Colony Credit Real Estate, Inc.
Q1 2021 Earnings Call Transcript

Published: 5 May 2021

[Operator:]

Greetings. Welcome to the Colony Credit Real Estate Incorporated First Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Palamé, General Counsel. Thank you, David. You may begin.

[David Palamé:]

Good afternoon, and welcome to Colony Credit Real Estate, Inc.'s first quarter and full year 2021 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, Mike Mazzei; Chief Operating Officer, Andy Witt; and Chief Financial Officer, Frank Saracino.

[Mike Mazzei:]

Thank you, David. Welcome to our first quarter earnings call. On behalf of the CLNC team, I would like to start by wishing everyone well and I thank you for joining us today. We are off to a very productive start in 2021 and we are incredibly excited about embarking on a new chapter for Colony Credit Real Estate. On April 5, we announced that CLNC had entered into an agreement with our external manager Colony Capital to terminate the management agreement and internalize the company's management and operating functions. This transaction was successfully completed on April 30. The CLNC team is appreciative of the support and recognition it has received from Colony Capital, who continues as our largest shareholder. And taking this step, Colony Capital has unlocked value for CLNC shareholders by allowing this management team to chart its own course in this next stage. We also thank our CLNC board members, who have invested tremendous time and focus as we worked through this process. Additionally, we are also very proud to announce today Independent Director, Cathy Rice, has assumed the position as the chairperson of our board of directors. We look forward to Ms. Rice's continued guidance and leadership. The internalization provides CLNC shareholders tremendous value enhancement. The self-managed structure will considerably reduce CLNC's expenses and be significantly accretive to earnings in 2021. This use of capital will provide a permanent return on equity in the mid-teens. This succeeds the equity returns we target on loan investments by at least several hundred basis points.

[Andy Witt:]

Thank you, Mike, and good afternoon everyone. The company remains focused on managing the balance sheet and continuing to build earnings and simplifying the business. Over the course of 2020 and through today, CLNC has meaningfully simplified the business. The first quarter results are consolidated as we are no longer reporting the legacy non-strategic assets as a separate segment. This portion of our portfolio is now insignificant relative to the overall portfolio. As such we've eliminated the segment from our reporting and realigned the reporting segments to reflect how we view and manage the business. The business is now presented as one portfolio comprised of the following segments. One, senior and mezzanine loans and preferred equity; two, net leased real estate and other real estate; three, CRE debt securities; and four, corporate. As of March 31, 2021, excluding cash and net assets on the balance sheet, senior and mezzanine loans and preferred equity is comprised of 64 investments in an aggregate at-share net book value of approximately $1 billion or 81% of the portfolio. This is the segment of the portfolio we anticipate allocating the majority of our capital towards as we continue to build company earnings. Net leased real estate and other real estate is comprised of 12 investments in an aggregate at-share net book value of approximately $162 million or 13% of the portfolio. The net lease assets remain core to our investment strategy due to the long-term stable cash flows they provide in addition to the potential for capital appreciation. The cash flows generated from this segment of our portfolio are often associated with mission critical infrastructure leads to credit tenants.

[Frank Saracino:]

Thank you, Andy, and good afternoon, everyone. Before discussing our first quarter results, I want to mention that we expect to file our 10-Q tomorrow. In addition, I would like to draw your attention to our supplemental financial report, which is available on our website. The supplement continues to provide asset-by-asset details as does our Form 10-Q. With that let's turn to our first quarter results. CLNC reported our first quarter 2021 total company GAAP net loss attributable to common shareholders of $92.3 million or $0.71 per share and distributed learning’s of $13.8 million or $0.10 per share. Excluding realized gains and losses and fair value and other adjustments total company adjusted distributable earnings were $18 million or $0.14 per share. The GAAP net loss attributable to common shareholders of $92.3 million reflects our recording of a $109.2 million in restructuring charges, and restructuring charges include a one-time cash payment of $102.3 million to terminate the management contract as well as transaction expense. During the first quarter, total GAAP net book value decreased from $12.96 to $11.98 per share an un-depreciated book value decreased from $14.14 to $12.84 per share. This change is primarily due to the upfront cash investment made to terminate the contract with our external manager. As expected first quarter 2021 adjustable distributable earnings came in lower than our 4Q 2020 results, a $26.1 million or $0.20 per share. The difference is primarily a result of our first quarter sell of our net lease industrial portfolio, fourth quarter resolution of legacy non-strategic assets, the timing or ramp of new loan originations and the placing on non-accrual of the San Jose California hotel investment that Andy mentioned earlier.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from Matthew Howlett with B.Riley. Please proceed with your question.

