Business Context and Reporting Period
The filing is a Form 10-K for the fiscal year ended December 31, 2018, filed February 28, 2019. The source filing identifies the registrant as Colony Credit Real Estate, Inc. (NYSE: CLNC), not Brightspire Capital, Inc.; this entity discrepancy should be verified.
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 real estate. On January 31, 2018, it completed a major combination involving contributed Colony Capital assets and the mergers of NorthStar I and NorthStar II. The Class A common stock began trading on February 1, 2018. Because the 2017 financial information largely represents the accounting predecessor and the combined company includes NorthStar operations only from February 1, 2018, period-to-period comparisons are not fully comparable.
Financial Results and Key Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $477.0 million | $164.8 million |
| Net interest income | $115.5 million | $119.2 million |
| Property and other income | $182.0 million | $24.5 million |
| Net income attributable to common stockholders | $(168.5) million | $88.5 million |
| Basic and diluted EPS | $(1.41) | $1.86 |
| Core Earnings, non-GAAP | $86.1 million; $0.70 per share | $97.8 million; $2.06 per share |
| Cash flow from operating activities | $100.7 million | $107.0 million |
| Total assets | $8.66 billion | $1.84 billion |
| Total equity | $2.85 billion | $1.41 billion |
Fourth-quarter 2018 revenue was $136.5 million, while net income attributable to common stockholders was $(127.1) million, or $(1.00) per share. The fourth quarter included significant credit provisions and real estate impairment charges.
- Portfolio: 160 investments with approximately $8.36 billion of book value, or $8.21 billion at the company’s share.
- Loan portfolio: 76 investments with $2.76 billion of book value at the company’s share, a 6.6% weighted average cash coupon and an 8.3% weighted average all-in unlevered yield.
- CMBS: $371.2 million of book value and a 3.8% weighted average cash coupon.
- Owned real estate: $2.09 billion of book value, approximately 16.1 million square feet, 93% weighted average leased, and approximately $135.0 million of annualized base rent.
- Loan losses: $113.9 million of provision for loan losses, including $53.8 million on four New York hospitality loans, $36.8 million on four cross-collateralized loans, and $23.8 million on three regional mall loans.
- Real estate impairment: $31.8 million, including $29.4 million related to reduced holding periods, rent reductions and vacancies and $2.4 million related to an office portfolio sale.
- Debt-to-equity ratio: 0.9x at December 31, 2018, compared with 0.3x at December 31, 2017.
- Liquidity: $77.3 million of cash and cash equivalents and $230.0 million of bank facility availability, for $307.3 million of corporate liquidity.
Material Changes Versus the Prior Comparable Period
- The combination substantially expanded the balance sheet and operating platform, adding NorthStar I and NorthStar II assets and liabilities and resulting in $2.02 billion of merger consideration.
- 2018 gross capital allocation exceeded $2.0 billion across 37 investments, including $868.7 million of senior mortgage loan originations, net-lease acquisitions of $618.9 million and $231.7 million of commitments to two Irish development joint ventures.
- Interest income increased by $11.4 million, but net interest income declined by $3.7 million because interest expense increased by $26.1 million and securitization-trust financing costs were added.
- Property operating income increased by $154.6 million, primarily from acquired operating real estate, net-lease portfolios and foreclosed properties.
- Management fees of $43.2 million and combination-related transaction costs of $31.9 million were incurred in 2018; neither was incurred in 2017 in the same form.
- Equity in earnings of unconsolidated ventures declined modestly to $23.8 million, primarily because private equity investments recorded a $55.2 million unrealized loss.
- Net cash used in investing activities was $467.7 million, compared with $439.3 million of cash provided in 2017, reflecting substantial new loan, real estate and venture investments.
- Net cash provided by financing activities was $487.5 million, driven by new credit-facility and mortgage borrowings, partially offset by debt repayments and $189.8 million of distributions.
Guidance, Outlook, Commentary, Risks and Unusual Items
No formal earnings or revenue guidance is provided in the filing. Management describes a flexible strategy to originate and acquire CRE credit and real estate investments, use prudent leverage, and target cash distributions and preservation of invested capital. The company expects leverage generally not to exceed 3-to-1 debt-to-equity, although its governing documents do not impose a maximum leverage limit.
- The four New York hospitality loans were placed on non-accrual in March 2018. The borrower pursued a sale of the collateral, and the company recorded total 2018 loan-loss provisions of $53.8 million. Interest income on these loans was recognized on a cash basis.
- Four cross-collateralized loans associated with 28 properties were in default; foreclosure was completed in January 2019. The company recorded $36.8 million of provisions on the loans and an additional $5.1 million provision on a related expense receivable.
- Three regional mall loans faced potential anchor-tenant losses. The company recorded $23.8 million of provisions and commenced foreclosure proceedings on two loans.
- The company recorded a $55.2 million unrealized loss on private equity investments and a $43.1 million valuation allowance against deferred tax assets associated with those investments.
- The company declared 11 monthly dividends of $0.145 per share during 2018, or $1.45 per share paid for the year. The filing states that the tax characterization was $1.08 of ordinary income and $0.37 of return of capital. The annualized dividend rate was $1.74 per share.
- The company intends to qualify as a REIT beginning with the 2018 taxable year and must generally distribute at least 90% of REIT taxable income. Failure to meet REIT or Investment Company Act requirements could materially affect taxes, leverage, operations and distributions.
- The company is externally managed by a Colony Capital affiliate. 2018 base management fees were $43.2 million, expense reimbursements were $10.4 million, and no incentive fee was incurred.
- Key risks include credit losses, collateral and real estate valuation uncertainty, interest-rate and LIBOR transition risk, margin calls, refinancing risk, reliance on the external manager, conflicts of interest, illiquidity, tenant and borrower defaults, foreign currency exposure, and potential loss of REIT or Investment Company Act status.
Subsequent events included an increase in the corporate revolving credit facility to $560.0 million, the origination or refinancing of seven senior loans totaling $246.6 million, conversion of all Class B-3 shares into Class A shares on February 1, 2019, and extension of the $300.0 million stock repurchase authorization through March 31, 2020.
Most Important Facts for an Investor to Verify
- Confirm the issuer identity: the supplied filing is for Colony Credit Real Estate, Inc., whereas the request metadata names Brightspire Capital, Inc.
- Reconcile the reported 2018 loss with Core Earnings, including the effects of $113.9 million of loan-loss provisions, $31.8 million of real estate impairment, $55.2 million of private-equity valuation losses and $31.9 million of combination costs.
- Review the performance, collateral values and resolution status of the New York hospitality, cross-collateralized borrower and regional mall exposures.
- Assess liquidity against 2019 debt maturities, margin-call provisions, $156.4 million of contractual lending commitments, and total contractual obligations of approximately $3.31 billion.
- Verify the sustainability of the $0.145 monthly dividend relative to cash flow, REIT taxable income, debt covenants and return-of-capital components.
- Review leverage, financing haircuts, recourse provisions and refinancing exposure across the $1.37 billion of credit facilities and $1.17 billion of mortgage and other notes.
- Evaluate related-party transactions, management fees, expense reimbursements, co-investments and the terms and termination costs of the external management agreement.
- Review the company’s REIT qualification analysis, Investment Company Act exclusion, foreign tax exposures and the expected impact of the LIBOR transition and CECL adoption.