Q4 2019 Earnings Call
Greetings and welcome to the colony credit real estate Inc. fourth quarter full year 2019 earnings conference call. At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
Once you require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host Jason carry Investor Relations.
Good afternoon walking the call any credit real estate Inc. fourth quarter and full year 2019 earnings conference call.
We will refer to call any credit we were thinking a C.L. and see calling me credit real estate call any credit for the company throughout this call.
Speaking on the call today, the company's President and Chief Executive Officer, Kevin Triangle, Chief Financial Officer, you already in General Counsel, David Hollaway.
Chief Accounting Officer break Sarah you know is also on the line to answer questions.
Before I hand, the call over to management. Please note that on this call certain information presented contain forward looking statements. These statements are based on management's current expectations and are subject to risks uncertainties assumptions.
Potential risks and uncertainties could cause the company's business and financial results to differ materially.
Discussing some of the <unk> that could affect results. Please see the risk factor section of our most recent 10-K and other forward looking statements in the company is correct periodic reports filed with the FCC from time to time.
All information discussed on this call is a them today February 27 2020.
The company does not intend and undertakes no duty to update what future events or circumstances.
In addition, certain financial information presented on this call represents non-GAAP financial measures. The Companys earnings release, and supplemental presentation, which are at least this afternoon and is available in the company's website presents reconciliations to the appropriate GAAP measures and an explanation of why the company believes such non-GAAP financial measure.
As yours are useful to investors and now I'd like to turn the call over to Kevin Tranquil, President and Chief Executive Officer of colony credit real estate.
Thank you, Jason and I want to thank everyone for joining today's conference call covering comedy credit real estate 2019 fourth quarter and full year results.
But before we begin or official presentation.
And now that the portfolio bifurcation plan has been successfully implemented and the company is well positioned for growth.
All of which you will hear about shortly I wanted to announce but I would be stepping down from my position at the president and CEO of quality credit effective February 29.
Andy with managing director and our Chief operating Officer Global credit quality capital has been appointed interim Chief Executive Officer in President effective February 29.
Overlap 12 years and he has played a pivotal role and building colony capital credit business and has a deep understanding of our company.
With Andy's capable leadership I'm confident that the company is well positioned to continue executing on legacy nonstrategic asset resolution and growing the company's core portfolio.
With that I'd like to now give a brief overview of the company in 2019 highlights, including an update on the portfolio bifurcation planned announced last quarter and then covered the key management priority for the coming here.
Redington, our CFO will then discuss details of our fourth quarter and the full year financial performance, including specifics on our deployment activity investment portfolio balance sheet and liquidity position.
The fourth quarter wrapped up a productive in pivotal year for colony credit real thing, where we made significant progress executing our strategic initiatives.
Most importantly, we announced the portfolio bifurcation plan in November which was the major milestone in our overall business strategy and prioritize rotating out of our legacy non strategic investments in order to address the dislocation between our current trading price and the net asset value or the portfolio and ultimately drive shareholder value.
We're pleased with our early progress the sale activity on the legacy non strategic for LNS portfolio.
We announced the portfolio bifurcation plant in November of last year and as a reminder, this plan included a onetime separation of our balance sheet into one a 4.5 billion dollar core portfolio and to a discrete 54 at that $1 billion legacy non strategic portfolio, which consisted up.
Operationally intensive owned real estate and all of our retail exposure and certain other legacy loans originated prior to the formation of fiancee.
All of which are inconsistent with our go forward core business.
Which will primarily focused on senior mortgages mezzanine loans net leased real estate.
Overall I'm pleased with the early success and executing the portfolio bifurcation plan.
Since announcing the plan in November we have sold seven legacy non strategic assets for approximately $43 million gross sale proceeds representing approximately $10 million and game and a 29% premium to their GAAP net book value.
In addition, six more assets are now under contract for approximately $126 million in gross sale proceeds, which would provide an anticipated gain of approximately $27 million.
And it 58% premium to get that book value.
