Colony Capital: Shares In This Under Siege REIT Could Double

Summary

• LA-based Colony Capital has been beaten down by a disastrous merger, according to IPO Edge editor in chief John Jannarone.
• Based on Jannarone’s analysis and the new involvement of an activist investor, he sees a recovery in Colony’s near future.
• Specifically, he likes buying Colony Capital at $5 with a stop loss at $3.50, and upside potential to $11 over the next year.

IPO Edge editor in chief John Jannarone told viewers of Real Vision’s Trade Ideas that Colony Capital (CLNY), a beaten-down REIT, is set to recover from a merger that sent its stock tumbling off a cliff in 2017.

The three-way merger was “misguided” and the company struggled from the beginning to match up smoothly with the other two companies, Jannarone said.

The turnaround point for CLNY began earlier this year, when an activist investor, Blackwells Capital, got involved. Jannarone has a source close to Blackwells who told him that the activist investor will require Colony to either “do something drastic,” like selling assets or running a real auction process, or they will try and replace the remaining directors and board.

The Trade

So, why is this positive for Colony’s stock? Jannarone did a sum of the parts analysis where he studied the seven different groups of the company:

He found that CLNY is worth at least $11 per share, more than double its current trading price of around $5.

Jannarone says that the pressure from Blackwells is “enough to be a catalyst” for the stock. “I think they want to see this thing approaching what the sum of the parts value is, and that’s over 100% higher than the current price,” he said.

He likes buying CLNY at $5 with a stop loss at $3.50. He sees upside potential to $11 over the next year. “The downside is super limited,” Jannarone added. “And this thing yields around 10%... so, especially with interest rates going down, it can't fall that much more.”

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments

[Justin Wiedeman]

Was this a classic pump and dump?

Sure looks like it.

I don't own the common, I'm well situated in the Preferred. But at some point I might be interested in the common, but not yet.

[Justin Wiedeman]

Any ideas on what Core FFO looks like this Q? Will it cover the dividend to the common?

Interesting nothing burger of an article this morning.

www.wsj.com/...

[stonergreg13]

Added more common 4.85, will add more at 4.75.

Greg

[Charlie's Munger]

how about at 4.50?

[stonergreg13]

Yep, add every .10 down. $4.65; 4.55 and 4.45. Getting almost 10% now. Expect the sale of the industrial portfolio will be a huge catalyst. Until then, clip coupons every 90 days. No problem being paid to wait!

Greg

[soulsilk]

Barrak's gone and it all starting to move. It's really time to load

[dennis rfm]

It sure would be nice to get rid of this terrible management team.

[jaerickson]

I feel lucky. I owned this six years or so ago for a couple years and then sold. don't think I will tread there now.

[AndreP]

A lot going on all of a sudden. Long but ready to dump.

[Pradiyie]

Tom Barrack is big time lying gas bag!He is a disastrous businessman

[stringcatt]

and the douche bags retained from the NRF merger.

[stringcatt]

and another failed 'businessman's' best friend Donald Trump.

[Value27]

Anyone have access to the text from the recent articles from the past 1-2 weeks shown here: www.blackwellscap.com/news? - "Colony Unit Sale Won't Pacify Aintabi's Fund" and "Blackwells May Launch Director Fight at Colony" Seems like things are heating up.

[Justin Wiedeman]

They need to. Fire needs to be lit. On the positive side, LIBOR 1/4 point cut (corresponding with Fed Funds rate) should mean common dividend covered in Q3 or Q4. Was not covered in Q4 2018 or Q1 2019 on the basis of Core FFO.

[Value27]

Imagine what a company like Blackstone or Brookfield could do with this asset base given their reputation, investor base, and low cost of capital.

[Stoxnstix]

I hear ya. It's absolutely amazing to me how these guys could have taken all these real estate assets down to a third of their value in a REIT structure. We all know real estate did not really lose that sort of value in this economy. It should be a crime.

[stringcatt]

Mueller may of thought so, too. Barrack was on Mueller's list.

[Value27]

It has been nearly 3 years since the merger and the company has been trying to monetize or syndicate its big balance sheet investments in healthcare and hospitality since day one with nothing material to report. We keep hearing that the foundation is being laid to do something with those segments, but how long can that really take? The market doesn't get much better than it currently is in terms of asset values and interest rates, although I do expect libor to drop quite a bit further (so would a buyer though). I think Jannarone is correct that the board and management team will get pushed out fairly soon if the company doesn't unlock a substantial portion of its NAV. I really think Blackwells would win a proxy fight, although I suspect there are some big transactions in the works already that will fend them off. I really hope that the company is repurchasing common stock hand over fist, or that it will with proceeds from bigger asset sales. Selling the industrial assets in this market should not be difficult and makes a lot of sense if the company can repurchase stock at ~50% of NAV.

[gekko69]

A 10% yield is concerning. Normally means a divi. cut is coming again.

[Seeking out theTruth]

Tom Barrack. Enough said. He controls this vehicle and sucks money from it. There is no activist with enough power to change his methods of looting this company. And I am a shareholder. Why? Because it think it is going sideways and acts more bond like at this point. Barrack and Colony controlled NRE just agreed to be sold at $17.03 per share after repeatedly reporting NAV of over $20. So that is how things work in Barrack world. Not believing the story about a double. Just more pumping and I predict it won't help a bit.

[Ern McCracken]

Right, and they decided to go into the oil business yesterday..... Not sure they have a core competency at this point, but I certainly don't think they have it in the oil business.

[linkdonald]

With apologies to Samuel Johnson on the subject of second marriages (mergers),; this sounds like the triumph of hope over experience.

[Justin Wiedeman]

They have a highly inefficient tax structure. Taxes paid on Investment Management and Debt and Other Equity. Yet, significant losses in REIT segments. That must be fixed. You are right that significant and substantial restructuring is needed. I'm not sure Management, that is happy to be there and fly the corporate jets, is with them. I hope so. It's not a criticism of Management, just a reality that when you are very wealthy and having fun - change can be hard to come by.

The real question - are they still hungry? If so I see significant upside - if not I see stagnation and the Preferred are a great investment either way.

Cash Taxes (thousands) 2018-14,476 2017-53,017 2016-7,190

[JohnJKCal]

I thank Real Vision who got some info from the Activist and Justin W. for his prior articles on SA. I have lots of legacy Preferreds, G, bought at IPO when Saultzman was the CEO. Not sure whether Saultzman, Colony Capital which literally "raped" Northstar REIT was the start of management greed and incompetence. Yes, this Tom Barrack is at least as bad as Saultzman. CLNY is almost as bad as AHT, pure EBITDA play with no respect to debt to equity ratio and balance sheet. I plan to get rid of all my preferreds before the Company may be taken private as in AMTrust Financial non cumulative preferreds and baby bonds and Brookfield having bought over 90% of TOO (TeKay Offshore).

[Justin Wiedeman]

@JohnJKCal

I understand, if I get wind of going private I'll be joining the Activist (Blackwell) and soliciting support for removal of the Board. But perhaps a private offer could result in a buyout of the Preferred given that litigation that would certainly ensue and stymie a sale. A sale would take out the cost of capital paid by CLNY, other than the small portion of fixed rate debt, and should be substantially higher than the current price.

As you know the problem for CLNY is the equity and debt cost of capital. To an insurance company or other fund with lower cost of capital, this would be a buy at $8 or $9. Given the underlying value of assets, I recommend a Strong Buy on the I and J.

But I hear you.