Colony Capital, Inc.
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Greetings, and welcome to the Colony Financial, Inc. Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lasse Glassen of Addo Communications. Thank you, sir. You may begin.

[Lasse Glassen:]

Good morning, everyone and welcome to Colony Financial, Inc.'s Second Quarter 2013 Earnings Conference Call. With us today are the company's Chief Executive Officer, Richard Saltzman; and Chief Operating Officer and Chief Financial Officer, Darren Tangen. Kevin Traenkle, the company's Chief Investment Officer; and Neale Redington, the company's Chief Accounting Officer, are also on hand to answer questions. Before I hand the call over to them, 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 that could cause the company's business and financial results to differ materially from those forward-looking statements are described in the company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, August 7, 2013, and Colony Financial does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The company's earnings release, which was released yesterday afternoon and is available on the company's website, presents reconciliations to the appropriate GAAP measure 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 Richard Saltzman, Chief Executive Officer of Colony Financial. Richard?

[Richard B. Saltzman:]

Thank you, Lasse, and welcome everyone to our second quarter 2013 earnings conference call. Our results this past quarter were again very solid, ahead of expectations, and I continue to be very pleased with the performance across all of our primary business strategies. During the second quarter, we had a significant amount of activity in capital raising, acquisitions, originations and successful asset management results. As a backdrop, the environment remains very favorable for our business model, with continued economic recovery in the United States leading to a number of attractive loan origination and equity investment opportunities, and Europe still in the very early stages of recovery, leading to loan acquisition and recapitalization opportunities, often around some form of distress. In terms of capital formation during the second quarter, we issued $200 million of 5% convertible senior notes due in April 2023. The 10-year notes have a conversion price of $23.60 per share and resulted in net proceeds of $194 million to the company after underwriter discounts. We are also very pleased to announce that we just closed a new $360 million corporate credit facility, more than doubling the size of our prior facility, on significantly improved terms and pricing, including an interest rate that is 75 basis points lower than our prior facility. Inclusive of approximately $270 million of common stock issuance completed year-to-date, Colony Financial has created access to over $650 million of incremental capital year-to-date through these various capital markets activities. Core earnings for the second quarter were $0.36 per share, or $23.6 million, which is up from core earnings of $13.8 million in the second quarter last year and $17 million in the prior quarter. Also, we paid a dividend of $0.35 per share for the second quarter, consistent with the prior quarter. During the second quarter, our investments totaled $462 million, the most productive quarter of capital deployment since we came public nearly 4 years ago. This is composed of one, $50 million into 2 loan portfolio acquisitions; two, $237 million in 4 new loan originations; and three, $175 million of additional capital to Colony American Homes, for an aggregate investment to-date of $550 million. For sure, we are continuing to see significant deal flow across the Colony Capital platform, a meaningful portion of which is proprietary, and from a healthy mix of loan acquisitions, loan originations and equity investments. It's a very exciting time for Colony Financial. Generally speaking, we are much more confident about the recovery and have good visibility on improving underlying real estate fundamentals throughout the United States, and these trends appear to be accelerating. This growing confidence is translated to an increased propensity to participate across a broader spectrum of the capital stack, including more exposure to equity-oriented investments. This might include other equity platforms analogous to what we did in Colony American Homes, whether Colony Capital sponsored, or otherwise with third-party best-in-class management teams. We also have launched several exciting new lending platforms, which will programmatically deploy capital in targeted first mortgage origination strategies at very attractive risk-adjusted yields. One platform is originating in warehousing first mortgages on more transitional and other non-conventional assets intended to be financed via low-cost, match-term nonrecourse CLO securitizations. Another platform is focused on lending to the multifamily asset class, potentially benefiting from the changes afoot within the GSEs' multifamily lending businesses. Leveraged return on equity expectations for these and other potential lending platforms that we are considering are in the low to mid teens. At this point, I'd like to make a few quick comments regarding the changing interest rate environment and why this is beneficial to our existing investment portfolio and prospects for future capital deployment. As we have stated since our formation, our investment portfolio was constructed to generate a hybrid total return, combination of current yield and capital gain potential from

