Q3 2020 Colony Credit Real Estate Inc Earnings Call

25, and 14 53, respectively.

These book values of both increased this quarter.

In more detail.

We continue to make progress on the resolution of our legacy non strategic assets we.

We anticipate collapsing a bifurcated financial reporting in this portfolio segment in the first quarter of 2021 as it will have been substantially resolved.

This will also simplify our reporting in 2021.

As we begin to pendant towards offense, we've started the implementation of our business plan to build earnings this.

Intel's reinvestment of our cash balances into newly originated first mortgage loans our.

Our strategy will be to focus on making floating rate loans to transitional assets as well as fixed rates the Mds condo alone.

We will utilize our warehouse lines for interim financing, where we have 1.5 billion of available capacity.

We will later contribute these loans into CLO, where <unk> securitization as we expect those markets to further improve and 2021.

It was by shifting the focus and momentum of the <unk> team beyond the challenges of COVID-19 and toward playing offense.

In our effort to close this gap, we are committed to continuing to protect the balance sheet, while redeploying capital into new investments build.

Building earnings and we instituting a quarterly dividend.

In summary will not fully out of the woods, we have accomplished many of our goals during this challenging time.

We are now focused on executing our business plan to grow earnings.

Capital. Additionally, we have three loans under application totaling approximately $94 million and committed cap.

Loan portfolio performance during the third quarter and October remained strong.

98% of core portfolio expected cash interest payments were received.

And 40% on Securities read though.

Lastly, as it relates to the core portfolio. The manage cielo continues to perform and benefit from LIBOR Flores at the underlying loan level, we continue to monitor and manage the performance of the trust for COVID-19 related developments as well as ordinary course loan payoffs within the underlying portfolio.

$7 million or 30 cents Michelle.

Since.

With the intent of resuming dividend payments to stockholders.

The Q1 2021.

Also within our core portfolio net lease real estate.

On a carrying value of $746 million at the end of the third quarter.

This portfolio consists of industrial and office properties, the weighted average lease term of 7.4 years.

The net lease assets are core to our investment strategy to sort of long term stable cash flows as they provide.

In addition to the potential for capital appreciation.

Turning to our legacy non strategic portfolio. This segment is predominantly composed of operationally intensive bound sales.

Real estate boom.

Full retail and certain other legacy loans originated prior to the formation Sheila C.

Please pick up your handset before pressing any keys to withdraw your question. Please press Star then too.

We will pause for a moment as callers join the queue.

First question is from Stephen laws from Raymond James. Please go ahead.

Hi, good afternoon.

Mike and his team a nice nice job getting a lot Donna no.

There are about six months.

Film thickness, taking time to join Mike but.

Good to see that you're shifting here to offset and then starting to pivot in that direction.

Pricing floating Larry pricing on a on a on a on a weight basis is probably in before as low fours to high 4% right.

Ro so probably 11%.

Leopard.

And we're looking at assets that we would look at four a CLO contribution and so is that market improves we'll put these on a financing lines, but we're gonna look to exit through Ah cielo or quite frankly as loans come out of the CLO that we currently have replaced those loans some of which we've already done the things that we are also avoiding in terms of trying to change them.

And the portfolio with keeping into alone sizes and are probably $25 to $75 million in size and really don't want to go much above that that would be really exceptional we want to make sure that any loan that we do.

Every lever it we can cure it but there's a problem we could take it off the line. So we're going to avoid big nine figure loans, we're going to avoid pre development, we're going to avoid ground up construction. The transitional that we're doing is really acquisitions.

Maybe some new tendencies or taking out an existing construction loan where Lisa has begun and we're going to step in and continue taking <unk>.

Taking the the leafs up risk and that could be with the existing developer or with with a new one I think many of the lines were looking at all or acquisition. The investment market has slowed down considerably because folks just don't know how to price assets right now given COVID-19.

So right now the demand for credit is not Super high but.

Excited about what we're seeing so I think as we move forward to close the answer on that it'll be a lot with with Andy had been doing when Andy was involved.

