Colony Credit Real Estate, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Greetings. Welcome to Colony Credit Real Estate, Inc. Fourth Quarter 2020 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I’ll now turn the conference over to your host, David Palame, General Counsel. You may begin.

[David Palame:]

Good afternoon, and welcome to Colony Credit Real Estate, Inc's fourth quarter and full year 2020 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.

[Mike Mazzei:]

Thank you, David. Welcome to our fourth quarter earnings call. On behalf of the CLNC team, I'd like to start by wishing everyone well and I thank you for joining us today. I'd also like to welcome Frank Saracino to his first earnings call as the company's Chief Financial Officer. These past 12 months have been challenging for all of us to say the least. We extend our thanks to those providing support and care on the many different front lines of the pandemic. I also thank our dedicated employees who are rising to meet the challenges they face both personally and professionally. That said, the CLNC team has accomplished much during this time. First, solidifying the balance sheet by dramatically reducing debt and increasing liquidity, which stands at $689 million today. Specifically, we have substantially reduced our CMBS securities holdings and have fully paid off our CMBS securities repo lines, as well as our corporate revolver.

[Andy Witt:]

Thank you, Mike and good afternoon, everyone. The focus continues to be on asset and liability management and liquidity as well as new origination and building earnings. Across the total core portfolio, we collected 96% of expected payments throughout the quarter. The uncollected portion is confined to one loan, which we are currently working to resolve and one net leased real estate portfolio, which was sold subsequent to quarter end.

[Frank Saracino:]

Thank you, Andy and good afternoon, everyone. Before discussing our fourth quarter results, I would like to draw your attention to our supplemental financial report, which is available on our website. I would also note that our Form 10k which will be filed tomorrow includes further information about January and February interest and rent receipts that Andy mentioned in his remarks. Furthermore, we continue to provide asset by asset detail for our core portfolio in our supplemental financial report, as well as all holdings in the Form 10K. Additionally, I would like to briefly comment on our non-GAAP earnings measure core earnings, which starting this quarter has been renamed distributable earnings. Historically, we have disclosed core earnings as an important financial metric that we use in addition to GAAP net income to assess the financial performance of our business. We want to be clear that this is a name change only and not a change in how we calculate this metric. We are making this name change following discussions between the mortgage REIT industry and the SEC over the past several months. The purpose of this change is to adopt terminology that is more descriptive of what this metric represents, a measurement of our results anchored in GAAP and adjusted for certain non-cash items that aligns with the company's ability to pay dividends. While there may be differences from quarter to quarter between our distributable earnings and dividend payments, we anticipate that they will be highly correlated over the long term.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question is from Stephen Laws with Raymond James. Please proceed with your question.

[Stephen Laws:]

Hi, good afternoon. Mike, you touched on this. I guess you and Frank both touched on prepared comments, but wondering if you can maybe quantify the outlook for portfolio growth, target senior loans, you mentioned aggregating more for CLO later this year. So I guess, two part question. How, how big do expect the loan portfolio to get either leverage target or just to assets? And then kind of how do you see CLO as a mix of total financing of the senior loan portfolio?

[Mike Mazzei:]

I think that we are repositioning the portfolio, we want to do more senior mortgage loans of the loans that will be done. You can see that we've done 700 million of 22 loans in commitments since September. So we're at a pretty good run rate. So it's not -- it's totally doable to do over billion dollars in loans originations this year, maybe a billion and a half. The question is, are we able to get there? We do want to use the CLO to answer your question directly as a financing model. So we'd like to do a second CLO. We do think that right now we're getting, roughly 11% ROEs and we can probably increase those ROEs if we can get a CLO done. But how big we grow, it depends on a couple of things Stephen. One, it depends on loan repayments that we have in CLO one, where we want to maximize that vehicle. As I said in the prepared remarks, there is an October reinvestment horizon this year. So we've had some loans pay off in the CLO where we've placed them already, some of that was with collateral that we had in the portfolio. But we may use some new loans to replenish loans that pay off in the CLO if we have any more loans, payoffs between now and October. So that could affect the timing of a second CLO. The other thing that can affect the CLO is beneath the cash. We raised cash for a reason to defend the balance sheet. As I said, we're not yet out of the woods and we're trying to make sure that we understand what assets may need potentially de-levering in the future. We want to make sure that we have adequate funds on hand to move assets around on the balance sheet should we have to deliver those assets. So those are two things that could affect our speed to the market in terms of growing the balance sheet and doing a second CLO. So those are slightly difficult. I appreciate from your side to Martin . The other thing I'd add is, we do have some non earning assets that we would like to repatriate those dollars for instance, like the LA mixed use project and the project in Ireland that we took the write down on and we would like to repatriate those if possible, monetize those if possible at some point and then reinvest that cash because that's just basically dead money right now. So there are a number of moving parts here. I hope that answers your question.

