April 06, 2016 - 9:39pm EST by
2016 2017
Price: 16.50 EPS 1.87 2.00
Shares Out. (in M): 135 P/E 8.8 8.2
Market Cap (in $M): 2,227 P/FCF N/M N/M
Net Debt (in $M): 3,295 EBIT 0 0
TEV ($): 6,148 TEV/EBIT N/M N/M

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  • REIT


     Colony Capital (CLNY) is a high quality REIT. It went public in 2009 as Colony Financial with the purpose of investing in various types of distressed real estate securities. It was managed by Colony Capital which was formed in 1991 by Tom Barrack who had previously invested in real estate for the Robert Bass Group. He is 68. The president of CLNY is Richard Saltzman who has been with the company for 13 years and was formerly head of real estate at Merrill Lynch. All of the top managers have been with the company for a number of years. In 2015 Colony Financial bought out the management company and became internally managed. CLNY paid $660 million of stock (or operating partnership units which are convertible into shares) of Colony Capital which was valued at $26.19 (the VWAP reference price) when the deal closed. As a result, Barrack owns 20.7 million shares of CLNY (15.3%) and Saltzman owns 2.2 million shares (1.6%). Altogether, management and directors own 23.8 million shares, 17.7% of the shares. With this internalization, Colony Capital became an investor in real estate of all types for its own account and a investment advisor to third parties with whom CLNY invests along side.

     CLNY reports five business units and corporate.

    1) CLIP (Colony Light Industrial Platform) started in 2014 and ramped up in 2015. At the end of 2015, CLIP owned 325 light industrial buildings totaling 34.7 million sq. ft. across 16 major markets. CLNY had a 62.4% ownership in the venture and had invested $495 million in it. The other 38% is held by limited partners who pay a fee to CLNY for its management. There was $$163 of uncalled capital commitments and $76 million undrawn on its acquisition facility at year end. The CLIP business will continue to grow as opportunities present themselves. CLNY's share of the equity in CLIP is $1.2 billion against which there are $720 million of non-recourse liabilities. CLIP contributed $44 million to FFO in 2015.

    2) Single Family Homes - CLNY acquired a 23% interest in about 19,000 single family homes for a net investment of $395 million at the end of the 4nd quarter of 2015. In the 1st quarter of 2016 this business was merged into Starwood's operation (SFR) and CLNY now owns 15.1 million shares of SFR. SFR owns and manages over 30,000 homes in the US. In 2015 the sector contributed $21 million of FFO. Going forward, CLNY will receive $13 million a year in dividends from the SFR position at the current dividend rate. SFR's dividends are expected to grow going forward.

    3) Real Estate Debt - This area is CLNY's legacy business. CLNY has invested in a wide variety of debt instruments including first mortgages, mezzanine loans, b-notes, preferred equity and non-performing loans. Altogether, CLNY has $3.2 billion invested against which there is $1 billion of non-recourse financing. CLNY's affiliate, Colony Mortgage Capital makes short term, first mortgage loans with loan-to-value ratios of 70% to 80%. In the past, CLNY has been able to securitize these. Its retained subordinated bonds from these yield LIBOR + 12% to CLNY. In 2013 CLNY recapped a UK shopping center with a 140BP million first mortgage and received 35% of the equity. This has since been refinanced but CLNY retains the 35% equity interest. Since CLNY's inception, it has acquired $5.5 billion of FDIC portfolios at 47% of face value. CLNY contributed $127 million for 40% of the portfolios and the FDIC retained 60%. This has been paid off. In sum, CLNY is capable of buying and reworking an large variety of assets successfully. This business segment is far and away CLNY's biggest profit contributor generating $250 million of FFO in 2015.

    4) Other Real Estate - CLNY had $1.2 billion invested in other real estate with $600 million of non-recourse debt against it. A triple-net-lease portfolio is a little over half the value. This portfolio consists of 53 buildings all of which are 100% leased. It is geographically diversified with holdings in Norway, Switzerland, France, Minnesota and Arizona.  The rest of the "other" category consists of 161 buildings scattered across the UK, Spain, Italy and the US. Office buildings, hotels, industrial buildings, a portfolio of Albertson's stores and a 2% equity interest in Albertson's represent the rest. The category contributed $56 million to FFO in 2015.

    5) Investment Management - With the acquisition of its investment manager, CLNY is now in the investment business offering products to third parties. At the end of 2015, CLNY had $9.3 billion of assets under management for which it earns a fee plus a carried interest in some instances. The sector contributed $36 million of FFO in 2015. In the 4th quarter of 2015, CLNY closed a new $688 million real estate credit fund. Outside capital funded contributed $550 million and CLNY is co-invested $138 million.

    6) Corporate - The expenses of running CLNY are accounted for in a heading entitled "Amounts not allocated to segments". These expenses include interest, compensation, administration, preferred dividends and miscellany. They amount to about $155 million on an annual basis.

     The company's balance sheet is solid. It is not a mortgage REIT. At year end 2015 it showed;

$315 million outstanding on an $800 million revolving credit facility due 8/2016 or converting into a 2-year amortizing note

$402.5 million 3.875% convertible bond due 1/15/2021 convertible at $24.8175

$200 million 5% convertible bond due 4/15/2023 convertible at $23.595

$625.75 liquidation value of 3 cumulative preferred issues - 8.5%, 7.5% & 7.125%

$1,543.25 claims prior to equity

$2.846 billion stockholders equity

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Barrack is getting older. He has an employment contract that keeps him involved until he is 73. He needs to transition the business to Saltzman. While Barrack got most of the upfront payment from the internalization, the deal includes a back end payment that rewards Saltzman with 22.123% of $120 million of stock valued at the $26.19 reference price. The back end shares will be distributed if;

1) If FFO for three years following the merger totals $6.06 a share, then $35.4 million of stock is paid out. If FFO comes in at 87.5% of $6.06 ($5.30), then the payout will be 54,000 shares for each 1/2% that FFO exceeds $5.30.

2) If FFO exceeds $6.06, then $716,000 shares will be paid out for every 1/2% of excess. If FFO exceeds $6.82, $17.9 million of shares will be paid out.

3) $35.4 million of shares will be paid out if $3.975 of outside investor funds are brought in over the first two years or $6.65 billion of outside investor funds are brought in in three years.

4) $17.8 million of shares will be paid out if outside capital raised exceeds the target in item #3.

5) $16.8 million of shares will be paid out if $500 million of outside capital is raised for non-real estate related funds, such as hedge funds.

This is a well managed business with a good reputation. It has solid assets and is well financed. It sells at a reasonable price. It has an incentivized management. It pays a dividend of $1.60 which give you a yield of 9+%.

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