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Colony Credit Real Estate, Inc. (BRSP 0.48%)
Q4 2019 Earnings Call
Feb 27, 2020, 5:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Greetings, and welcome to the Colony Credit Real Estate, Inc. fourth quarter and full-year 2019 earnings conference call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Jason Parry, Investor Relations.

Jason Parry -- Investor Relations

Good afternoon, and welcome to Colony Credit Real estate, Inc. fourth quarter and full-year 2019 earnings conference call. We will refer to Colony Credit Real Estate, Inc. as CLNC, Colony Credit Real Estate, Colony Credit or the company throughout this call.

Speaking on the call today are the company's president and chief executive officer, Kevin Traenkle; Chief Financial Officer Neale Redington; and General Counsel David Palame; Chief Accounting Officer Frank Saracino is also on the line to answer questions. Before I hand the call over to management, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties could cause the company's business and financial results to differ materially.

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For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K and other forward-looking statements in the company's current and periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, February 27, 2020, and the company does not intend and undertakes no duty to update for future events or circumstances. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released this afternoon, is available on the company's website presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

And now I'd like to turn the call over to Kevin Traenkle, president and chief executive officer of Colony Credit Real Estate. Kevin?

Kevin Traenkle -- President and Chief Executive Officer

Thank you, Jason, and I want to thank everyone for joining today's conference call covering Colony Credit Real Estate 2019 fourth quarter and full-year results. But before we begin our official presentation, and now that the portfolio bifurcation plan has been successfully implemented, and the company is well positioned for growth, all of which you will hear about shortly, I wanted to announce that I will be stepping down from my position as the president and CEO of Colony Credit effective February 29. Andy Witt, Managing director and our chief operating officer of Global Credit at Colony Capital, has been appointed interim chief executive officer and president effective February 29. Over the last 12 years, Andy has played a pivotal role in building Colony Capital Credit business and has a deep understanding of our company.

With Andy's capable leadership, I am confident that the company is well positioned to continue executing on legacy nonstrategic asset resolutions and growing the company's core portfolio. With that, I'd like to now give a brief overview of the company's 2019 highlights, including an update on the portfolio bifurcation plan announced last quarter and then cover the key management priorities for the coming year. Neale Redington, our CFO, will then discuss the details of our fourth quarter and the full-year financial performance, including specifics on our deployment activity, investment portfolio, balance sheet and liquidity position. The fourth quarter wrapped up a productive and pivotal year for Colony Credit Real Estate, where we made significant progress executing our strategic initiatives.

Most importantly, we announced a portfolio bifurcation plan in November, which was a major milestone in our overall business strategy and prioritize rotating out of our legacy nonstrategic investment in order to address the dislocation between our current trading price and net asset value of the portfolio and ultimately drive shareholder value. We are pleased with our early progress in the sales activity on the legacy nonstrategic, or LNS portfolio. We announced the portfolio bifurcation plan in November of last year. And as a reminder, this plan included a onetime separation of our balance sheet into, one, a $4.5 billion core portfolio; and two, a discrete 54 assets, $1 billion legacy nonstrategic portfolio, which consisted of operationally intensive owned real estate and all of our retail exposure and certain other legacy loans originated prior to the formation of CLNC, all of which are inconsistent with our go-forward core business, which will primarily focus on senior mortgage and mezzanine loans and net lease real estate.

Overall, I am pleased with the early success in executing the portfolio bifurcation plans. Since announcing the plan in November, we have built seven legacy nonstrategic assets for approximately $43 million of gross sale proceeds, representing approximately $10 million gain and a 29% premium to their GAAP net book value. In addition, six more assets are now under contract for approximately $126 million of gross sale proceeds which would provide an anticipated gain of approximately $27 million and a 58% premium to GAAP net book value. Furthermore, 27 assets with a GAAP net book value of $228 million are now listed for sale for our loans that are expected to pay off in the near future.