[Stephen Laws:]

It does and those two assets were kind of next up, any color around the timing of when you might be able to reallocate that capital.

[Mike Mazzei:]

So the timing on reallocating cash, we have the cash and that's just going to be over the next six months us trying to understand what assets if any might need moving around, and then just how much cash will be like on balance sheet versus the portfolio, it may be at the end of the day, that number could be $100 million in cash on hand. But we might want a little bit more than that, over the near-term to make sure we can manage through things. With regard to the non-earning assets, some of that is out of our control. And I don't mean to be passive in that regard. I wanted our shareholders, still we're actively managing those positions, but for instance, the LA mixed-use, the update on that is that the hotel at the LA mixed-use project has been completed. It has received its TCL, the developer has basically delivered it to the hands of the hotel operator and manager. I don't know exactly the hotel, I don't think the hotel is actually open for business today. But I do know that there have been some closings. And this is all public information by the way, closings on the hotel, some hotel condos, and we’ll mention that in our 10-K filing. It's not a substantial number, but it's the plumbing is beginning to work. I think the biggest thing with regard to the liquidity of that position will be whether or not the developer or owner operator sells the hotel. And I do believe that there will be a marketing process on the hotel that commences shortly, I can't tell you what the outcome of that will be. But if the hotel were to sell, and the proceeds were used to pay down the senior debt, it would very much put our position in a much more favorable position to monetize, but those are things that are out of our control at this point. With the project in Ireland, we had substantial delays on that because of COVID. As you can imagine, CEOs and real estate facilities people are not rushing to ink new deals, and sign big leases. So there's been delay there regarding signing up an anchor tenant for the project. And so time does hurt deals. And we looked at that. And we ran some various types of outcomes on that, to sensitize it and we came up with a markdown because of the delays, which I think are substantially driven by COVID. So it’s possible that there could be a monetization of that in 2000 as a co-lending position with our affiliate Colony Capital. And that's something that we can discuss with them. But we're very much, it's a non earning asset. It's dead money on the balance sheet from that regard. And we're very focused on it, but not totally in our control.

[Stephen Laws:]

Got you. And lastly, can you talk a little bit about the dividend policy and looking forward, how did you guys arrive at the $0.10 level was above what I was looking for. But can you talk about, is that going to be revisited annually is that it's something you'll grow quarterly as the portfolio ramps-up? How do you think about the dividend policy now moving forward?

[Frank Saracino:]

Sure, this is Frank, I'll answer you. So look dividend was established at a sustainable level with a view towards growing it as we deploy cash and repatriate and deploy our capital from our performing and non-accrual loans as Mike said. So, yes it will be visited on a quarter-by-quarter basis.

[Stephen Laws:]

Great, Appreciate the color this evening. Thanks.

[Frank Saracino:]

Okay, thank you.

[Operator:]

Our next question is from Randy Binner with B. Riley. Please proceed you’re your question.

[Randy Binner:]

Hey, good evening. Thanks. A lot of good information, thank you. I'm just trying to kind of summarize it a little bit on some of the credit adjustments. So the gains, the realized gains were relatively smaller, mostly from exiting CMBS. And then the mark on the fair value, just was primarily due to the Dublin project, and that is still it’s in the 20 some odd million. Is that fair?

[Mike Mazzei:]

Yes.

[Randy Binner:]

Okay, and so and then, I guess Mike, you had mentioned that the timing of the CLO depends on cash allocation, and kind of what else in the portfolio might need to be delevered. So this, I guess that the category number five that you all lay out in the slide deck it seems to be the kind of leading indicator of where that need would be, is that what we should look at in conjunction with the 10-K, I'm just in this format, trying to kind of think about what might be next before things turn more kind of clearly positive on originating loans in this CLO 2.0?