Furthermore, 27 assets with a gap netbook value of $228 million are now listed for sale or loans that are expected pay off in the near future.
Altogether. This represents approximately 75% of the Alan as portfolio that is resolved or an active phases of resolution.
Our overarching objective is to liquidate the Alan as portfolio in an orderly fashion and reinvest the resulting available proceeds to grow our core portfolios Undepreciated book value and the company's core earnings.
Evidence of this our core portfolio Undepreciated book value per share increased from $13 in 96 cents.
And the third quarter debt $14.40 in the fourth quarter, primarily as a result of the one that sale proceeds being redeployed.
In the core portfolio during the quarter.
These recently completed sales coupled with several in execution transaction suggest that the book value of the Allen at that that their supportable.
It's also highlights our prudent approach at resolving these assets, where we remain highly focused on maximizing proceeds from all dispositions with no need or intention fire sell any asset.
Turning to deployment.
We remain very active in 2019, having committed over $1.6 billion, a total capital across 27 investments primarily in multifamily office senior loan.
Since inception in early 2018, we have committed approximately $3.8 billion a total capital across 65 investments through our core portfolio that are 100% performing and have a blended to current are are we up 12%.
The successful deployment has helped us achieve a 14% year over year increase in total company earnings and over a 20% increase in total investment assets since inception.
Turning to our balance sheet improvement, we significantly improved our capital structure during the year, culminating with the successful $1 billion manage yellow execution in the fourth quarter.
We're pleased with the closing of our first CLL demonstrating the strength of our loan origination business and that's a relationship and ability to access the capital market.
The transaction accretive Billy replay $770 million recourse repo debt with non recourse financing at a lower cost of funds.
In addition, we develop 17, new institutional investor relationships across six classes of offered nodes.
We believe to manage nature of the transaction exemplifies institutional investor confidence in the management team.
Finally, we substantially reduced our risk profile and improve the earnings quality of our portfolio throughout the year through the resolution of approximately $350 million of asset sale, including $140 million that private equity secondary address.
$76 million retail loan resolutions.
$40 million of CMBS VP sales at approximately $100 million of other non core asset sale.
In 2019, we concentrated our origination efforts, primarily on senior mortgages, which represented over 87% of our total deployment.
Approximately 78% of our total deployment occurred or multifamily at office asset classes with a focus on markets with strong fundamentals that demographic.
We expect to continue this investment pattern in 2020, focusing our investment activity in coastal market as well as other markets demonstrating a combination of job growth affordability and positive in migration.
With that I think the switch gear to discuss the key management priorities as we head into 2020.
First we will continue to work with a sense of urgency to prudently resolve assets in the LNS portfolio.
Thanks to efforts in the fourth quarter, we have momentum heading into 2020 with approximately 75% are they at one as portfolio either sold under contract or listed for sale.
More importantly, these proceeds will provide an engine of growth for our core business.
Next we are highly focused on the deployment of our liquidity into targeted asset classes to grow our core portfolio.
We remain confident in our ability to continue to source transaction to an investment level return on equity into low double digits.
Third we will continue to enhance our capital structure on liquidity position and we'll continue to explore accretive debt alternatives, while maintaining prudent leverage ratios.
And finally with a simplified business plan.
Good progress on our LNS sale, we will look to significantly increase our investor visibility with goals of expanding institutional ownership and equity research analyst coverage of sequencing.
Ultimately I'm confident our ability to execute our priorities in 2020 and expected result of these initiatives will allow us to close the gap between the current share price and book value and position colony credit real estate for long term success.
With that I'll turn the call over to deal right again for a more detailed explanation of our fourth quarter and full year operational and financial results.
Thank you, Kevin and good afternoon, everyone before discussing our fourth quarter and full financial results.
I want to draw your attention to our supplemental financial report, which is available on our website.
Includes additional information on each of our business segments. In addition to a description of how we just fine core earnings.
This definition will excluded from core earnings gains losses, and impairments of real estate.
Including unconsolidated joint ventures, some preferred equity investments, but will include provision for loan losses.