Altogether, this represents approximately 75% of the LNS portfolio that is resolved or in active phases of resolution. Our overarching objective is to liquidate the LNS portfolio in an orderly fashion and reinvest the resulting available proceeds to grow our core portfolio's undepreciated book value and the company's core earnings. As evidence of this, our core portfolio undepreciated book value per share increased from $13.96 in the third quarter to $14.40 in the fourth quarter, primarily as a result of the LNS sale proceeds being redeployed into core portfolio during the quarter. These recently completed sales, coupled with several in execution transactions, suggest that the book value of the LNS assets are supportable.

This also highlights our prudent approach at resolving these assets, where we remain highly focused on maximizing proceeds from all dispositions with no need or intention to buy or sell any asset. Turning to deployment. We remain very active in 2019 having committed over $1.6 billion of total capital across 27 investments, primarily in multifamily and office senior loans. Since inception in early 2018, we have committed approximately $3.8 billion of total capital across 65 investments to our core portfolio that are 100% performing and have a blended current ROE of 12%.

The successful deployment has helped us to achieve a 14% year-over-year increase in total company earnings and over a 20% increase in total investment assets since inception. Turning to our balance sheet improvement. We significantly improved our capital structure during the year, culminating with the successful $1 billion managed CLO execution in the fourth quarter. We were pleased with the closing of our first CLO, demonstrating the strength of our loan origination business, investor relationship and ability to access the capital markets.

The transaction accretively replaced $770 million of recourse repo debt with nonrecourse CLO financing at a lower cost of funds. In addition, we developed 17 new institutional investor relationships across six classes of offered notes. We believe the managed nature of the transaction exemplifies institutional investor confidence in the management team. Finally, we substantially reduced our risk profile and improved the earnings quality of our portfolio throughout the year through the resolution of approximately $350 million of asset sales, including $140 million of private equity secondary interest, $76 million of retail loan resolution, $40 million of CMBS B-piece sales and approximately $100 million of other non-core asset sales.

In 2019, we concentrated our origination efforts, primarily on senior mortgages, which represented over 87% of our total deployment. Approximately 78% of our total deployment occurred in multifamily and office asset classes with a focus on markets with strong fundamentals and demographics. We expect to continue this investment pattern in 2020, focusing our investment activity in coastal markets as well as other markets, demonstrating a combination of job growth, affordability, and positive in migration. With that, I'd like to switch gears to discuss the key management priorities as we head into 2020.

First, we'll continue to work with a sense of urgency to prudently resolve assets in the LNS portfolio. Thanks to efforts in the fourth quarter, we have momentum heading into 2020 with approximately 75% of the LNS portfolio either sold, under contract or listed for sale. More importantly, these proceeds will provide an engine of growth for our core business. Next, we are highly focused on the deployment of our liquidity into targeted asset classes to grow our core portfolio.

We remain confident in our ability to continue to source transactions with an investment level return on equity in the low double digits. Third, we will continue to enhance our capital structure and liquidity position, and we'll continue to explore accretive debt alternatives while maintaining prudent leverage ratio. And finally, with a simplified business plan, and good progress on our LNS sales, we will look to significantly increase our investor visibility with goals of expanding institutional ownership and equity research analyst coverage of CLNC. Ultimately, I'm confident in our ability to execute our priorities in 2020 and expect the results of these initiatives will allow us to close the gap between the current share price and book value and position Colony Credit Real Estate for long-term success.

With that, I'll now turn the call over to Neale Redington for a more detailed explanation of our fourth quarter and full-year operational and financial results.

Neale Redington -- Chief Financial Officer

Thank you, Kevin, and good afternoon, everyone. Before discussing our fourth quarter and full financial year results, I want to draw your attention to our supplemental financial report, which is available on our website. It includes additional information on each of our business segments in addition to description of how we define core earnings. This definition will exclude from core earnings, gains, losses and impairments of real estate, including unconsolidated joint ventures and preferred equity investments but will include provision for loan losses.

