Shares of Colony Credit Real Estate (CLNC) have surged over the past six weeks, nearly doubling from a low of $4.37 on Oct. 29 to a high of $8.11 on Nov. 25. Since then, CLNC’s share price has been trading in a range, closing most recently at $7.75 (on Dec. 8).
The rally in the stock has been fueled by a sequential improvement in 20Q3 results and optimism about a faster-than-anticipated rollout of a COVID-19 vaccine. In early November, CLNC reported 20Q3 GAAP earnings of $0.04 per share, reversing 20Q2’s $1.77 loss. The 20Q2 net loss reflected impairments, write-downs and losses on sales for a number of investments. In 20Q3, those losses largely subsided. CLNC also recorded 20Q3 cash flow from investing activities of $381 million, driven by repayments on loans and real estate securities and asset sales. Substantially all of the proceeds were used to pay down debt, including the entire outstanding $340 million balance on its revolving credit facility. As of Nov. 5, CLNC had $609 million in liquidity, including $438 million of cash and $171 million in credit facility availability. Management declared that it has succeeded in stabilizing the company’s balance sheet.
Although management remains vigilant, CLNC is now turning its attention to new investments, which will allow it to rebuild its earnings base. It expects to reinstate the dividend on its common stock during 2021, assuming no deterioration in the macroeconomic environment, but most likely at an initial level well that will be below its previous monthly rate of $0.10 per share. Longer-term, CLNC and Colony Capital (CLNC), its external manager and largest shareholder, will address CLNY’s earlier proposal to internalize CLNC’s management.
Despite the progress that CLNC management has made in stabilizing its business and positioning for an eventual upturn, the rebound in the stock has benefited from the rebound in the broader market. While the news on the vaccine is encouraging, it appears to me that this rally is well ahead of the fundamentals. With another wave of the coronavirus upon us, the economic recovery has tapered off and the risk of another economic downturn remains high, which would further delay the permanent recovery that CLNC’s borrowers and lessees need to continue meeting their obligations. For that reason, I think CLNC’s stock is vulnerable to another setback, even though I think its longer-term prospects are promising.
December 13, 2020. (Excerpt from a report originally published on December 9, 2020. Please contact me for the full report.)
Stephen P. Percoco
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