The core earnings will come solely from at coal portfolio.
While we will record legacy non strategic earnings separately.
Similar to last quarter, we're providing asset by asset details for all of our holdings in our supplemental financial report as well as form 10-K, which we filed shortly.
We believe decided transparency.
I will help investors some research analysts better understand that company and the value of our assets given the additional data. It provides on a two business segments. We believe delineating our investments between core and legacy non strategic portfolios creates clarity around the core mission.
Further we believe it will facilitate a greater understanding of our company.
Got it embedded within its assets.
For the fourth quarter sales in sees core portfolio reported GAAP net income of $30.3 million or 23 cents per share.
Core earnings of $43 million, well 33 cents per share.
In addition, the company's legacy non strategic portfolio generated GAAP net income of $3.7 million or three cents per share and LNS earnings of $5.3 million or four cents per share.
For the fiscal year 2019, we reported core portfolio GAAP net income of $75.4 million, well 57 cents per share and core earnings of $169 million dollar 29 per share.
During the fourth quarter, we paid a monthly cash dividend.
14 cents per common share for the month of October on a monthly cash dividend of 10 cents per common share for the month since November and December.
In addition, we were declared a 10 cents per share monthly cash dividend for the month of January and February of this year.
Our annual dividend per share of $1.20 is more than fully covered 180% of full year 2019 core earnings.
Turning now to deployment, we allocated in initially funded $123 million and 77 million of capital.
Respectively during the fourth quarter.
Deployment activity consisted of one senior loan among mezzanine loan growth within the United States and with an expected blended return on equity of over 12%.
These two investments are collateralized by multifamily and mixed use properties.
For the fiscal year 2019, we successfully allocated and initially funded approximately $1.6 billion $1.2 billion of capital respectively.
Across 27 investments to our core portfolio.
These investments carried an expected blended return on equity over 12%.
And that makes it these allocations is approximately 87% senior loans, 12% mezzanine loans from 1% of that.
All of these investments are in the U.S. was a little over 80% split about evenly between the west and north east areas of the country.
Property type mix is approximately 39% multifamily, 39% office, 12% of that makes juice seven cents industrial and 3% her child.
Overall, the thoughtfully diversified imprudent deployment activity for the year was in line with our overall investment strategy.
Additional pull from your activities for the quarter included one full loan repayment for $17 million a gross proceeds along with full partial repayments totaling $27 million of gross proceeds.
There are a total of six sales during the quarter five LNS portfolio sales for $22 million a net proceeds.
63% premium to GAAP net book value.
I'm, one coal fired our hotel asset for $74 million, which was under contract during the third quarter.
I would first slide premium to GAAP net book value.
Turning to I call portfolio as Kevin mentioned Undepreciated book value stands at approximately $1.9 billion.
$14, some 40 cents per share.
Up from $13.96 per share in the third quarter.
Our loan book continues to be the largest segment for the carrying value of approximately $2.9 billion at year end.
Blended on yet levered yield on our loan book is approximately 7.7% than average loan size of $52 million.
Furthermore, the loan portfolio remains well diversified in terms of size collateral type and geography.
Moving to see I read that security is within our core portfolio I pulled further has a carrying value or $363 million at quarter end.
And predominantly consists of investment grade rated securities.
As we've mentioned before I share read this debt securities portfolio as an attractive yield and provides the company, but additional liquidity options within our investment bolt far there.
As wireless access to efficient borrowing alternatives.
Also within our core portfolio net lease real estate comprises 25% difficult far there.
Now to carrying value of $1.1 billion at the end of the fourth quarter.
This portfolio consists of industrial and office properties with a weighted average lease term of 9.4 years.
Net lease assets, a core to our investment strategy due to the long term stable cash flows. They provide in addition to the potential for capital appreciation.
As part of our in house disclosures, which were implemented in the third quarter, we introduced risk ratings on all lines within our core portfolio.
It is to provide more detail regarding the credit risk profile by coal business.
