Colony Capital: The Big Pivot on Hold

In response to activist pressure precipitated by a deterioration in its financial performance and a steady decline in its stock price, Colony Capital announced in November 2019 a new strategy to focus on growing its Digital Realty and Investment Management business, divest over time its healthcare, hospitality and other equity and debt assets and sell substantially all of its investment management business to Colony Credit Real Estate (CLNC). 

Most of that plan, however, is now on hold due to the economic downturn precipitated by the COVID-19 pandemic.  Colony has experienced operating losses from a plunge in occupancy at its hospitality properties, more muted but still consequential declines in occupancy and increasing operating costs at its healthcare properties, payment defaults on its other senior loans, mezzanine loans, preferred equity interests and property leases and sharp declines in prices of its real estate debt securities.

As a result of the squeeze on its own profitability, Colony has announced that it is in payment default or non-compliance with $3.54 billion of its total $8.10 billion non-recourse debt, 90% of which is attached to its hospitality properties.  The company is in active negotiations to execute forbearances and/or debt modifications and extend maturities on loans coming due.

Despite these challenges, Colony has taken steps to bolster its liquidity and financial flexibility.  In March, it borrowed $600 million under its corporate credit facility.  In late June, it amended its credit facility to ease financial covenants and add digital assets to the borrowing base.  In exchange, the company paid down the facility by $200 million, leaving $800 million of cash at corporate and $100 million of available credit.  In mid-July, Colony issued $300 million of 5.75% Exchangeable Senior Notes due 2025, the proceeds of which will be used to repay the maturing $400 million of 3.875% Convertible Senior Notes on January 15, 2021.  Also in mid-July, the company paid the quarterly dividends on its four outstanding series of preferred stock.

In the midst of all of this, Colony has completed a change in its senior management.  On July 1, Marc C. Ganzi, who was brought in to lead the Digital business, became Colony’s CEO, replacing Colony founder Thomas J. Barrack, Jr., who remains Executive Chairman.  Jacky Wu, another Digital executive, is now Colony’s CFO.  Longtime Colony veteran Mark M. Hedstrom continues as EVP and COO.

From here, Colony will stay focused on addressing the current challenges in its businesses. As the economy continues to improve, so should its financial performance.  The company could get a boost from another round of aid to the hospitality sector from the Federal government.  Although there are questions about potential long-term structural changes that could affect recovery values especially in sectors like hospitality, price discovery for real estate properties will improve with the economy.

With the normalization in economic activity, Colony will be able to proceed with its pivot to Digital and its plan to divest most of its real estate assets and the investment management business.  Although there are considerable uncertainties that could limit ultimate recoveries, Colony’s stock is trading at around $1.90, off of its all-time April low of $1.33, but well below its pre-COVID levels of around $6.00.  Assuming that its healthcare and hospitality properties can return near to their pre-COVID valuations, my analysis suggests that the stock has upside to around $4.01 ($3.68 with the potential dilution from the conversion of the new Exchangeable Notes into equity).  Growth in the Digital business and a recovery in the value of Colony’s 36.5% stake in CLNC (which would be driven by a rebound in CMBS and other real estate debt securities prices) could provide further upside.

Colony also has four series of preferred stock outstanding that are each currently trading around $20, a meaningful discount from the $25 liquidation value. At those prices, they offer a 9% dividend yield, which I view as attractive.

Colony Capital, Inc. (CLNY) will report 2020 second quarter earnings on August 7.  Colony Credit Real Estate, Inc. (CLNC) will report its second quarter earnings on August 6.

July 29, 2020

Stephen P. Percoco
Lark Research
16 W. Elizabeth Avenue, Suite 4
Linden, New Jersey 07036
(908) 975-0250

© 2015-2023 by Stephen P. Percoco, Lark Research.   All rights reserved.

This blog post (as with all posts on this website) represents the opinion of Lark Research based upon its own independent research and supporting information obtained from various sources. Although Lark Research believes these sources to be reliable, it has not independently confirmed their accuracy. Consequently, this blog post may contain errors and omissions. Furthermore, this blog post is a summary of a recent report published on this subject and that report provides a more complete discussion and assessment of the risks and opportunities of any investment securities discussed herein. No representation or warranty is expressed or implied by the publication of this blog post. This blog post is for informational purposes only and shall not be construed as investment advice that meets the specific needs of any investor. Investors should, in consultation with their financial advisers, determine the suitability of the post’s recommendations, if any, to their own specific circumstances. Lark Research is not registered as an investment adviser with the Securities and Exchange Commission, pursuant to exemptions provided in the Investment Company Act of 1940. This blog post remains the property of Lark Research and may not be reproduced, copied or similarly disseminated, in whole or in part, without its prior written consent.

This entry was posted in CLNY, Real Estate and tagged , , . Bookmark the permalink.