[Darren J. Tangen:]

Thank you, Richard. Second quarter 2013 core earnings were $23.6 million or $0.36 per basic and diluted share, and net income was $20.3 million or $0.31 per basic and diluted share. The $0.05 per share difference between net income and core earnings is composed of approximately $0.01 of noncash equity compensation expense and $0.04 per share of depreciation expense, resulting from our interests in single-family homes and our hotel portfolio. Book value per share remained unchanged at $18.58 from March 31, 2013 to June 30, 2013. However, fair value per share increased from $19.66 as of March 31, 2013 to $19.91 as of June 30, 2013. With respect to our second quarter earnings, our share of loss from Colony American Homes was $2.6 million on a GAAP basis, or $0.04 per share, and $1.1 million loss on a core earnings basis, or $0.02 per share. Considering the loss from Colony American Homes and the fact that we entered the second quarter with cash still on the balance sheet, core earnings of $0.36 per share was a good result, reflecting the strong performance of our other investments. Given the recent acquisition pace of homes and associated transaction expenses and the lag period to get homes renovated and leased, we expect that Colony American Homes will contribute roughly breakeven core earnings for the remainder of 2013. Notwithstanding the earnings drag from our 1/3 portfolio exposure to Colony American Homes, we continue to expect our $1.40 per share annualized regular way dividend to be covered through 2013 core earnings. Beyond 2013, we expect Colony American Homes financial performance to improve as the portfolio occupancy begins to stabilize. And further, we expect that Colony Financial's other investments will grow in relative size to our stake in Colony American Homes, hopefully setting the stage for 2014 core earnings to grow significantly beyond prior year levels. On the asset management front, I provided performance statistics on our seasoned small balance loan portfolios on our last call. And after another quarter, I am pleased to report that performance remains consistent. We currently own an interest in 18 seasoned small balance loan portfolios, with a total book value of $264 million and an average purchase price of $0.53 on the $1. We have resolved approximately 34% of the unpaid principal balance as of June 30, 2013 and total collections on these resolved loans averaged 1.4x our purchase price basis. Trailing 12-month weighted average current yield for the remaining loans in these portfolios, as of June 30, was 8%. And as we've mentioned previously, 5 of our 8 FDIC loan acquisition portfolios have paid off or fully defeased their acquisition debt and are distributing cash to us. In terms of capital market activities, as Richard mentioned, Colony Financial has created access to over $650 million of new capital year-to-date in 2013, including $270 million of common equity issuance, $200 million of convertible debt issuance and $185 million of additional revolver capacity through the $360 million credit facility we just closed this week. Based on current borrowing base availability, we have access to the full $360 million, as this facility has expanded the type of assets and associated income that can qualify for the borrowing base, as well as increased the advanced rates. The new revolving facility has a 3-year term, with an ability to extend any outstanding balance at initial maturity for an additional 2 years, subject to certain terms and conditions, and also features an accordion option to increase the size of the facility to $600 million, subject to obtaining additional lender commitments. The interest rate on the facility is LIBOR plus 275 basis points at our current leverage levels, 75 basis points lower than the rate on our prior facility. As such, utilization of this new facility should be meaningfully accretive to our earnings. That concludes our prepared remarks. And we would now like to open the call up for questions and answers. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Daniel Altscher with FBR Capital Markets.

[Daniel K. Altscher:]

I had a question about the fair value -- book value that looks like it was up, what, like $0.22, yet stated book value was down -- sorry, was unchanged. Can you maybe just give us a little color on the components there of, maybe what increases, is it just better credit? I guess the thinking of that, with the rates moving higher in the quarter, you could have seen some decrease in the fair value. So I'm wondering is there -- what drove the increase in the fair value?

[Richard B. Saltzman:]

Sure. Let me start. We don't really provide individual transactions that we've consummated data, with respect to the fair values that we provide each quarter, on the one hand. On the other hand, I mean, while certainly, interest rates have gone up, to the extent that we built a portfolio of basically credits that were distressed but hopefully on the mend, that we were extracting very wide credit spreads. As a general matter, we haven't been impacted by the rise in interest rates, number one. And then number two, of course, we have a very meaningful investment in single-family homes for rent, as you appreciate, through Colony American Homes. And certainly the data, in terms of home price appreciation around the country, has been quite robust with respect to improvement in those values. So really, the combination of the 2 has contributed to the good results that we're reporting this quarter.