[Mike Mazzei:]

All right, they're all loans in the underperforming bucket, let's say we have about $250 million of that, it's the Dockland’s piece in Century and a couple of other assets, I think total of about five, we have CMBS that's not earning, of which we can sell some, there's a risk retention bond that we’ll hold. So if we can repatriate that cash, we could add, you can do the math and put a 10 or 11 on that, a $200 million and that we could put that to work. The rest of it really is just its loans that are performing today, where we have to just have a watchful eye. I mean, we have as Andy said in his prepared remarks, we have borrowers that are coming out of pocket on some loans. I think generally in the industry, generally in the industry across everyone's portfolio, if you have hotel loans, or you have heavily transitional assets that require substantial lease-up, those business plans are behind. And those borrowers are scraping together to make that service. Some of these loans that have been, we've had reserves repurpose. So we have an idea of what that universe might be, those loans are performing today. But we have to be mindful that we have of the cash that we have, you might have to have a $200 million of that cash ready to move assets around. That's why the money was raised. So that we don't have to worry about moving assets off of warehouse facilities, or out of the CLO should loan down the road default. We don't know that. But we have to, we have to have a watchful eye for that. So those are the headwinds, as we deploy cash, we need to have a hedge check to make sure we have enough cash on the balance sheet to protect against those. So right now that could be a $200 million out of what we have. And right now, we’re deploying the cash as you could do the math, and we've done $700 million loans since starting from a cold stop in September. So it's not impossible that with the cash we have on hand that we can, we can do double that again, right depending on know how much the CLO one needs if loans pay-off, and depending on our need to utilize the cash elsewhere, but we're going to do what you would agree with at all times, we're going to protect the balance sheet. As I said in the third quarter earnings call, raising this capital came at a price. And so we're going to make sure as we deploy it, that we don't have to go back to raise more capital, we want to make sure we have enough to defend the balance sheet.

[Randy Binner:]

That's really helpful. The $200 million, a nice way to think that, so the CLO 2.0, there's obviously a lot of variables. But if you think of it as being bigger than the first one?

[Mike Mazzei:]

I would say we want to hit the market sooner. And by the way, when I say that loans could pay-off and get reinvested by October in the first CLO, that doesn't mean that we would necessarily wait that long to do the second CLO, I think the second CLO could be smaller than the first. We're doing, as Andy said, 19 out of the 22 loans Andy are multifamily.

[Andy Witt:]

Correct, yes. It’s about 80% of the deployment has been in multifamily.

[Mike Mazzei:]

Right. And Andy, it might be worth giving a few statistics on the loans we've originated because I do think that it's a much different portfolio, you've got no hotel, no retail. And this configuration might lend itself the average loan size, the smaller, Andy should give a little synopsis of what we've been originating and the coupons and spreads we've been getting to give you a better feel of what that second CLO can look like, Andy?

[Andy Witt:]

Great. So since we originated or refinanced originating in September, we put to work about $690 million over 22 loans, nine have closed. Of that 80% of the loans have been in multifamily. The other three in office, the average loan size has been approximately $31 million. So one of the things that we're focused on now is the dispersion of the loan size. So not getting too much exposure to any one position. So the dispersion is really between $11 million and $72 million. In terms of the all-in rates, we're kind of seeing a rough 4% and that's with our line advance rate and cost of funds generating approximately 11% ROE. So our view is to move those loans potentially into a CLO and increase that ROE.

[Randy Binner:]

That’s super helpful, what's the office? Like is it suburban or somewhere where office is working at present?

[Mike Mazzei:]

Yes, it's non-gateway, it's office, it's very well, very targeted deals where we like the tenancy, we like the area, it might be a suburban market in a office and a major MSA that we like. So we've been very select. But I think when Andy gives you the rundown that you kind of seeing the average loan size is smaller. And so you could do a deal that’s $750 million and avoid the concentration risks and get the right scoring from the agencies to give you a good advanced rate and good execution on the deal. So I don't think we would wait to hit the ground running. But now to get a $1 billion, you get better economies of scale from your issuance cost. But I think we would want to probably try to hit the window earlier if we could. We do think there's some franchise value. I think there’s some franchise value for the firm to put its second CLO rather than wait for that incremental $200 million of assets.

[Randy Binner:]

Yes, I would agree. Thank you.

[Operator:]

And our next question is from Tim Hayes with BTIG. Please proceed with your question.

[Tim Hayes:]

Hey, good afternoon, guys. Thanks for taking my questions. My first one, just to expand on the pipeline here a little bit. You mentioned that the ROE you're achieving there is pretty in line with the portfolio average right now. But you're rotating more senior you're focusing on more defensive assets and where I'd expect to be more competition. So just curious and you mentioned some comments earlier about increased competition. So just curious, if you see a negative impact on the asset yields in the back half of the year, as more capital comes back into the market, and things get a little bit more competitive. And if you think that should be offset by this with what you're seeing on the liability side of things?

