|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|
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
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+%.
|Entry||04/07/2016 04:29 PM|
Going forward, CLNY will become more of a real esate equity owner and fund manager. It should get a higher multiple. How high, I have no idea, but today's valuation is not challenging. In addition, CLNY listed $700 million of assets that earn about 2% today. Those have been earmarked for recycling into higher yielding investments.
So, I think that it is worth $20.00. That and the dividend gives you a pretty good rate of return.
|Entry||04/07/2016 05:27 PM|
I thought they only earn carry and fees on new money raised, not what existed at time of internalization
|Entry||04/07/2016 06:49 PM|
No, they earn fees and carry on all of the assets that old Colony Capital had under their management prior to internalization, the $9 billion of fee earning assets. Of course, new Colony Capital pays the salaries and expenses of that business. It is a nice chunk of business, for which good money was paid, but it is a wasting asset due to the life span of each fund.
|Entry||04/07/2016 07:28 PM|
ELE2996: Could you please walk us through how you arrive to your $20 target in a little more detail and where you see the upside beyond that? What are your assumptions?
|Entry||04/08/2016 08:14 AM|
CLNY has historicly done a good job investing in real estate debt. With the internalization, the company has a much broader and more attractive area of opportunities available to them. They should continue to be able to produce $2.00 of FFO and, if history is a guide, they should be able to increase FFO. The $1.60 dividend is attractive and can possibly increase. I think that the stock can trade at $20.00 because it is a ptetty solidly run business which is able to produce distributable cash flow without unduly high levels of leverage.
To get beyond $20.00 you have to believe that the company can be successful in bringing in 3rd party funds on a promoted basis. In its 2014 annual report, the company wrote "To date, our Company has deployed its capital directly into equity and debt investments and only earns the income from the associated real estate investment. But with our ability to sponsor new funds, we can effectively "leverage" our capital as the general partner, where we will not only earn the income from the underlying rael estate investments, but also fees and potential carried interest from the private funds under management. As depicted in our presentation filed Janaury 2015 that can also be found on our website, returns on equit ("ROEs") should meaningfully increase, perhaps by an average of 4.5% which implies total average ROEs of 17% going forward." All of that is "on the come". If CLNY is successful in this, the stock can be worth more than $20.00. Right today, at $16.50, I don't think that you are paying for the opportunity, should it come to fruition.
|Entry||04/08/2016 10:43 AM|
That's a terrible question. I am still in NRF. It maybe a good source of funds, but I am waiting to see what comes of the review at NRF/NSAM. I still own both.
|Entry||04/11/2016 01:18 PM|
Sorry that I was not clearer. I mean legacy as in "original and they still do it". FWIW, I think that it is a benefit that the company is involved in many aspects of the real estate market.The debt market is important in the real estate business.
|Subject||Undervalued at a discount to book|
|Entry||04/14/2016 09:18 AM|
Colony has been confusing historically, but the company recently began disclosing the true economics of the business in the Q4 2015 supplemental (here: http://bit.ly/1SWsgyf. The financial situation will clear-up throughout the year to reveal a well covered 9.4% dividend yield and a diverse set of growing businesses that are worth in excess of ~$20 p.s. of book value, for a base case 30% return (including the dividend). If Saltzman hits incentive AUM fund-raising targets, the stock will be worth in the mid-$20s for a 50%+ return. At a discount to book, the investment management business, industrial REIT, SFR stake and equity investments are significantly undervalued. I expect the valuation gap to close as transparency increases throughout the year.
Segment Overview and Valuation
There are five segments and unallocated corporate expense. The picture linked to below contains a sum-of-the-parts valuation with a brief description of each segment and summary profitability metrics (earnings/NOI/EBITDA). The changes from Q4 run-rate to 2016P are driven by adjustments for same-property growth, new funds closed, properties acquired and one-time expenses.
|Subject||Re: Undervalued at a discount to book|
|Entry||04/14/2016 09:36 AM|
Sum-of-the-parts with business descriptions and notes:
|Subject||Re: Re: Re: Undervalued at a discount to book|
|Entry||07/08/2016 12:52 PM|
The whole Colony NorthStar complex is incredibly cheap at these levels. I am adding to CLNY rather than NSAM/NRF because I think the distribution of outcomes is better if the deal breaks, but all three are highly undervalued (and I don’t think the deal will break).
If the deal goes through, you have a combined entity generating $1.55-$1.75 of AFFO (per NSAM share), with a well-covered $1.08 dividend (10% yield), trading at 9x earnings. The upside is 70% assuming little growth, including the dividend.
If the deal breaks, CLNY management pursues a similar strategy and the stock trades at a 20% discount to book (deducting goodwill from pro-forma book value), with a well-covered yield and a top management team at the helm. One year upside is $21 for a 45% return, including the dividend. The stock could be worth $25+ in a couple of years as management hits AUM fund-raising targets.
The European exposure at Colony is limited. About 5% of NAV is in the UK and another 14% is in the rest of Europe (~19% total NAV exposure to Europe, ~$670m net assets). Adjusting for a 15% change in the pound/dollar exchange rate lowers NAV slightly and has a similarly muted impact on AFFO. CLNY has FX hedges in place that protect against 15%+ currency moves and $134m of European exposure is a stable investment in Statoil’s headquarters (a single-A tenant owned by the Norwegian government). The NPV of NRE’s $14m annual fee is $180m using an 8% discount rate and assuming it continues in perpetuity after 2034. It is a tiny piece of FFO and the $6 Bn equity value of the three entities.
I don’t think the deal will be recut because it is a value generating solution to each entity’s problems. For NRF/NSAM, it collapses the onerous NRF management fee, derisks NRF’s dividend and provides NSAM shareholders with a large yield uplift. All entities benefit from the immediate synergies and from having a great team raising capital on the Townsend platform. I understand why NRF/NSAM shareholders are upset that NSAM management is receiving $106m in NewCo shares despite missing incentive comp targets, but I view the poor share performance and new comp as sunk costs. The upside hereafter is substantial; 60% returns are easily foreseeable in 2017.
I think the next few months will be much better for Colony NorthStar. The company will release pro-forma financials that improve visibilty into NewCo's earnings and I wouldn’t be surprised if they disclose additional synergies with the final proxy in the October timeframe. After the deal closes, the company will be well positioned to repurchase shares if the valuation is still at these levels. Colony has a history of underpromising and overdelivering: guidance on the SFR merger was sparse, but increased slowly over time and the business has outperformed expectations. I foresee a similar dynamic unfolding at Colony NorthStar.
|Entry||09/28/2016 06:20 PM|
Check your CLNY sharecount--should be 135mn. You are probably missing the 20mn+ OP units.