[Matthew Howlett:]

Hi. Thanks everyone. Thanks for taking my question and congratulations. Mike, could you spent just a few more minutes now that you've sort of taken this company back, you're going to run the company, now you've taken it back. You talked about unlocking value. It's yours – it's the employees – you talk a little bit about the vision – your vision for the company going forward a little bit more and how you're going to create shareholder value. Just a little bit more – just a few minutes just talk about what the long-term plan is?

[Mike Mazzei:]

Thank you, Matt, and welcome – welcome to our coverage universe. Look forward to working with you. So the vision is – the vision can be a long answer. Let me start by kind of giving you a summary of where we are right now. So where we are, is in terms of earnings we're going to like the trough part of the earnings point in our growth. Why we a trough? We're trough because we have peak liquidity, right? We've had more cash than we've ever had, and we're working it down. We're starting to originate loans. We've originated $1 billion and so that is going to pull us out of the trough as well. The internalization has done, Frank, mentioned the economics of that in terms of adding to earnings. And then we mentioned that we are starting a process for what will be our second CLO probably sometime in the early third quarter. And we've now identified assets and I spoke about this in my remarks, these underperforming assets or non-earning assets that we're going to be focusing on largely due to COVID impacted assets. So that's where we are in terms of right now and why we feel like we're on the trough of earnings and coming out. In terms of the vision, I hate to disappoint you it’s kind of simple. We just – we want to transition this balance sheet and this company to becoming a pear and what we consider the best-in-class commercial mortgage REIT in our set. Now, I'm not going to tell you what I think the best-in-class, or don't want to insult anybody by leaving them out. We want to evolve this balance sheet into more of a pure play, commercial mortgage balance sheet with predictable earnings and predictable credit going forward. This management team has signed on for trying to accomplish this in 2021 fully and this is our eight month goal. How we do it as we're going to – wit the things involved we have to obviously grow our earnings. We have to improve our ROA and this is really also largely entails the rotation of the asset base and continuing to rotate the asset base as we've been doing mostly into first mortgage bridge loans. So now how – that's kind of a what? We want to be best among the best-in-class, pure play commercial mortgage REIT and the how we get there. And we alluded to some of this in the prepared remarks, we continue to deploy cash into first mortgages and now selective mezz and expand the property types that we're looking at. We've done $1 billion so far, and we continue to evolve the balance sheet into a pure play commercial mortgage. I think 90% of what we've done out of the 30-plus loans has been multifamily acquisition loans, average loan size around $30-ish million. We mentioned again, we want to execute on our second CLO to maneuver into non-request financing that will probably also boost earnings a few cents. We looked to tee that up now for the – as I said mid-summer and hopefully get another one done. Maybe late Q4 were very, very early in Q1. And then the balance of that is really what I would call really the game changer for CLNC in 2021. And the game changer is turning the current non-earning assets around. And we can do that in a, in a couple of ways. One, we could simply get assets off the bench and on the field and producing revenue again, and financed again, and Fairmont, San Jose is a great example of that. It's an asset where the borrowers and bankruptcy the loans are non-accrual, we're pulling it off of its financings. And so if we could turn that asset into an earning asset again and get it financed, that means a lot. And we're looking to do that and we're working closely with that borrower. And another way is just simply repatriating capital on a non-earning assets by monetizing them in some way. And then we invest in those – the monetization of those assets into new loans. An example of that would be for instance Century Plaza. They're in the process of trying to sell the hotel at Century Plaza right now and the condo towers are being completed. And if that hotel is successfully sold, it'll pay down the debt substantially. And then that we may unlock value for us and the ability to monetize. So this last step of dealing with the non-earning, it really counts as a full game one, you're turning assets into earning assets, or are you turning cash into new assets? And also with result is on the cash balance side, it gives you more visibility into the cash that you need, or I should say that you don't need to defend these assets any long. And then once you're able to understand what cash you no longer need to sit on, you then unlock that cash and you invest it. And so we're no longer sitting on too much idle cash, and it gives us the confidence to get down to more of an operating level of cash. And so I'll close with what's the math – the basic math around that we want to operate the company, say with two, three CLOs outstanding, a couple of several billion dollars. We probably need – call it a bucket a quarter of cash, $125 million of cash plus our undrawn revolver. Right now we're sitting on about $330 million in cash and so if you get that down and what you got $200 million cash to spend, as soon as you know that we're spending part of it now, and we'll spend the rest of it. When we know that we've got these assets protected. And then you got something like Century Plaza, which is $97 million in market value. And let's say, you can unbridle that because good things happen at the asset over the course of the summer. And then you've got Fairmont, San Jose which in and of itself is $180 million, that's going on encumbered. And if you can get that earning again and then maybe finance it at 50% advance rate and produce another $90 million in liquidity, you're looking at $200 million plus $100 million plus $90 million, you're looking at close to $400 million and liquidity. And you put a 10.5 on that, and it’s or 11 it's like $0.35, $0.40. And so to summarize and I'm sorry for being longwinded, we want to transition the balance sheet; we are doing that in to a pure play. We want to be best-in-class among what we are is in our pure peer set. We – this is the roadmap, how to get there? We're doing most of it now. We just need to turn these non-earning assets and monetize them, we will get them earning again and lock the last portion of our earnings.