[Mike Mazzei:]

Sure. So I'll try and take that in pieces. I think what we're seeing generally in our pipeline is about 80%, of what we're evaluating is really in the multifamily and office sectors. So all the activity is being concentrated in those two sectors for the obvious reasons, we’re seeing pricing come in a bit. But what we're also seeing is our line lenders bringing their pricing in, so we're able to achieve our kind of all-in ROEs. In terms of the back half of the year, I think that's going to be largely dependent on the amount of competitors that enter the market and where that activity is concentrated. So you may see sectors like hospitality, retail opened back up, which may provide for a larger playing field, and less concentration within those two asset classes.

[Tim Hayes:]

Okay, yes, that’s helpful.

[Andy Witt:]

We've also been focused on passive growth. I mean, we really have been looking at areas like Arizona, Texas, some areas of Georgia, the Carolinas, we're looking at states where we feel as we're doing loans, we'll probably call it 75% loan to value, maybe a little less in some cases, they're mostly acquisition loans. So there's hard equity behind us. But we're looking at assets that are and there also, in terms of the actual commitment versus future funding, much more narrow, probably more like 7%, 8% GAAP where it's really more value-add as opposed to transitional. Now, at some point, we got into the market early, which is great, and we got a great, a great, a great start, it will get more competitive, there may be opportunities down the road, quite frankly, where we’ll do a hotel loan that is an acquisition loan. And we can find the right one, there may be some retail assets that are grocery anchored that we like, right now, we haven't had the need to do that. But as the markets reopen, and there's more certainty about pricing as the economy reopens, we'll have more confidence in how we could evaluate those assets. But right now, we've been finding the low hanging fruit and we've been going for it.

[Tim Hayes:]

Yes, that makes sense. And you mentioned just that your average loan size should come down. I mean, has that been a function of the pricing you're seeing at that end of the market versus the higher end of the market or again, just trying to look for some color as to how your pipeline is holding up from a yield perspective?

[Mike Mazzei:]

I think as Andy said earlier, we're really, we're trying to, here's what we're not doing. What we're not doing is we're not doing nine figure loans. We're not doing mezz right now. We're not doing ground up construction. And we're not doing pre-development. And we’re trying to do average loan sizes where, when we talk about earlier about how we need to have cash to defend the balance sheet, we have some larger loans, you could see that in our filings. And so right now, what we're also trying to do is, as I mentioned, we're trying to, this is the market, these are the conditions mostly multifamily is getting done. That's what's out there. That's what's being sold right now. And we also want to rebalance the portfolio. And so as if you roll this forward six months from now, you're going to see heavily skewed towards more senior first mortgages, a lot more multifamily. And you’re going to see the average loan size coming down dramatically. And the reason for that is we want loans that we can defend, we want loans, that if something goes awry in credit, things go awry, when you're a holder of credit, things will happen. And we want to make sure that we're doing loan sizes, that no one loan will really affect us, and that we can manage our assets, liabilities better by having smaller average balances. And so that's now there are also may be some better price points there. And so be it. But no matter what, that's the area of the market, we prefer to be in.

[Tim Hayes:]

Yes, that's helpful. Thanks, Mike. Appreciate it. And then can you just confirm or maybe, I know you mentioned the Dublin loan, but were there any other loan impairments or meaningful increases in specific provisions on any loans outside of that asset?

[Frank Saracino:]

No, this is Frank. No, there wasn't.

[Tim Hayes:]

Okay, thanks, Frank. And my last question here to the extent you can disclose this information, can you just maybe give the net equity that you have in those five rated loans, the Dublin loan, and then and if you could confirm, I just don't remember off the top of my head if that that LA loan, if there's any leverage on that, I know, it's a mezz loan. But if you could just confirm the net equity?

[Mike Mazzei:]

There's no leverage on the LA fixed-loan. And there's no direct leverage on these loans. However, if you go through the filing that we make, the 10-K, I said we're breaking out some additional information. We did do a preferred financing, I think in the second quarter, and some of these assets were part of that vehicle, and you’ll see that outlined in the filing. So we not only did we provide some more information on some loans, and on some real estate owned, we also provided some more information on that vehicle. And so that while it's not like a warehouse facility, or CLO type of pledge, if there is an equity like pledge of those assets that we'd have that that you could see in the 10-K filing that will be a direct answer to your question.

[Tim Hayes:]

Okay. Yes, I'll have to look for that in the filing. Thanks for pointing to that. And then would you be able to disclose the specific reserves you have against those loans?

