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Assessing Survival Potential: Colony Capital

Harrison Schwartz profile picture
Harrison Schwartz
14.74K Followers

Summary

  • Most REITs remain around March lows despite a recovery of major indices.
  • The REIT Colony Capital has struggled with profitability for years and has seen significant impairment losses.
  • Colony Capital has rising leverage, high interest expense, and high executive compensation, which have made its cash flow margins quite thin.
  • The REIT also has high exposure to the senior living and hotel industries, which are likely to face the brunt of COVID-19-related losses.
  • Without significant cost-cutting efforts, it is unclear that the company will see a full recovery.
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The U.S. equity market crash of March 2020 was one of the fastest-paced stock market declines in history. The following rally has been one of the market's most rapid rises. That said, a surprisingly large number of companies and industries have not felt the ongoing rally and remain near March 15th lows. In my opinion, these are the companies investors should be looking at today.

In general, companies that have failed to return fall into two categories: those undervalued and forgotten by the market, and those which carry extreme risk. In general, REITs fall into either of those two categories, as most remain near mid-March lows. Some are likely to see significant COVID-19-related losses, and others are pulled down by investors' latent fear of REITs (stemming from the last financial crisis).

One battered-down REIT is Colony Capital (CLNY), which is one of the largest opportunistic real estate investment companies in the world. Problematically, the company focuses on hospitality and healthcare properties (mainly senior living) which are likely to be hit hard by the current situation.

Colony Capital's Ongoing Difficulties

The company has been struggling for quite some time. The share price has been in a negative trend since 2015, and the company has been unable to turn a profit for years. Its leverage has been on the rise, as have impairment losses from underperforming assets. See its performance as well as dividend yield and P/B below:

As you can see, the total return of CLNY has been deeply negative for quite some time, falling around 66% since inception (with dividends included). While its returns have been abysmal, its valuation is very low today, as it is far below its book value and pays a very high dividend yield. Obviously, if the company can manage a turnaround, it may be very rewarding to investors.

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This article was written by

Harrison Schwartz profile picture
14.74K Followers
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (83)

T
Stock up quite a bit since the earnings call.

Here is yesterday's presentation:
ir.clns.com/...

note Page 8: Tom Barrack is no longer part of Management
s
@Tosh123 ,

Author said it’s a value trap and best to avoid. Trading at $1.99 at the time. Can’t believe he even has the nerve to publish another article. Thanks for the post.

Greg
Uncle PennyBags profile picture
@stonergreg13 Looks like our bullishness and prudent buying of these assets was the correct move. I remember catching so much flak for buying 500K worth of preferreds at $9.36 avg across all 3 G, I , and J. I've got a couple mil in gains that says that was also prudent.
k
Excellent commentary,thanks.
d
This comment section was excellent. Thank you all for adding so much to the discussion.
r
anyone have any thoughts on the 50+ million volume of shares traded yesterday at 1.80? That's 10% of outstanding shares...
S
regarding the preferred stock buys by Barrack, the SEC filing states the purchases are by an investment entity managed by Colony not him personally, per the filing :
The securities are held by an investment vehicle between and managed by (i) an investment fund sponsored and managed by affiliates of Colony Capital, Inc. (the "Company") and beneficially controlled by the reporting person through the general partner of such investment fund and (ii) a wholly-owned subsidiary of the Company's operating subsidiary, Colony Capital Operating Company, LLC. The reporting person disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein, and the inclusion of these shares in this report shall not be deemed an admission of beneficial ownership of all reported shares for purposes of Section 16 or for any other purpose.