[Matthew Howlett:]

I really appreciate it. And you're making great progress. And I don't want to get you to heavier yourself, but with the way the company is structured today is going to be highly efficient. The shareholders own the management company, they own the origination platform, you mentioned some mid-teams returns, but is there any reason not to think that this company when it is fully ramped and you've turned to portfolio will not have one of the top highest ROI in the sector?

[Andy Witt:]

We're shooting to be in our peer group with ROE. We're sitting on a lot of assets right now, including cash, which are running any nothing. When you look at the rest of our assets, our ROE falls within the peer group. We think the internalization is important for shareholders. Not only does it add to earnings, but it improves the governance, streamlines the governance, makes the company more transparent. We're getting a mid-teens return on that. And yes, our goal is to absolutely close the GAAP between market value and book value. And we think this – these next quarters in 2021, we've gone through a lot with COVID in terms of raising capital to defend the balance sheet and working on some of the difficult assets that we had. But now we're seeing a path toward higher earnings, getting the dividend up and closing that GAAP between market value and book down.

[Matthew Howlett:]

I really appreciate it. I'll end up here, but I really appreciate and look forward to covering the story.

[Andy Witt:]

Thank you. Thank you for asking the question.

[Operator:]

Thank you. Our next question comes from Tim Hayes with BTIG. Please proceed with your question.

[Tim Hayes:]

Hey, good evening guys. Hope you're doing well. My first question focuses around the dividend, and I know it's a Board decision, Mike, but I just want to get a better feel for decision to increase to $0.14 this quarter, and how to think about it in the next couple of quarters here. So I know that you guys reported adjusted distributable earnings of $0.14 per share, is the move – is that the best benchmark for the dividend going forward? Is that adjusted distributable number? And then second of all, is it kind of the move to the dividend there? I know you said you expect this quarter to be kind of trough earnings, but is the Board expecting adjusted distributable earnings to be covering this $0.14 dividend on a quarterly basis going forward, or is there some growing into that – that you expect to kind of happen over the coming quarters?

[Andy Witt:]

Thank you, and hello, Tim. There's no growing into it that that when you look at on a cash basis we were able to pay that out of cash. And then again as I earmarked before, with the originations that are closing and coming online, and as we continue to deploy cash and with this – that'll also increase earnings. And then over the next coming quarters, not only deploying cash balances that we've already expected to out of that 330, but really as I laid out earlier the math is, we cover the $0.14 and we're looking to get these earnings up with this extra call it $340 million of capital, which could provide, $0.35, $0.40 in cash. So the math is pretty basic. We feel like we're in a trough quarter. But we think things are pointing up. We've got the CLO that we'd like to do. Hopefully that enhances the ROE on the assets that we have in place now. The internalization will get fully vetted and absorbed over the coming quarters. We have some upfront accruals that we had to take in this quarter as well for compensation to make that adjustment. So I think this is as I said, I think this is a trough quarter is covered out of cash, and I kind of gave you the roadmap for how we think we get it up. It's just a matter of executing on the cash and may mainly on those non-earning assets.

[Tim Hayes:]

Right. Okay. That makes sense. So yes, I guess just based on the trend we saw in the past couple of quarters, is it fair to expect that you will gradually increase the dividend as some of that capital is deployed over time versus like waiting and seeing kind of where stabilized earnings shakes out as you make more progress with that initiative, and then kind of resetting the dividend. It's kind of dumb questions. We just saw you do this, but I just want to hear from you guys and make sure I'm thinking about it correctly.

[Andy Witt:]

Well, look, to be clear nobody wants to go backwards, so that's not our intention. So I think the steps that we took that we feel confident that we're not going to go backwards. And I do think, as I've said, our job is to grow earnings. This is the path to grow earnings. And as we grow earnings, we're going to increase that dividend. We will be cautious in terms of making sure that we don't overstep. We don't want to do that, but I do think that the plan will be I can't say it will be dollar for dollar, penny for penny, but it will be on that same path. So I do think this is a trough in earnings. And I do think my expectation is we will see a dividend growth in the future. But again, when we assess that with the board, we want to make certain that we're not going backwards.