[Mike Mazzei:]

In terms of CECL?

[Tim Hayes:]

Yes.

[Mike Mazzei:]

Those we don't disclose, I think remember the CECL reserve is kind of a portfolio loan, so we don't necessarily have particular reserves against them.

[Andy Witt:]

But Tim to get back to the point I mean, on the two largest loans in that non-earning bucket, we marked Century back substantially, LA mixed-use I should say back substantially last quarter and then we have the Project when we did this quarter, so you're seeing those already have their asset level write-downs have occurred on those.

[Tim Hayes:]

Right, right. Okay. Well, again, thanks for taking my questions.

[Mike Mazzei:]

Thank you for joining us.

[Operator:]

And our next question is from Steve Delaney with JMP Securities, please proceed with your question.

[Steven Delaney:]

Thanks. Hey, Mike, congrats to you and Andy and Frank on all the progress over the last six months. It's nice to listen to the update this evening. Thank you. You touched on this, thought about the preferred financing in the second quarter. But I want to talk to you about your balance sheet and corporate debt, unsecured debt. The preferred financing, does that work a little bit like a term loan be where you've just got to, you just kind of got to wrap around everything that doesn't have a first lien? Or is that preferred claim? Is that just assigned to certain assets that you have?

[Mike Mazzei:]

It's the latter.

[Steven Delaney:]

Good, good.

[Mike Mazzei:]

It’s not a term loan B, specifically assigned to five assets. And that will be and what we did, Steven, and by the way, thank you for joining us. Great to hear you. And that that I would say in this 10-K filing, I would not to avoid the question here, you'll be able to go to the filing and have a precise answer to your question in the filing this quarter.

[Steven Delaney:]

Great, great.

[Mike Mazzei:]

But it’s not a term loan B type, it is five, five discrete assets pledged like vehicle.

[Steven Delaney:]

Perfect. So this gets me to congratulated you on the six months past, it sounds like you, you've got good half a year to still kind of get where you really want to be. It's great that you're lending. But you look at the second half of this year and further normalization and assuming progress in the economy, it just seems to me, I'll look at your balance sheet. Now that you're going to have one segment, it's easy for debt analysts, equity analysts like for everybody to monitor the company and get comfortable with financial ratios, trends, et cetera. It just seems to me, you don't have any preferred equity. And most commercial mortgage REITs don’t because the coupons are just too high, if it's retail. But the thing I'm really thinking about is corporate debt, unsecured senior notes, three, five, seven years, now the longer ends moving higher, but the three to four-year range hasn't moved much. And who knows where rates are, but just thinking ahead, in terms of how you grow your balance sheet, do you consider the use of a little bit of a modest amount of corporate debt on top of your almost $2 billion equity base, how that might work in and allow you to just kind of give you another little boost to put on the new good assets you want to put on? Thank you. That's my only question.

[Mike Mazzei:]

That's a great question. And the answer to the question is yes. It’s term loan B like some of our peers have. And then some of our peers are substantially unsecured in a liability structure. There's a lot of flexibility in that. And so that when you go through periods of time like this, I think you need to look at what was your true cost of capital? Well, we raised capital in a crisis, right. And that was not cheap. So when you look backward, you look at the cost of capital and say, gee, had you had more unsecured debt or term loan B, that might have been less expensive. And then looking forward, when I talk to you about having cash on the balance sheet. Well, that cash on the balance sheet comes with an opportunity cost. So we have to factor that cash in and say, could we have less cash if we had more unencumbered assets where we can move things around.

[Steven Delaney:]

Yes.

[Mike Mazzei:]

And have more flexibility with our balance sheet. So I do think that having only secured debt has its costs in operation versus a term loan, which might be more expensive and coupon on face, it might look dilutive to discrete assets you're putting on, but I think overall in your corporate structure, I think that is something that has to be looked at. And so I do think that as we progress later in the year and towards the back end of the year, that may be something that as we get everything else settled, that may be something that we take a much closer look at. I agree with you.

[Steven Delaney:]

All right, great. Well, listen all the best for 2021. And thank you for those comments.

[Mike Mazzei:]

Thank you for the question.

[Operator:]

And we have reached the end of our question-and-answer session. And I'll now turn the call over to management for closing remarks.

[Mike Mazzei:]

Well, I want to thank everyone for joining the call. I would encourage everyone to look at our 10-K filing for the additional information that we've provided there. We think it is very, very worthwhile. And we look forward to you joining us again in early April for our first quarter 2021 earnings call. Thank you very much. Bye.

[Operator:]

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.