Further, core earnings will come solely from our core portfolio, while we will report legacy nonstrategic earnings separately. Similar to last quarter, we are providing asset-by-asset details for all of our holdings in our supplemental financial report as well as Form 10-K, which will be filed shortly. We believe this added transparency will help investors and research analysts better understand our company and the value of our assets given the additional data it provides on our two business segments. We believe delineating our investments between core and legacy nonstrategic portfolios creates clarity around the core mission.

Further, we believe it will facilitate a greater understanding of our company, and the value embedded within its assets. For the fourth quarter, CLNC's core portfolio reported GAAP net income of $30.3 million or $0.23 per share, and core earnings of $43 million or $0.33 per share. In addition, the company's legacy nonstrategic portfolio generated GAAP net income of $3.7 million or $0.03 per share and LNS earnings were $5.3 million or $0.04 per share. For the fiscal year 2019, we reported core portfolio GAAP net income of $75.4 million or $0.57 per share, and core earnings of $169 million or $1.29 per share.

During the fourth quarter, we paid a monthly cash dividend of $0.145 common share for the month of October and a monthly cash dividend of $0.10 per common share for the months of November and December. In addition, we have declared a $0.10 per share monthly cash dividend for the month of January and February of this year. Our annual dividend per share of $1.20 is more than fully covered at 108% of full-year 2019 core earnings. Turning now to deployment.

We allocated and initially funded $123 million and $77 million of capital, respectively, during the fourth quarter. The deployment activity consisted of one senior loan and one mezzanine loan, both within the United States and with an expected blended return on equity of over 12%. These two investments are collateralized by multi-family and mixed-use properties. For the fiscal year 2019, we successfully allocated and initially funded approximately $1.6 billion and $1.2 billion of capital, respectively, across 27 investments to our core portfolio.

These investments carry an expected blended return on equity of over 12%. And the mix of these allocations is approximately 87% senior loans, 12% mezzanine loans and 1% other. All of these investments are in the U.S., with a little over 80% split about evenly between the west and Northeast areas of the country. Property type mix is approximately 39% multifamily, 39% office, 12% other mixed-use, 7% industrial and 3% hotel.

Overall, the thoughtfully diversified and prudent deployment activity for the year was in line with our overall investment strategy. Additional portfolio activities for the quarter included one full loan repayment for $17 million of gross proceeds, along with four partial repayments totaling $27 million of gross proceeds. There are a total of six sales during the quarter, five LNS portfolio sales, a $22 million of net proceeds at a 63% premium to GAAP net book value and one core portfolio of hotel assets for $74 million, which was under contract during the third quarter and sold for a slight premium to GAAP net book value.Turning to our core portfolio. As Kevin mentioned, undepreciated book value stands at approximately $1.9 billion or $14.40 per share, up from $13.96 per share in the third quarter.

Our loan book continues to be the largest segment with a carrying value of approximately $2.9 billion at year-end. The blended unlevered yield on our loan book is approximately 7.7%, with an average loan size of $52 million. Furthermore, the loan portfolio remains well diversified in terms of size, collateral type and geography. Moving to CRE debt securities within our core portfolio.

Our portfolio has a carrying value of $363 million at quarter end and predominantly consists of investment-grade rated securities. As we've mentioned before, our CRE debt securities portfolio has an attractive yield and provides the company with additional liquidity options within our investment portfolio, as well as access to efficient borrowing alternatives. Also within our core portfolio, net lease real estate comprises 25% of the core portfolio and had a carrying value of $1.1 billion at the end of the fourth quarter. This portfolio consists of industrial and office properties, with a weighted average lease term of 9.4 years.

The net lease assets are core to our investment strategy, due to the long-term stable cash flows they provide in addition for the potential of a capital appreciation. As part of our enhanced disclosures, which were implemented in the third quarter, we introduced risk ratings on all loans within our core portfolio in order to provide more detail regarding the credit and risk profile of our core business. Our overall risk rating at year-end remains at 3.1, consistent with prior quarter with one loan moving from a three to four rating. That loan is a mixed-use mezzanine loan located in San Rafael, California.