[Tim Hayes:]

Yes, certainly can appreciate that. Thanks Mike. And then just based – another question on the comment you made earlier about the pipeline. And in the past couple of quarters, you've been focusing on first mortgage loans and largely the multifamily space and you mentioned kind of suburban office as well. But it sounds like you're expanding outside of that, expanding that scope a little bit. So can you talk about in what sense you're expanding the scope? Is it asset type? Is it structure? Are you willing to do a little bit more mezz than you were a quarter or two ago? Is it level of transition? Are you willing to do some construction lending and that kind of stuff? So any color on kind of this enhanced pipeline would be helpful?

[Mike Mazzei:]

Well, I think that we want to do substantially first mortgages, construction loans can be first, but we also want to execute, as I said, in another CLO even after the one we do in the summer. So I think the assets will substantially look like that first. Secondly, we will expand in terms of other property types. We will expand into even hotel, other office at markets. We've been sticking to suburban office markets and what we thought high growth areas of the country and we'll continue to do that. And yes, there will be a portion of the balance sheet where we use, call it, $100 million to $150 million of capital to do mezz transactions. And so those could be mezz transactions where we do the senior and we lay off the senior, but it will be a senior that we can definitely defend in terms of size. And so we might – we may do mezz loans between $10 million and $25 million. We've done some mezz behind – multifamily construction before that is working out very well. Is there some other mezz that we've done for instance, Century Plaza, which is just too big in terms of scope and size and we all were – where we are with that. So, yes, we are going to focus on some mezz and we are going to expand the property types. Is it possible we do construction? I would say very, very, very selectively. There are some developers that we've worked with in the past that are very good. And if one of them came to us again today that would be something we definitely would consider given the track record we've had with a handful of those developers we've worked with in the past.

[Tim Hayes:]

Okay. Got it. And then just one more for me, you mentioned kind of your funding costs coming down a bit, and you obviously mentioned the CRE, CLO, like, I don't know if that was – what the basis for the comment was, or if it was more around kind of what you're seeing from your repo providers. If you could just provide a little bit more color around that comment and if you are seeing your repo costs come down and if there's been any movement on advance rates as well.

[Mike Mazzei:]

Yes. So the banks have been coming lock step with the market have been getting very aggressive. You do have to look beyond that. If you're executing on a CLO, you're on that bank line for 30 days, 90 days and you're on the CLO for a few years. So we are looking through to the CLO, that market has been stable. And it really is a market that is focused on collateral and issuer. And certain issuers with certain collateral pools will definitely do better. And so, we're targeting that probably sometime in July. And so, hopefully, there will be a few cents of upside per share in that execution, but market conditions between now and then can change, but the banks have been absolutely tightening. Both in advance rate, they've been – they've been increasing advance rates slightly and they’ve been coming, banks much preferred will drop the rate than increase the advance rate. They've been increasing the advanced rate modestly, but they've been dropping the interest rates on warehouse facilities much further.

[Tim Hayes:]

That's helpful color. Thanks Mike. I'm going to hop back in the queue.

[Operator:]

Thank you. Our next question comes from Steve Delaney with JMP Securities. Please proceed with your question.

[Steve Delaney:]

Yes, hello Mike and congrats to you and the team on the internalization. That's a huge step, so glad to have you in that position. So everything – a lot of stuffs have been covered. I just had a question about the CLOs. On – I wouldn't clear whether you had one or two existing CLOs? Is it two?

[Mike Mazzei:]

Yes, that's my fault because in my remarks, I'm referring to a second. But we have one outstanding that was done in 2019 for $1 billion. And we are – our second one, we are teeing-up.

[Steve Delaney:]

You are teeing that up.

[Mike Mazzei:]

We are teeing that up right now with the process with the rating agencies and the banks, and that could be call it a July deal, end of July deal. And then hopefully we'll look at another one at the end of the year, given the trend rate that we're on.

[Steve Delaney:]

Yes.

[Mike Mazzei:]

The one that's teed up for July is pretty substantially locked and loaded.

[Steve Delaney:]

Great, great. Then the one – let's call it the old CLO, is there any replenishment in that or is that done? Is that static now

[Mike Mazzei:]

That's not static. Yes, Andy, do you want to – maybe Andy can cover some of that for us.

[Andy Witt:]

Yes. So, we have the ability to replace collateral in CLO1 through October of 2019.

[Steve Delaney:]

Yes.

[Andy Witt:]

So we are replacing collateral as loans pay off. And we are .

