CLNY is the creation of Tom Barrack, he's a long time real estate investor and close friend of Donald Trump who is known for speaking at the 2016 Republican National Convention and more recently writing a blog post asking for a bailout of the commercial mortgage market. Commercial mortgage REITs have recovered quite a bit in the last week or so, but prior to that they were hit with margin calls as the value of their CMBS assets fell and started a chain reaction of forced selling creating more forced selling as prices dropped. CLNY is not a mortgage REIT, but is the external manager for one in Colony Credit Real Estate (CLNC) and CLNY owns 36% of CLNC's equity, but CLNY and its preferred stock declined alongside the commercial mREITs anyway.
CLNY's current strategy is to "focus on building the leading digital real estate provider and funding source for the occupancy, infrastructure, equity and credit needs of the world's mobile communications and data-driven companies." They started down this path last July by purchasing Digital Bridge Holdings, a private equity firm that managed six separately capitalized digit real estate companies and a $4B fund it co-raised with CLNY, Digital Colony Partners Fund (which recently acquired ZAYO). Along with Digital Bridge came a new management team that is slated to take over CLNY on 7/1 and move Tom Barrack to Executive Chairman. This might be the right strategy, the tower and data storage REITs all trade at rich valuations, if CLNY can fully pivot maybe they'll get some of the benefit of that premium, but most of the value here is in the legacy assets.
Let's start with CLNY's capital structure as of 12/31/19:
|CLNY's Q4 Supplemental|
Their main assets are majority interests in two large portfolios (essentially REITs in their own right), one in an assortment of healthcare assets (but mostly senior housing and skilled nursing) and the other in select-service and extended stay hotels with brands associated with either Hilton or Marriott. Both asset sleeves refinanced their debt in 2019 and pushed out maturities to 2024 and 2026, I haven't spent much time on the covenants, but the debt is non-recourse and under a worst case scenario, CLNY could mail back the keys to the lenders. In hospitality, I do tend to think extended stay is performing better than other segments (still long some STAY) as its more of a residential replacement than true travel and then select service might recover sooner than destination resorts or convention heavy locations. But again, non-recourse, a blow up in either or both would be a scary headline but wouldn't take down the entire enterprise, for the below, just going to assume both portfolios are zeroes.
The remaining assets are an interesting grab bag, cynically, it seems like CLNY was used as a way for Tom Barrack to invest with friends or in vanity projects whether it made sense for a public REIT or not:
1) Investment Management Business
When CLNY (originally CLNS) was formed in the three way merger with NSAM and NRF, I figured CLNY wanted to be the next Brookfield Asset Management (BAM), they would mostly be an asset management company and then would have "YieldCos" they would manage and partially own. They've sort of done that, just not executed as well. But with the acquisition of the digital business, they have a considerable management company arm that is essentially unencumbered and generates approximately $160MM a year in base fee revenue.
2) Colony Credit Real Estate (CLNC)
CLNC is mostly a commercial mortgage REIT but does own some net lease properties and other assets, it's suffered like the rest of the sector, but has generally limited CMBS exposure at under 7% of assets, recently closed a CRE CLO which termed out much of its debt, and has been current thus far on any margin calls. Interestingly, I've only seen margin calls on RMBS or CMBS and not whole loans, whole loans are likely harder to price or more negotiable, might be worth focusing on mREITs with more whole loan exposure than to securitized products.
At Thursday's ~$5 close, CLNC has a market cap of approximately $665MM, trading at about 30% of the last reported book value (likely coming down). But a 36% ownership at today's depressed prices is still worth $240MM to CLNY, plus the management fee contract but we're including that in the investment management business above. They do account for their stake in CLNC via the equity method, so its grossly overstated at the moment compared to CLNC's market value, meaning an accounting impairment is likely on the way. CLNY's long term plan with CLNC is to sell their position down over time once it is trading more inline with book value. CLNC is interesting in its own right and might deserve a separate post, but for the purposes of CLNY let's say it survives and leave it here.
2) Other equity and debt portfolio
Here's the grab bag of other assets that includes some directly held real estate (sometimes the result of a foreclosure), their $186MM investment in DataBank which is one of the six companies that Digital Bridge manages, a stake in Albertson's which might be one of the few large companies to conduct an IPO this year (can't think of a better year for a grocery store to come public again), and all their co-investments in institutional funds they manage.
This sleeve is valued at $1.8B on the balance sheet and CLNY pre-corona intended to monetize $300-$500MM of assets this year. That'll likely change, but even putting a significant haircut on the assets, let's say they're worth 30% less in this environment, making the net equity worth ~$900MM, that's probably overly punitive as a lot of this is at cost in their financials, but the exercise is to see how much value is left for the preferred assuming an extended crisis.
This modified SOTP is too severe, but just illustrating that I think the preferred stock is still money-good versus a trading price in the $16-17 range.