And the increase was based on a change in the borrowers' exit strategy from individual residential home sales to a bulk sale approach. The borrower is still planning to repay Colony at maturity in June 2020. And we will continue to monitor this position, and we'll update you in future quarters. Turning to our legacy nonstrategic portfolio.

This segment is predominantly composed of operationally intensive owned real estate, all retail and certain other legacy loans originated prior to the formation of CLNC. Total GAAP net book value for this portfolio stands at approximately $359 million or $2.73 per share. As Kevin mentioned earlier, we closed a $1 billion managed commercial real estate collateralized loan obligation during the fourth quarter, which accretively financed interest in 21 floating rate mortgage loan secured by 39 properties, with 83.5% initial advance rate at a weighted average coupon at issuance of LIBOR plus 1.59% before transaction costs. The loan collateral includes multifamily, office and hospitality properties across 10 states in the District of Columbia and features a 2-year reinvestment period.

The CRE, CLO bolstered the company's capital structure, improved the return on equity on our retained interests and is a direct result of the investor relationships we have fostered, our origination team's execution capabilities and capital markets capabilities. Moving to our balance sheet. Our total at-share assets stood at approximately $5.6 billion as of December 31, 2019. Our debt to assets ratio was 57% at the end of the quarter.

And our current liquidity stands at approximately $378 million between cash on hand and availability under our revolving credit facility. Lastly, I'd like to comment on the current expected credit losses, or CECL accounting standard, which was adopted by the company on January 1, 2020. Based on our portfolio size and composition, as of December 31, 2019, we expect to record a day one CECL reserve of approximately $23 million, which will have an approximately $0.18 impact to our January 1, 2020, book value per share. The CECL reserve will modulate in future periods through an adjustment to net income as our portfolio expands or contracts, the credit quality and risk attributes of our loans improve or decline, our overall market conditions strengthen or weaken.

We will continue to provide further disclosure of ongoing reserve impacts due to CECL in the Q1 2020 earnings conference call. In closing, 2019 was a transformational year for CLNC as we undertook significant actions to focus on our ongoing efforts on growing our core portfolio, while rationalizing assets within our legacy nonstrategic portfolio. The fourth-quarter results are a demonstration of the efficacy of our business strategy. Looking forward to 2020, we expect the core portfolio to see more stabilized performance with increased core earnings as a result of reinvesting capital from LNS resolutions into core assets.

Before handing our call over to our General Counsel, David Palame, I would like to thank Kevin, both personally and on behalf of the team for his leadership and friendship and to recognize his tireless efforts to bring our strategy to fruition over the last two years. Thank you, Kevin, and we wish you the best of luck. David?

David Palame -- General Counsel

Thank you, Neale. Before moving on to the Q&A portion of the call, I would like to discuss the special committee review process. As previously announced during the fourth quarter, Colony Credit Real Estate independent directors received the letter from Colony Capital, proposing to explore the possible internalization of the management of CLNC and the transfer of Colony Capital's credit management business to CLNC. In response, our board of directors formed a special committee, consisting exclusively of independent and disinterested directors to explore this internalization proposal as well as other strategic alternatives.

The special committee has engaged both an independent financial advisor and legal advisor to assist them in their review. As a further update, Colony Capital publicly reported today, that it plans to take actions necessary to enter into an agreement with CLNC and/or one or more third parties with respect to a disposition of Colony Capital's management agreement with CLNC, subject to the company's consent, whether in the form of an internalization of management, sale of Colony Capital's management agreement with CLNC or similar transaction, the effect of which is to dispose of Colony Capital's management agreement with CLNC. The scope of any such transition is focused on Colony Capital's management agreement with CLNC and not Colony Capital's private credit investment management platform and associated private credit interest. Please refer to our earnings release and soon to be filed 10-K for further disclosure regarding these matters.

With respect to the process, we will not be addressing any questions on these matters on the call or otherwise at this time. With that, we will open the line for questions limited only to our fourth quarter and full-year results. Operator?

Questions & Answers:


Thank you. Our question today comes from Randy Binner of B. Riley FBR. Please proceed with your question.