[Steve Delaney:]

Good. Okay, thanks. And on the new one, I've seen a couple of deals recently aggregation is the deal, right? I mean, you've got to work with the banks. You got to get to the size that the execution you want, whether that's $800 $1 billion or whatever. I've seen a couple of ramp-up periods. I know you probably have to pay for that because the collateral is not specified. But is that something that might work for you since you are sort of in this period of re-starting your lending activities?

[Frank Saracino:]

I think that we would – we're looking to go more of a specified pool. And I think there might be some ramp up, but, I think, we'll keep that limited because we really want to get the best in execution we can. So, we are taking a little bit of market risk when you're aggregating more, but we'd rather have a smaller ramp up and better execution.

[Steve Delaney:]

Super. I appreciate the color and look forward to talking soon. Thank you.

[Frank Saracino:]

Thank you, Steve.

[Operator:]

Thank you. Our next question comes from Tim Hayes with BTIG. Please proceed with your question.

[Tim Hayes:]

Hey, just another quick up here. Just on the CMBS securities that were sold in the second quarter, was there a material gain or loss associated with that transaction?

[Mike Mazzei:]

Frank, do you want to take that?

[Frank Saracino:]

Yes, I can take that. Yes, there was a gain. There was a gain on one and a slight loss on the other. But I would not qualify either one as material.

[Tim Hayes:]

Okay. Got it. And I know that you mentioned Mike, just you highlighted some specific assets where it kind of makes sense to prune the core portfolio further, but just a high level, you do have a few kind of troubled assets that you've highlighted. And we've talked about over the past few quarters. I’m curious you maybe – you mentioned Century City. Are there any others that you point to, as these are liquidation candidates and versus we want to try to work this out, we're in this one for the long haul. And may be just broadly, how much more pruning of the core portfolio do you think there is left?

[Mike Mazzei:]

I'm not going to say that we're looking to liquidate an asset. But let me just identify what we have and what you'll see in our reporting as the assets that are mainly the non-earning assets. And that's the Dockland, Dublin development deal, Century Plaza, the Fairmont San Jose. Fairmont San Jose is just an asset that needs to come out of bankruptcy. It may not be anything we do there, and we may actually just continue to hold that asset. So we need to get it back to earnings. So that's an example of something that we're focused on it, but we're just trying to convert it into earning. We're not trying to necessarily liquidate that asset. Those are the three biggest to keep an eye on.

[Tim Hayes:]

Right. And then maybe Long Island City office asset and the Berkeley Hotel, might have been the other ones that we have talked about in the past. Are any of those, I guess, Fairmont San Jose is the only one where there's maybe some more – I did in the court – handed the court right now. So, there might be some more kind of deadlines or some timelines rather around clarity for that asset. Or do you expect any near-term resolution to any of the assets I just kind of mentioned?

[Mike Mazzei:]

Well, on the Century Plaza deal, as I said in my remarks, the borrower right now has that hotel on the market. I can't speak for where they are in that. I don't want to speculate. But that I do know the hotels on the market. There have been some condos that have closed in the hotel condo portion of it that have paid down the loan modestly $20 million. And there are outstanding commitments on the tower condos, but the towers aren't going to get completed until later in 2021. So there's something going on at the property level at Century Plaza, which we're just watching and observing. And as that works its way through then we'll, we'll have an opportunity to potentially monetize. And that's all being done at the property level. And the Fairmont San Jose situation, that's a convention center hotel. And unlike the other hotel, you mentioned which has an enormous tennis facility, and it could be considered a destination hotel where people want to go to just to get out and like a resort, they are different hotel assets. And so that's why Fairmont San Jose is where it is because it is mostly a group type of convention type of asset. But that too will work its way through, we think relatively quickly because we hope that the bankruptcy judge understands that getting that asset turned on as quickly as possible is best for the equity and for the austerity in involved. And then in terms of the Dublin asset, that's one that is a little bit more, squishy if you will. It's land, we're waiting for entitlements to come through to enhance the development prospects of the property, both on the residential and on the office side. And there, the borrower is still working with. COVID has just kind of lightened up in island , workers are back at the site. And the developer still working on securing an anchor tenant for the office development. So that one has got a little bit more uncertainty there. The others we think have more of a short-term timeline.

[Tim Hayes:]

Got it. That's helpful color. Thanks again for taking my questions there.

[Mike Mazzei:]

Thank you.

[Operator:]

No further questions at this time. I would like to turn the floor back over to management for any closing comments.

[Mike Mazzei:]

Well thank you for your support and for joining us on today's call. We look forward to updating you on our second quarter earnings call in early August. Thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.