the filing does not state what his "pecuniary interest" is so my guess is these purchases were in one of the many separate entities CLNY manages and Barrack's interest if any is only through what he owns of CLNY.
at least they were paying attention and picked up cheap preferreds which is a vote of confidence in those but who knows where the common ends up or how long preferred dividends are suspended. I certainly don't feel good about entrusting any $ with Barrack but there is a price at which there may be value in the preferreds and possibly the common
Awayk profile picture
Agree with Tosh123, stonergreg13 and Uncle Pennybags, who got this started... Yeah, charitably, the article leaves much to be desired and I have read others that are also a mile wide and inch deep from this (rather prolific) author. All that aside, the comments are really useful if you view CLNY as a reasonable near-term "spec" buy so, thank you. CLNY is predisastered as they say and Marc Ganzi has been described to me as a genius by people who I consider geniuses. Good luck to all CLNY longs.
D
I’ve owned this thing for tooo long. I’ve been able to average down to just around $2. It’s been tough making myself keep buying.

If it goes below my cost I’ll buy more.
r
Why did not the management purchase its own stock at multi decade lows? I was buying it myself at $2, $1.5 etc. My effective purchase price now is at $3.63. Really big question to the management, why are you not purchasing the shares? A very good use of a portion of the 1 billion it now has in reserves would be to repurchase at least 100 mln shares.
Uncle PennyBags profile picture
Probably the same answer I've heard on several conference calls now when management of every company ever has been asked the same question as of late. To hold liquidity for keeping solvency and other possible acquisitions of distressed assets that may arise in the current opportunistic environment. In a world where companies are having a hard time getting cash, when you have it, and a lot of it, you sit by and let others panic before you come in and buy them up on the cheap. If they immediately just buy their own stock they lose out on other large and strategic potential buys. They already bought assets in Brazil and Canada in the last few weeks for a song. More to come.
r
Dear UnclePennybags

I wish I had the optimism you have on this CLNY, but hanging in there. Have been hanging in there for quite a while now. Learnt a lot of real life valuable lessons investing in CLNY. I may have lost a bit money on this but definitely learnt a lot with CLNY.
Squabkiller profile picture
They did not buy, directors were given 81291 shares for free. Barrack SOLD and was given shares. I went over the last 15 form 4s.
T
Agreed the stock will be sloppy over the next 18mths (I'd recommend the prefs for those that don't have the stomach). Tomorrow's quarterly call will be brutal. BUT this company is completely misunderstood at the moment as exhibited by the author. Barrack's political beliefs definitely doesn't help them tell their turnaround story, the sooner he exits the better. Anyone associated with Trump is basically toxic to 50% of the country. Once Ganzi is at the helm and they get over 60% of assets in digital (expected by year-end) the stock will start performing better.

I differ with the authors' conclusion.

1. A dividend cut and equity dilution are possible?
Yes, there will definitely be a dividend cut. No, they won't dilute since they have been buying back stock/prefs and the new CEO is locked into shares and is compensated in stock

2. Unfortunately, its recovery strategy has been to transition away from its core business to the data center business, where it has essentially no foothold?
Why is it unfortunate they transitioned away from Hospitality/Healthcare to Digital last year, that makes no sense. CLNY is small and nimble enough to roll up smaller data centers/towers/microcells/fiber that the larger players (American Tower, Equinix, Crown Castle) won't bother with. They are the only player in the market pursuing all 4 digital strategies. Their purchase of Zayo last year was rather large? Saying they have no "foothold" is pretty odd.

3. Instead of reducing its assets and paying off its high-interest debt?
They sold Industrial to Blackstone at a profit last fall, used capital to repurchased preferreds
They sold RXR in January for a profit. They sold off hospitals last year.

Their hospitality/healthcare debt is NON-RECOURSE that was termed out last year. Why are you consolidating that on CLNY's balance sheet?

They have over $1B of cash on the balance sheet. They haven't tapped their $750MM revolver

4. The company seems to wish to pursue endless growth by chasing performance?

They have under a billion now in Digital Colony Fund #1 that they are putting to work during an opportune time instead of sucking their thumbs.

5. Personally, this strategy seems to improve executive compensation as opposed to shareholder safety?

They have replaced mgmt at CLNY and CLNC that are paid via stock. They cut back staff last year and lowered executive costs.