Randy Binner -- B. Riley FBR -- Analyst

Yes. Thank you. Just wanted to say, Kevin, it's been good to work with you and best to luck on your next professional endeavor.

Kevin Traenkle -- President and Chief Executive Officer

Thanks Randy.

Randy Binner -- B. Riley FBR -- Analyst

Yes, you bet. Well, I'm going to try to talk about just the fourth-quarter results. But I guess that the potential for a buyback is still listed in the press release, you didn't discuss it on the call, but I mean, how would you think of allocating capital to a buyback relative to other investment opportunities, considering you're trading at 70% all-in book and implying an earnings yield about buying back the stock, risk-free that, I think, rivals what you're doing in the portfolio? Can you kind of walk us through how you think of that capital allocation decision?

Kevin Traenkle -- President and Chief Executive Officer

So Randy, you're right, we did disclose that. So the board has authorized or extended the authorization for a buyback, and we have considered that in the past. And I think we've discussed that on calls previously in terms of comparing that to our investment opportunities. And we think that there is still some very compelling investment opportunities out there in terms of making loans and some good pipeline.

And beyond that, I would just say, because we're in the process, we do have a blackout. So it really hasn't been on the table because of that blackout.

Randy Binner -- B. Riley FBR -- Analyst

OK. And then I wanted to go back to the comments around sales proceeds in the legacy book and how, and I think you outlined this in the press release, too, that you're transacting and expected transaction above book value. But the $228 million you mentioned in the script, does -- is that simply just the real estate that you have all real estate available for sale in legacy? Or there's more for sale than that, correct?

Kevin Traenkle -- President and Chief Executive Officer

Yes. That's right, Randy. And perhaps it's helpful, right, the last page of the press release has a listing of the LNS resolutions. So we've got sold under contract and then there's the expected loan payable listed for sale.

So that's the $228 million, where you see the net carrying value is the combination of the expected loan payoff and listed for sale. And then there's another group that is preparing for sale. So not currently listed, and we'll be looking at in the future. But you could also see associated with that the gross carrying value.

So we've described that net of any associated debt.

Randy Binner -- B. Riley FBR -- Analyst

Understood. OK, that's helpful. And then the fourth quarter, the macroeconomic environment for commercial real estate was supportive, and there's been a little bit of a change in the market expectation for risk here this week. Are you seeing anything different in your negotiations or day-to-day activities in light of what's going on in the broader market?

Kevin Traenkle -- President and Chief Executive Officer

Well, as you say, it's really been over the last this last week where we've seen a heightened view on the risk of coronavirus and perhaps other topics, but mainly coronavirus. We are monitoring that in terms of day-to-day conversations, haven't really had a substantial shift over the last couple of days with potential borrowers. But in terms of our overall business approach, we're monitoring this very carefully. We're obviously focused on our exposure to potential in this area, which would probably be around the hospitality industry, about 14% of our book is focused in that area.

But as I think we've described to you in the past with our core loan book, we have very strong sponsors involved in those deals, and we have a decent amount of equity subordination in those deals. So we feel comfortable in terms of potential to withstand some blips that may come through this. Other sides of it to think about just longer term are — and just what happens to the economy, which then has knock on impacts on interest rates, obviously. So we're thinking about that, but I think still a little too early to change our strategy around it.

Randy Binner -- B. Riley FBR -- Analyst

Right. And then the last question is just kind of broader, the property and other income line was significantly better than arm OP. Was there anything unusually good in that line in the quarter?

Kevin Traenkle -- President and Chief Executive Officer

I don't think so. We can double check that, and we do have our 10-K release coming out, which will have sort of MD&A explanations there, Randy, but we can and see if there's any better explanation for movements, but I think it was consistent with what we'd anticipated.


[Operator signoff]

Duration: 31 minutes

Call participants:

Jason Parry -- Investor Relations

Kevin Traenkle -- President and Chief Executive Officer

Neale Redington -- Chief Financial Officer

David Palame -- General Counsel

Randy Binner -- B. Riley FBR -- Analyst

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