Our overall risk rating at year end remains at 3.1.
Consistent with prior quarter.
With one line moving from a three to a full rating.
That learn as a mixed use mezzanine loan located in San Rafael California.
And the increase was based on a change in the borrowers exit strategy from individual residential home sales to a bulk sale approach.
The borrower is still planning to repay colony at maturity in June Twentytwenty.
We will continue to monitor this position, we'll update you in future quarters.
Turning to our legacy non strategic portfolio. This segment is predominantly composed of operationally intensive owned real estate.
Retail and certain other legacy loans originated prior to the formation of sale and see.
Total GAAP net book value for this portfolio stands at approximately $359 million or $2.73 per share.
As Kevin mentioned earlier.
We closed a $1 billion managed commercial real estate collateralized loan obligation during the fourth quarter.
Richard critically financed interests in 21 floating rate mortgage loans secured by 39 properties.
83.5 ignition advance rate.
At a weighted average coupon at issuance of libel plus 1.59%.
The cooler transaction costs.
The loan collateral includes multifamily office and hospitality purposes across 10 states in the district of Columbia and features a two year reinvestment period.
The CR AC yellow posted the company's capital structure improved the return on equity on our retained and trusts.
As a direct result of the investor relationships with fostered origination teams execution capabilities.
Capital markets capabilities.
Moving to our balance sheet total that share assets stood at approximately $5.6 billion as of December 31st 29 team.
Two assets ratio was 57% the ended the quarter.
And our current liquidity stands at approximately $378 million.
Between cash on hand, and availability under our revolving credit facility.
Lastly, I'd like to comment on the current expected credit losses will see so accounting standard which was adopted by the company on January 1st Twentytwenty.
Based on our portfolio size and composition as of December 31st tried to 19.
Spect.
To record a day, one Cecil reserve.
Of approximately $23 million.
Which will have an approximately 18 cents impact.
Our January 1st Twentytwenty book value per share.
The seasonal resentful modulating future periods.
Turning adjustments to net income as our portfolio expands so contracts the credit quality on risk attributes of our loans improve all declined.
Wearable market conditions strengthen or weaken.
We will continue to provide further disclosure.
Well on guarding reserve impacts giudice cells in the Q1 Twentytwenty earnings conference call.
In closing 2019 was a transformational year for sale and see if we undertook significant actions to focus our ongoing efforts on growing I call portfolio.
Rationalizing assets within our legacy non strategic portfolio.
The fourth quarter results are demonstration of the efficacy of our business strategy.
Looking forward to Twentytwenty, we expect the coal portfolio to see most stabilize performance with increased core earnings as a result of reinvesting capital for Mellanox resolutions into core assets.
Before handing out cool over to our general Counsel David Palembang.
I would like to thank Kevin both personally and on behalf of the team for his leadership and friendship and to recognize his tireless efforts to bring our strategy to fruition or the last two years.
Thank you, Kevin and we wish you the best of luck.
David.
Thank you Neil.
Before moving onto the Q any portion of the call I would like to discuss this special Committee review process.
Previously announced during the fourth quarter colony credit real estate independent directors received a letter from colony capital.
Turning to explore the possible internalization of the management LLC and the transfer of colony capital credit management business to see on C.
In response to our board of Directors formed a special committee, consisting exclusively of in London, and disinterested directors to explore this internalization proposal as well as other strategic alternatives. The special Committee has engaged both an independent financial advisor and legal advisor to assist them in their review.
Further update colony capital publicly reported today, they plan to take actions necessary to enter into an agreement with the LNG Ghandour, one or more third parties with respect to a disposition of colony capital management agreement will see LNC subject to the company's skews that whether in the form of in internalization of management.
Sales of non capitals management agreement with see on C or similar transaction.
Which is to dispose of colony capital management agreement with see on C.
The scope of any such transactions is focused on colony capital management agreement with the LNG and not telling capitals private credit investment management platform and associated private credit interest.