Disclosure: I own shares of CLNY Preferred Series G
Nice post. Have you looked at Ladder Capital? Mostly whole loan exposed so has met all margin calls on their smaller CMBS book. Do you know how the secured debt on whole loans work? Do missed / deferred mortgage payments remove loans from asset coverage calcs? Any mechanics there?ReplyDelete
I haven't looked at them yet, but interestingly the new CLNC CEO came from Ladder. I'm not sure of the repurchase agreement mechanics on whole loans, just assume its more underlying asset performance driven than price drive, there will surely be pain in the underlying performance but the originator will have more control/options in how that gets worked out? At least that's my assumption. For the CRE CLOs, missed payments will cause haircutting in the asset coverage calculations, and the margins there are relatively small compared to a traditional CLO, so I imagine a lot of those will see funds diverted initially from the equity/sponsor. But overtime they can be cured.Delete
Just had the same thoughts on these (I bought the Is).ReplyDelete
Have also been a heavy buyer (though not as heavy as I'd like) of SACC/SCCB--notes which represent basically the only debt for SACH, a tiny hard-money real estate lender. A host of reasons for caution--recent management change (was 2 brothers, now is one of those brothers), concentrated in high-tax, NY-dependent Connecticut, recently expanded to other geographies where they have less expertise and more reliance on 3rd parties, are lending to probably weaker borrowers--but they lend very short-term at a reasonable LTV, have brass-knuckle expertise as hard-money lenders, which will be useful if things do sour further, and have a clean, easy to understand model and BS. high-30% return to par (in 4 years for the first series), plus ~9% current cash yield, and VERY good coverage. Was obviously more tempting when they were sub-$10, but I think this does better during a protracted swoon than many prefs, and still offers nice upside if/when things normalize.
Thanks - interesting idea, I'll take a lookDelete
Any insight as to why Tommy boy is selling his series G at ~10 per share?ReplyDelete
Hard to say, he was a buyer the previous week, rebalancing between the preferreds? I sold the G's today, bought the I's, just depending where liquidity is might be able to get a better price, think they're all pari passu.Delete
Hi, thanks for the great analysis. I'm thinking of getting into this now. What is your exit strategy? Is it short term and just taking profits as they come or long term and hitting that possible price of $25?Delete
Somewhere in between. I'd say my turnover is likely to be higher in the current environment, so if it trades up to $22-23 in the near term and there are better opportunities out there, not going to wait for the extra couple dollars. Same goes on the downside, if I'm wrong, might be quicker to exit too.Delete
Thanks I appreciate the reply. Would you buy CLNY? Or do you think it's too risky?Delete
I haven't bought the common, that's probably the best answer I can give to it. I think to buy CLNY you need to have some view or confidence in the new business plan of being a digital infrastructure investor/manager and how likely they are to succeed there. I think the preferred is a shorter putt.Delete
Thanks for your help. I will stick with the preferred stock for now. I look forward to your future posts! Have a good day!Delete
Cash balance typo in your SOTP? I have been looking at this as well and it's an interesting one.ReplyDelete
Ah thanks, yeah should be $520MM.Delete
Thanks for the post. Have you looked at Cedar Realty Trust preferred?ReplyDelete
I haven't, thanks for the idea, I'll take a lookDelete
Took a brief look at it, seems like if the assets are worth a 12% cap rate on 2019 NOI (who knows what 2020 will look like) the preferred stock is cover? Is that about right?Delete
I want to look into their redevelopment and other capex needs, essentially had zero cash at year end.
How did you get to 30% discount for CLNC?ReplyDelete
It's about 30% of book, not a 30% discount, sorry if that wasn't clear. Book value was $16.49 as of 12/31 (what's it now?), trading for ~$5.00.Delete
how are you getting to $520 cash? Isn't it just:ReplyDelete
12/31/19 BS: Consolidated $1,205,190 less NCI $114,224 = CLNY Share $1,091mm
Less: $403mm in pref redemption (Jan 20)
Plus: $179mm from RXR sale
Adj. 12/31/19: $862mm
I was using the number from their Q4 press release (2/28), which should include the RXR sale:Delete
Liquidity and Financing
As of February 25, 2020, the Company had significant liquidity of $1.3 billion including $520 million cash-on-hand and through availability under its revolving credit facility.
Got it - thank youReplyDelete
Hi, I just the news that Colony is delaying their preferred stock dividend. Does that change your opinion on this or do you think buying at the dip might be a good idea?ReplyDelete
It doesn't change my opinion really, still think these are money good in the long run, but hard to time when to buy a dip. Their posture seems to be that they'll suspend the preferred dividend, but then Barrack boldly says that the common stock's survival a certainty? It's relatively small for me, might add more if it dips on a true suspension of the dividend, but I feel good about it eventually recovering to ~par.Delete
Thanks for the quick reply. I'll be adding more!Delete