And transitioning the firm in 2019 with the team where they will focus on tll assets and we're going to be doing that.

With the addition of George Koch.

Which I think is a major coup for the firm.

We will also have the ability to do securitize loans in the <unk> market.

That may take US 90 to 120 days to get the plumbing in place to do that.

But we'll we'll try to augment the business with a higher row and that as well.

Great. Appreciate appreciate the color on that and as we.

I guess shit the little towards the existing portfolio can you talk about.

Maybe a near term so say three to six months outlook on on expected commitments from an unfunded commitment standpoint that will need to be funded and then.

Repayment outlook do you have any visibility on loans that are maturing here in the next one to two quarters and how repayments are looking on that on that front.

In terms of future fundings that is that is a number we can we can give you I'm going to say that total.

It's probably something under $200 million all the way out.

Past 2021 in fact.

So you might want to cut that number and half of 2021, it's not a big it's not a big number for us in terms of future.

A future fundings, we have seen some loans payoff in the CLO and we have replace those loans with loans from the balance sheet. There are some loans that could continue to go away on a CLO and we will continue to do that we're we're originating current loans cielo is a great liability structure in terms of cost I think it's got like a one LIBOR plus 159.

Cost basis, so anything that comes out of that <unk> will look to put any new.

Originated <unk> and as long as they meet the guidelines in terms of weighted average maturity and and and and things like that I think the thing we are going to focus on is really trying to repatriate.

The lower yielding underperforming assets and try to try to monetize though so that doesn't necessarily mean sell them, but it means that we do have a slug of assets, whether it's the law mixed use which is nonaccrual we put the waterfront property, which is described in the form 10-Q, you'll see tomorrow was in the previous filings.

That is not accruing at this point in time.

So we haven't MSC MBS, we turned off picking the interest carry on that and we were writing down the basis. So we've got a slug of assets that are underperforming and it would really moved to kneel for us. If we can if we can repatriate bad capital and put that back out in the market.

Yep.

Makes sense I appreciate that color.

On the dividend in return of capital to shareholders kind of.

I guess, a two part question here, but.

And I'll wrap it up but Mike.

Mike if he could talk a little about how we should think about framing the dividend should we look at the the adjusted.

Core LNR Cps at I know you said it probably gets more straightforward on a reporting basis next year, but.

It's something where you are.

Positive.

Distribution requirements as opposed to losses is carry forward or are you looking to pay yielded two or three times.

You know.

San Pierre can you talk a little bit about how you're thinking about framing the size of that dividend.

I think that.

We're not looking at we're not looking at a yield on day one.

We are looking at when we when we fully deploy capital and we repatriate some of the assets on the balance sheet trying to figure out where we think that will bring earnings in terms of that deal.

But on day, one I think we're looking to pay a dividend.

So we're not we're not looking I was shooting for a metric.

When we looked at the when you look at the prepared remarks, you see I mentioned that we sold core assets.

We've sold some of the discount took a hit on a navy.

We've done that financing and those were those were not.

Mince words around that that is very compelling its a huge our away having said that.

Just out of the gate as we amended our line during the course of the year.

We were.

Hi, good restriction regarding.

Buybacks in and leakage of dividends beyond what's required for wheat status. So we are we have a restriction on buybacks now that could be discussion that we have with our lenders at a later date.

But I also note that so while the earliest compelling.

The capital is gone and we're on a size right now where I think shrinking the firm in it to make to move the needle you really have to have the buyback a lot of shares and if you do that the the percentage ownership by colony capital increases.

You have more overhang, there and from what we've noticed in the buybacks, which have been nominal in the sector, they really other than giving confidence to shareholders, which we want to do that.

It's very short term effect in terms of moving the stock now obviously it has long term effect on EPS, because you taking shares out of the market, but we don't see necessarily the pop in that so thats why specifically stated in the prepared remarks, we recognize that there is a discount but we think the plan to get the discount gap closed is that.