Has this author listened to their recent quarterly calls, read their presentions or looked over their 8k/10ks?
s
@Tosh123

Agree, nice post. They withdrew there dividend guidance, so I hope they actually eliminate the common dividend. I'm very long the common and a small position in the pfds. Use the money saved to continue the purchase of digital assets and hopefully the turnaround will begin in 2021. The announced dividend cut should drop the common to 1.50 or below. That's when I plan to add a large amount. JMO

Greg
f
Don't see them eliminating the dividend however i do see them paying bare minimum anywhere between .02 to .04 cents.
A
Tosh 123. Appreciate the post.
d
worth owning for the towers and fiber alone, which are moat assets. Not everything in the IT space is "chasing performance". Google can build their own data centers, but they can't build their own wide area networks, at least not in a reasonable timeframe
robkrow profile picture
Another "expert" "pick" from HDO down the drain.
Squabkiller profile picture
Consistent, at least.
Uncle PennyBags profile picture
I find this a poorly written article lacking some important information. You talk about the high debt level as most REITS have, CLNY has higher leverage, yes, but much of it is variable and when the FED dropped rates to 0, they have seen interest expense savings of tens of millions. I don't see any mention of the comments recently made by Barrack, the outgoing CEO, about how only 4% of revenues were not collected in Q1. He alluded to Q2 being a little rougher, but in this environment, not getting hit by margin calls like most other REITS and having a large margin of accounts paying without issue are two huge plot holes to this article.

Not to mention that not only are they only slightly affected by the pandemic thus far, they have ample liquidity and are one of a few companies actually buying cheap assets during this troubling time around the world. You don't bet on the horse that is hurt and licking his wounds, you bet on the horse that never lost a step and has actually gotten a boost and is running faster when many others fell way behind. Ganzi is taking the healm in 6 weeks, and he is one of the brightest in the digital capital business and I think the discount the market has been giving to CLNY for their leverage and "management discount" for not liking Barrack isn't going to last much longer.

At 11% and a $15 dollar handle when par is $25 and a massive yield to call, I'd be taking a decent position in common here, but a massive position in preferred shares here. There is a reason Barrack spent over a million dollars of his own money on the preferreds on this dip and why Blackrock and Vanguard together own the lion's share of the company. GL
I
"having a large margin of accounts paying without issue"

I'd wait for the cc to reach that conclusion their hotel assets are solid?
Justin Wiedeman profile picture
Hospitals nearly broke as well. Senior Care going broke as well.

It's a CCP Virus world, they are going to have huge cash flow drags.
Uncle PennyBags profile picture
Well, seeing as Hilton just reported top and bottom line beats for Q1, I think it is something to monitor and not jump out the window on, yes. Am I denying their hotel / hospitality properties and senior living properties are possibly having issues? No, but I think across the REIT space in general, the concerns at Colony are way overblown per recent comments from the CEO and the fact that they are actually deploying capital to buy cheap assets instead of hording it for survival. All their digital assets are paying 100% and even expanding in their own rights as well as indicated by yesterday's news on the massive and rapid expansion in Canada off the heels of that deal.
jarhead68 profile picture
You nailed it. Management sucks. Why no one has stepped up to kick Tom Barrack to the curb is a head scratcher. As long as he has anything to do with CLNY, this is a train to nowhere.
Justin Wiedeman profile picture
I have followed very closely. But I'm out.

seekingalpha.com/...
Justin Wiedeman profile picture
Yes, I closed my position on the Preferred. Took a haircut, licking my wounds and moved on...
kanikum profile picture
Good, there are so many other fine companies out there to put your hard earned money to work, so why keep a disaster?
Justin Wiedeman profile picture
But for CCP virus it was extremely under valued. Now... It's a different world.
j
Why? Digit infrastructure is in even greater demand post Covid-19. I'm still attending Zoom board meetings.
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