[Daniel K. Altscher:]

Got it. Okay, that's great. And then a second question, I guess on this multifamily loan origination joint venture that you referenced, subsequent to the end of the quarter, $143 million, is that related to the in-place JV? Or is this a brand-new investment that's not related to the -- I think the one in Texas and Florida?

[Richard B. Saltzman:]

Yes. This is different. So that's a preferred equity investment, the one that we have in Texas and Florida, where it's a combination of providing preferred equity plus having participation in the upside, with a group that we have a lot of confidence in that's been acquiring multifamily assets in those markets and basically building out their platform. The new joint venture that we're referencing is with one of the larger multifamily debt origination groups in the country, where their view, as well as our view, is that given likely GSE reform, there's going to be an opportunity to do both transitional assets in the multifamily space, similar to what we've been doing otherwise in the commercial space, as well as perhaps some dislocation coming out of the restructuring of the GSEs, which will provide an even wider swath of opportunity over time.

[Daniel K. Altscher:]

Okay. So this is a -- so then -- are those loans that were already -- they've already been originated?

[Richard B. Saltzman:]

No. To be originated. New loans to be originated.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jason Arnold with RBC.

[Jason Arnold:]

Just a follow-up on the multifamily into the equation. I think you said roughly $140 million kind of an investment potential there. Did you feel that this could be something that could kind of ramp up more meaningfully over time, just given kind of the opportunity and outlook that you have there?

[Richard B. Saltzman:]

The answer is yes, absolutely. But I'm going to turn it over to Kevin Traenkle, our CIO, to provide a little bit more detail around that.

[Kevin P. Traenkle:]

Yes, it's a very good question. And we've been watching some of the body language of the GSEs for quite some time now. We actually do think, with them kind of changing their policies, there'll be a huge opportunity for the private sector to get more involved. So this is the first of what we think is a longstanding business, where we could provide a substantial amount of capital to good real estate owners and operators in the wake of some of the changes at the GSEs. So we do think it will be a longstanding business.

[Jason Arnold:]

Great. Sounds intriguing. Okay. And then I guess, just one other follow-up on the new credit facility. Just curious if you could kind of compare and contrast what assets were not financeable in the prior facility that you can finance now? And then maybe also give us some color on the advance rates on the new facility.

[Darren J. Tangen:]

Sure, Jason. It's Darren here. I'll take that. In our prior facility, we were quite restricted in types of -- in terms of the investments that qualify for borrowing base assets. And where there was some sensitivity was on some of our leverage positions and mezzanine loans and the like, juxtaposed against the new facility, where we, pretty much all of the new investments that we currently have in our portfolio, of which there is approximately 60 today, virtually all of those now are creating some amount of borrowing base capacity or availability for us, so it's a pretty substantial improvement from what we previously had. And in terms of advance rates, there's different advance rates depending on the type of investment. But suffice it to say that it creates availability well in excess of the overall size of the facility, which is $360 million. So we've got full use of this facility. And frankly, have the ability, as we mentioned to accordion it up to a larger size in the future, if we get additional lender commitments.

[Operator:]

Our next question comes from the line of Jade Rahmani with KBW.

[Jade J. Rahmani:]

Can you comment on your current cash position post quarter end and the available investment capacity, including the credit line recycling of investments, such as the commercial bank financing on 3 loans that you noted and the potential CLO? I mean, the question I have is, how much cash and investment capacity, based on the investment activity you've announced post quarter end, do you currently have available?