Going out and buying shares in the market onetime and having a one or two day effect on the stock.

But rather to effectuate the plan and use the capital to effectuate. The plan. So right now I think the buybacks are probably something that we're not highly focused on certainly we are restricted from doing it so that would have to be remedied, but.

But even if even if we didnt have the restriction I think we'd rather we invest into the business and I think we're at a point where given the equity the equity size of the firm.

I don't know if that makes sense to shrink.

The size of the firm in terms of economies of scale.

In terms of where we are with shareholder equity.

Great I appreciate those comments and you make some very very good points. There obviously, it's clear you've put a lot of thought into that so.

Thanks, a lot for taking my questions. This afternoon and have a great. Good evening.

Thank you.

The next question is from Randy Binner Anderson B. Riley. Please go ahead.

Hi, Thanks so.

Let me try to ask a couple.

Dimension the dividend.

The best I can so I guess first Mike when you said you were deploying 100 million.

Was that generic or does that matter to the $23 million in 94 million identified in the south on page five right. So that would that does not that is that's a very good question. So if you look at if you look at leverage of around 70% 75%.

That could be probably something like 300 something million in loans. So on the 100 million that hundredish million that were deploying right. Now then that may be 30 out of.

The the first 100 slots and we don't have any clear cut we're doing 50 to 100, what we're basically saying is with gradually deploying cash and as we're deploying that cash will also closely monitoring the portfolio to make sure that there are no delevering means elsewhere in the portfolio and as we get more confidence around.

That more of that 400 million will make its way into loans. So if you took all $400 million you could just.

Multiply that by.

For you guys you got your you got your loan amount.

Now if we get into the CMBS conduit business rally, we got probably uses 50 to 100 million of capital because you're turning over loans every two three months and getting that capital back and recycling it.

So they may be a portion of that 450 that we allocate to the conduit business, but thats probably not till.

Late fourth quarter early 2021.

Because there was some partial income that that was recognized during that period them that'll come out.

We then have a number of sales that are taking place primarily in yellow nice book.

During queue for as well, which will further reduce income so.

I think you have to.

Three those components to keep driving that.

24 cents downwards.

To form a base.

Q1, where we would set a dividend.

And then as Mike said will be deploying either through out of existing commitments all through new deals that we pick up.

And that will give us an opportunity to grow during the year or later in the year, but we did a sort of a baseline of Q1.

Alright that makes sense and then.

But.

Whatever that basis.

And make you said, there's no you're not thinking of metrics, but I mean is it is it reasonable to think of it being.

Like a 90 or 100% payout ratio if I wanted to think of it just generally.

I mean, ultimately ultimately will be.

We don't get there by the end by the end of the year, but I think our goal is to start off with something that we know we can pay.

And then as we redeploy capital and we're confident around other issues around the balance sheet. If there are any covid persist. So it's really what we're trying to do Randy is yes, I think the initial dividends start that's where we're opening up.

We don't want to go backward.

So we will open up there and if if drawing after a quarter or two we have confidence that were redeploying capital and the use of our capital elsewhere. It's not needed then that dividend is going through is going to come up and again I have to comment that this is a discussion that we have to have with our board they.

They know that we're saying this obviously that we want to reinstate the dividend, but we have to we have to have a.

And the fourth quarter.

Kind of resolved where that starting point will be and start off with confidence level that we're not going backwards.

This is a paste it will only grow from here.

Yeah. This is helpful.

Then to the non-core being claps that kind of 75 cents and book value that still remains.

When you say that's collapsed I guess.

How should we think about what happens to that 75 cents is it is it basically disposed of in monetized between.

Now and whenever non-core has collapsed next year is that is that is that the easy and right way to think of it or is there. Some other way to think of what happens to that portion of book value.

Overtime.

Be transitioned into cash.

But in the interim period.

Who will be grouped in with total assets. So we just want to call it out separately. So it's.

It's not a red.

Reduction in bulk value as that goes away as we conversion from from.

LMS assets to just sort of included was a total assets as we collapsed in time.

