and carved-out CLNY Investment Entities, while post-February 1, 2018 results include the acquired NorthStar businesses.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net interest income | $30.0 million in 2018 versus $31.7 million in 2017 | $90.4 million versus $92.0 million |
| Property and other income | $53.9 million versus $6.4 million | $122.9 million versus $17.9 million |
| Total expenses | $151.8 million versus $10.1 million | $302.0 million versus $28.8 million |
| Net income (loss) | $(58.7) million versus $31.5 million | $(45.2) million versus $95.8 million |
| Net loss attributable to common stockholders | $(52.7) million versus $21.3 million | $(41.4) million versus $67.1 million |
| EPS, basic and diluted | $(0.42) versus $0.45 | $(0.36) versus $1.41 |
| Core Earnings, non-GAAP | $38.8 million, or $0.30 per share | $123.5 million, or $1.02 per share |
- Total assets were $8.65 billion at September 30, 2018, compared with $1.84 billion at December 31, 2017. Total equity was $3.05 billion, including $2.89 billion attributable to stockholders.
- Cash and cash equivalents were $56.3 million, with restricted cash of $116.0 million. Management reported total corporate liquidity of $366.3 million, consisting of cash and $310.0 million of unused bank credit facility availability.
- Loans and preferred equity held for investment were $1.92 billion net, supported by a $35.1 million allowance for loan losses. The portfolio had a 6.4% weighted-average cash coupon and 7.8% all-in unlevered yield at the company’s share.
- Real estate, net, was $1.98 billion. The owned real estate portfolio had approximately 15.6 million square feet, 93.1% occupancy and $147.5 million of annualized base rent.
- Total debt carrying value was approximately $2.39 billion, comprising $1.28 billion of mortgage and other notes, $1.02 billion of credit facilities and $81.4 million of securitization bonds. The reported debt-to-equity ratio was 0.8x versus 0.3x at December 31, 2017.
- Operating cash flow was $59.9 million for the nine months, compared with $74.2 million in 2017. Investing cash flow was $(348.6) million, while financing cash flow was $319.9 million. Cash increased by $31.1 million to $56.3 million.
- The company declared dividends of $0.145 per share per month during the period, or $1.16 per share for the first nine months. October and November dividends were also declared at $0.145 per share monthly, implying a $1.74 annualized rate.
Material Changes Versus the Prior Comparable Period
- The Combination materially expanded the balance sheet and added operating real estate, CMBS, securitized assets and unconsolidated investments. 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 September 30.
- Property and other income increased substantially because of the acquired NorthStar real estate, two net-lease portfolio acquisitions and properties obtained through foreclosure.
- Net interest income declined modestly despite a larger portfolio because higher interest expense, including financing of consolidated securitization trusts, offset increased interest income.
- Expenses increased sharply, including $31.7 million of management fees, $38.2 million of transaction, investment and servicing expense, $72.7 million of depreciation and amortization, and $32.9 million of Combination-related transaction costs.
- The company recorded a $35.1 million third-quarter loan-loss provision related to four New York hospitality loans and a $29.4 million impairment of operating real estate. These items were excluded from Core Earnings.
- The company’s portfolio included three consolidated securitization trusts with $3.12 billion of mortgage loans and $2.98 billion of related mortgage obligations presented at fair value. The company’s retained subordinate interests were approximately $142.0 million.
Guidance, Outlook, Risks and Unusual Items
- No formal earnings guidance was provided in the filing. Management emphasized flexibility to originate, acquire, finance and actively manage CRE assets and to pursue restructuring, foreclosure or disposition strategies for underperforming investments.
- The four New York hospitality loans had a combined unpaid principal balance of approximately $260.2 million, were on nonaccrual status and were secured by the same collateral. Management was evaluating recapitalization and earlier collateral sale alternatives.
- A separate troubled-debt situation involved four cross-defaulted loans with aggregate carrying value of approximately $137.1 million of collateral. The company stated that the collateral was expected to cover the loan balances, but one previously current loan defaulted after September 30.
- Unfunded lending commitments totaled approximately $138.7 million, subject to borrower qualification conditions. Contractual obligations, including debt, estimated interest and ground leases, totaled approximately $3.04 billion, excluding lending commitments.
- Subsequent to quarter-end, the company sold its multi-tenant office portfolio for $177.0 million and repaid the related $97.4 million mortgage. It also entered into new repurchase facilities providing up to $500.0 million in aggregate capacity and announced additional investments, including a potential $162.4 million commitment to an Irish development joint venture.
- Principal risks include CRE market and valuation volatility, borrower and tenant credit losses, leverage and refinancing risk, interest-rate and LIBOR exposure, prepayment and extension risk, foreign currency exposure, dependence on the external manager, related-party transactions, and the ability to maintain REIT and Investment Company Act compliance.
- The company’s controls and procedures were deemed effective as of September 30, 2018, and management reported no material changes in internal control over financial reporting.
Most Important Facts for Investors to Verify
- Confirm the registrant identity: the provided filing is for Colony Credit Real Estate, Inc., ticker CLNC, rather than Brightspire Capital, Inc.
- Assess the credit outlook for the four New York hospitality loans and the adequacy of the $35.1 million allowance relative to collateral values and potential resolution proceeds.
- Reconcile GAAP losses with Core Earnings and evaluate whether recurring cash earnings support the $0.145 monthly dividend.
- Review leverage, borrowing-base requirements, repurchase-facility maturities and covenant compliance, particularly the $49.5 million facility maturing in 2019 and other near-term obligations.
- Evaluate the effect of the Combination and acquisition accounting on period-over-period comparisons, asset values, depreciation, transaction costs and noncontrolling interests.
- Review fair-value assumptions for Level 3 investments, consolidated securitization trusts and impaired real estate, as changes in discount rates, cash flows or capitalization rates could materially affect reported results.
- Monitor foreign investments and hedging arrangements, including approximately $173.2 million of European net investments and related currency risk.