Please refer to our earnings release and soon to be filed 10-K for further disclosure regarding these matters with respect to the process, we will not be addressing any questions on these matters on the call or otherwise at this time.
With that we will open the line for question limited only to our fourth quarter and full year results operator.
Thank you Eric questions today come from Randy Binner, B. Riley FBR.
Please proceed with your questions.
Yeah.
Thank you just just wanted to say Kevin it's been good to work with you and best of luck on your next professional endeavor.
I'm not quite ready by me.
Yes, you got.
Well I you know I'm, then I'm going to try to talk about just the fourth quarter results, but did I guess this the the potential for a buyback.
It is still listed in the.
In the press release, if you didn't discuss it on the call, but I mean, how.
You know, how how would you think of allocating capital to a buyback relative to other investment opportunities considering you're trading at you know 70% to all in book and.
You know I, you know, implying an earnings yield on buying back the stock risk free that I think rivals what you're doing in the portfolio can you kind of walk us through how you think of that capital allocation decision.
So so Randy you you're right. We did disclose that said the board has authorized or extended the authorization for a buyback.
And we have considered that in the past and I think we've we've discussed that.
On coal as previously.
In terms of comparing that to our investment.
Opportunities and we we think that there's still some very compelling investment opportunities out there in terms of.
Making loans.
And some good pipeline.
And beyond that I would just say because we're in the process, we do have a blackout.
So so it really hasn't been on the table because of that because of that blackout.
Okay, and then I wanted to go back to the the comments around.
Sales proceeds in the legacy book and how.
Thank you outlined this in the press release to that you're you're transacted and expect to transact book value, but the.
The the 228 million you mentioned in the script that's that's.
Is that simply just the the real estate that you have all real estate available for sale and legacy or is there theres more for sale than that correct.
That's right Randy and perhaps if it's helpful right right. The last page of the press release has a listing of the.
The the LNS resolutions. So we've got sold under contract and then as the expected loan payable listed for sale. So that's the to 28, where you see the net carrying value is the combination of the expected loan payoff and listed for sale.
And then as a another group that is preparing for sale. So not currently listed and on we'll be looking at in the future, but you could also see associated with that the a the the the gross carrying value. So we've described that nets of if any associated debt.
Understood. Okay. That's helpful.
And.
Yeah, the fourth quarter, the macroeconomic environment in environments commercial real estate was supportive and there's been a little bit of a change in them in the markets.
You know expectation.
For risk here this week.
You seen any.
Anything different in your negotiation as their day to day activities in light of what's going on and the broader market.
Well as you say, it's really been over the last a this this last week, where we've seen a a.
A heightened view on on the risk of of Corona virus, and perhaps how that tell pace, but mainly corona virus. We are monitoring that in terms of day to day conversations.
I haven't really had a a substantial shift over over the last couple of days.
What ways with with potential borrowers, but in terms of our overall business approach now were monitoring this very carefully.
We were obviously focused on our exposure to too.
Potential in this area, which would probably be around the hospitality industry about 14% of I book is focused in that area, but as I think we've described here in the past with that call loan book.
We have very strong.
Sponsors involved in those deals and we have a a decent amount of equity subordination in those deals. So we feel comfortable in terms of potential to withstand some some blips that may come through this.
Other sides of it to think about just longer time are.
And just what happens to the economy, which then has now gone impacts on on interest rates are obviously, so with thinking about that but I think still little too early to to change our strategy around it.
Right and then but last question as you kind of broader the the property in other income line was significantly better than our mop.
Was there anything unusually good in that line in the in the quarter.
I don't think so leaks and.
Double check that and we do have our 10-K.
Or at least coming out, which will have sort of mdna explanations that Randy but we couldn't.
And see if there's any better explanation for movements, but I think it was consistent with what we'd anticipated.
Okay, Great I'll leave it there thanks a lot.
Okay. Thank you Randy.
Thank you. So much we have reached the end of the question and answer session. This will conclude todays conference you may disconnect. Your lines at this time, we appreciate your participation and have a great evening.