Balance sheet back together and ultimately catch I'm sorry.

I jumped <unk>.

The commentary on it.

No I think that covers it I think it just rover and I got it I just made me.

Sorry go ahead any.

No I think that the story is today.

Portion of the book stands at about 6% of net book value and what you could expect to see over the coming quarters is a meaningful reduction of that.

At which time will collapse, the reporting but continued to manage the underlying assets to maximize value.

Got it okay I'll leave it there I can I can take some of the the other details dropline. Thanks, so much.

Next question instrument, Steve Delaney from G&P Securities. Please.

Please go ahead.

Thank you Hey.

Hey, Mike it's good to be home with you and congrats to you and Andy and kneel on the progress that you guys have made an exciting to go into 2021 with the new game plan.

Steve Thank you for joining us it's a pleasure to have you.

It's my pleasure all month, George co ordinator is.

More very familiar but I apologize I, just googled name, but I couldn't find it can you just tell us like where do you spend the last five or 10 years.

It's actually he'd be very flattered that you ask five to 10 years.

[laughter] I'm not going to.

I'm not paying them as an old Guy like me.

[laughter] George.

Georgia switches years at major financial institutions.

Initially Morgan Stanley, where he ran the securitization got platforms. There then he wants to Merrill Lynch prior to the financial crisis.

And then after the financial crisis, when I was that be of a George and I work together. They are he rejoined the farm and then George and I also work together at lava capital for a period of time and then unfortunately, we lost them too.

Two back to Morgan Stanley.

And I got him off the bench recently so.

So we see that.

Decade major institution.

In this business.

Well between George and yourself, you guys shouldn't have much trouble getting back into the conduit club I would think with your with your relationships. So that's that's a great development and congrats on that so I just have one other quick thing.

You describe your first few owns.

20, $30 million type loans, I mean, it kind of feels like with a call middle market, but the real question is.

Historically, we always talk about property types multifamily industrial so how much are you thinking about geography. These days and just a combination of things like rent controls social unrest urban flight.

You've got a choice to wear which yagur fees you want to expose your capital too and I'm just curious if your thoughts about that today with what we've been through with Covid and everything are different than they might've been two or three years ago.

Thank you I think that that plays and well first of all.

For the time being the the property types that were focused on given what's going on in the market have narrowed and that's the theme surface everywhere.

And that will hopefully changes, we get a better idea of how retailers effective certainly.

I actually think the retail will have a longer effect impact.

Then the lodging business the lodging business will come back those assets people want to go and travel and beat an asset for a reason.

You may get some changes because of.

A remote working in the ability to telecommunications or whatever but.

We think that the hotel business will eventually will eventually come back.

So there are states the growth states, we love.

And you're seeing that flight going on so whether it's in the southwest Southeast Texas.

All of those states are are all positive on our radar screen.

Will do business in any state and any any any location.

Based on the loan metrics, but we are there are concerns that there are some states, where where taxes are going up and there is a shrinking population.

And that is an overriding concern that we look for.

And so there have been some transactions we've looked at where we've all things being equal we say that that's an area. That's a state that's the city where taxes could be going up dramatically. We don't know the state of play.

In terms of social unrest I think we think this is a piece of short term phenomenon and right and these are.

Hopefully that times.

Right when that they're not going to deter us from from from doing transactions, but generally where we're trying to stay middle market. So doing a deal and major msas. What are you doing bigger loans, probably something we avoid so something where we're doing as I said 25 to 75 billion dollar loan sizes.

More middle market more secondary cities.

Is probably the initial the initial focus.

That sounds that sounds great well listen thanks for the Tom and great to beyond with Ya.

Thank you thank you for joining us.

Okay interesting concludes the question and answer session, how I'd like to turn the conference back over 10 like Nazis for any closing remarks.

Well, thank you for joining our call today, and we look forward to updating you in the fourth quarter results in February. Thank you very much say well.

This concludes today's conference call you may disconnect. Your lines. Thank you for participating in hypertension K.

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