[Darren J. Tangen:]

Sure. Well, Jade, it's Darren here. Let me try to tackle that one. We are -- at present, we don't have any cash on hand. We are slightly into our line -- into our new revolver. However, we have a good amount of availability on that revolver, particularly now that we've upsized it. And we are -- like we experienced in the first half of this year and going into the second half of the year, there are going to be some repayments of some of the loans in our portfolio. So I expect between revolver availability and capital being returned to us from repayments and the ability to finance some positions, sitting here today, we probably have approximately $400 million to $500 million of capital that I would expect we could deploy between now and the end of the year, without going back to the capital markets. So I think we've got a good amount of availability. And you mentioned the CLO business or platform that we've started up, which actually, a separate warehouse line or credit facility, could be, and actually is expected to be, set up for that business, which could actually create even additional availability -- capital availability above and beyond the levels I just mentioned.

[Richard B. Saltzman:]

And the other thing I would add is that we could finance additional positions that we own directly. So I think Darren's comments really pertain to kind of corporate-related activity, cash in, cash out. But we can also finance other individual positions that we own or will own.

[Jade J. Rahmani:]

Is there a dollar amount, or maybe a percentage of your portfolio that you think is, I assume you're referring to selling A notes, but you could possibly also be referring to putting leverage on your single-family investment. Is there a dollar amount or percentage that you would think about or that we could think about?

[Darren J. Tangen:]

Well, we're going to be continued to be very conservative in our outlook on how much leverage we want to take on. So for sure, at Colony American Homes, we're going to begin to introduce some leverage there. I think I commented in my remarks that we're currently putting in place a credit facility there, as kind of our next capital markets raise, now that we're close to having invested all of the $2.3 billion of equity that was raised there. But I would say, we're at 20% today. I think we've referenced. And certainly, we're comfortable, given where we are, from a fundamental standpoint, from a credit cycle standpoint, taking that up. But we're not going to take it up dramatically.

[Jade J. Rahmani:]

Okay. Just on the single-family. I mean, you noted securitization, I was wondering how you look at that. I mean, do you look at the securitization vehicle as a perpetual type of financing structure? Or do you view it as liquidating trust, where -- I mean, there's potential asset sales as part of that?

[Richard B. Saltzman:]

No, we're not looking to do any asset sales. I mean, we do selectively cull, in the County American Home portfolio, assets from time to time that don't exactly fit our business model, but otherwise, we still think this is a very sustainable business opportunity, where we want to own the assets for the long term, we want to take the company public, as I mentioned. And so securitization really is just a way to hopefully finance the portfolio very efficiently as the market emerges, develops and tightens.

[Jade J. Rahmani:]

Okay, great. And then finally, you alluded to it in the fair value mark comment, but I was wondering if you have an estimate you'd be willing to provide on the weighted average home price appreciation you think the Colony American portfolio has seen so far?

[Richard B. Saltzman:]

Well, I'm not so sure I can provide a specific number, since we haven't really disclosed anything like that yet. But suffice it to say, it's up. And I think we've been pretty conservative in terms of the marks that we've put on that portfolio relative to the reported appreciation numbers that you've seen and what you've seen in terms of the Case-Shiller Index and the like. And of course, this has been true consistently around our total portfolio. We provide, and this is from a Colony Capital perspective, fair value marks on a quarterly basis to the private fund LP investors, who are in many of the same investments that Colony Financial owns. And one of the things that historically we've always been very cautious about is kind of getting ahead of ourselves there. There's just no value associated with that. So we try to do it in a way that is consistent with what we're required to do from a GAAP standpoint, but hopefully taking more of a conservative skew. And I think the mark for the Colony American Homes portfolio is consistent with that methodology and philosophy.

[Operator:]

[Operator Instructions] Mr. Saltzman, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

[Richard B. Saltzman:]

Great. So thanks, everybody, for joining us this morning. As I hope you appreciate, we feel great about the quarter, the continued ramp-up in our business, the fact that from a credit cycle and a fundamental perspective, we think we're really at the beginning of a great few years ahead of us, in terms of what we're seeing in the U.S. And then outside of the U.S., I think we're a few years behind, so that hopefully we can take advantage of some of the distress in Europe and other places, consistent with what we've been doing in the U.S. over the last several years. So we look forward to a great completion of this year and a great next few years. Thank you again for your confidence in us and joining us today.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.