What happened

Shares of Colony Capital, Inc. (NYSE:CLNY) are down 18.6% at 2 p.m. EDT on July 16 after falling as much as 20% earlier in trading. Today's sell-off came after the company issued a press release after market close yesterday, saying that it was proposing a private offering to raise $200 million, with the plan to use the proceeds to repurchase and repay 3.875% convertible senior notes that are due in 2021.

So what

It's a bit strange that shares would fall so sharply on the news that the company was lining up additional cash, particularly since the new debt would be due in 2025 and be used to repay debt that matures in 2021. The company has also halted its dividend for now, a prudent move considering many of its properties aren't even generating enough cash to meet loan obligations. 

Empty hotel lobby.

Empty hotels are a major problem for Colony Capital. Image source: Getty Images.

It's likely that the company's debt investments -- not debt it's taking on to repay other obligations -- are the bigger concern. Colony Capital reported in May that it was attempting to work with lenders in its hotel portfolio -- some of which were already in default -- and the risk of default and foreclosure is substantial. According to reports, the company is at risk of losing control of two hotel portfolios financed with commercial mortgage-backed securities, holding almost 140 properties with 14,987 combined rooms.

Now what

While Colony Capital, the business, is proving able to tap capital to address its corporate and subsidiary-level debt, it's proving less successful in renegotiating the debts that are secured by properties. The loss of properties to foreclosure destroys value for shareholders; both the loss of the book value of the property, and the loss of the cash flows those assets can generate during normal market environments. 

Hotels in particular are very exposed to the ongoing COVID-19 pandemic, and investors are clearly concerned about Colony Capital's hotels portfolio, which is on track to get much smaller with limited -- if any -- recourse for the company to recover anything. It looks like Colony Capital itself is likely to survive, but it's far less clear how much asset value it could lose during the downturn, so long as lenders don't play ball on renegotiating mortgage debt at the property level. 

With that said, it's probably best to keep it on your watch list for now, and let the worst of the downturn play out so we have a better idea how things will look on the other side before investing. Things could get much worse before they get better.