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
16 W. Elizabeth Avenue, Suite 4
Linden, New Jersey 07036
© 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.