Colony Capital CLNY
January 12, 2015 - 5:29pm EST by
matt366
2015 2016
Price: 24.81 EPS 1.82 1.87
Shares Out. (in M): 123 P/E 13.6 13.3
Market Cap (in M): 2,720 P/FCF 0 0
Net Debt (in M): 1,065 EBIT 0 0
TEV: 4,120 TEV/EBIT 0 0

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  • REIT
  • Real Estate Monetization
  • Management Internalisation
  • Commercial Real Estate (CRE)
  • Residential Real Estate
  • Real Estate Asset Management
  • Potential Dividend Increase
  • M&A Catalyst
 

Description

Investment Thesis:

 

Colony Financial (“CLNY” or the “Company”) is currently undergoing three major strategic events that should unlock shareholder value. Pre-eminent among these events is the internalization of management. Going forward, investments into Colony Financial will effectively be into Colony Capital, the general partner. CLNY investor incentives will now be more aligned with Colony Capital principals, as well as giving CLNY investors access to the Colony Capital fee stream. The transformation dramatically enhances the investment platform from essentially a real estate loan and equity fund to a real estate fund asset manager with an extremely strong track record. Second, CLNY recently purchased the industrial portfolio of Cobalt Capital for $1.6bn in an accretive transaction, further diversifying the business mix. Third, CLNY is actively pursuing strategic alternatives for its stake in Colony American Homes through a sale, spin-off or spin/merge transaction.

The combination of these three activities has led to some near-term confusion surrounding CLNY’s earnings power and future structure. Upon completion of the above transactions, the revaluation of the business should happen quickly as the dividend is raised to reflect the enhanced earnings power. If one excludes the value of CAH from the current share price, the stock is trading at below 10x pro forma earnings. As the dividend is raised to meet the enhanced earnings, REIT investors will be attracted to the dividend yield story.

 

Company Overview:

 

CLNY is a REIT focused on essentially two segments. Its core operations are primarily composed of interests in real estate and real-estate-related debt, including loans acquired at a discount to par in the secondary market and new originations. Secondary debt purchases may include performing, sub-performing or nn-performing loans. CLNY also owns a 25% in Colony American Homes, a REIT focused on renting single family home rentals. CLNY is currently externally managed by Colony Capital. CLNY has an equity market capitalization of approximately $3.0bn and an enterprise value of $4.1bn.

 

Announced Events Impact on the Financials:

 

The Cobalt transaction, which closed on January 6th, represents a $1.6bn acquisition of 256 light industrial assets. Based on information announced in late December, it is possible to estimate pro forma financials. The business was acquired for a prospective stabilized capitalization rate of 7%, implying approximately $113mm of NOI. With attractive financing set at LIBOR + 2.3%, net income contribution will be about $44mm. CLNY financed the acquisition by selling down some of the equity (retained stake of 63%) and through debt issuance. The transaction will be about 16% accretive to earnings. Street analysts have yet to include the accretion in their models, likely due to the lack of specific guidance provided by the Company.

The internalization of management from Colony Capital is scheduled to close in the first half of 2015. The transaction was completed through the issuance of equity to Colony Capital to satisfy the acquisition price of $657mm. The key principals of Colony Capital, Thomas Barrack, JR. and Richard Saltzman, have agreed to 5-year employment agreements with Colony Financials. Upon completion, the transaction will result in the cessation of management fees being paid to Colony Capital, as well as the receipt of management fees of all Colony Capital funds. The amount of these fees has not been disclosed in the past; however, management has described them as industry standard or approximately 1.5% of AUM. With Colony Capital equity AUM of approximately $10bn, annual management fees assuming a 30% margin on management fees (in-line with other asset managers) should be about $45-50mm. In addition, Colony will save approximately 50% of the existing management fees it pays to Colony Capital, resulting in a savings of $20mm annually. Even with a slightly dilutive stock issuance this transaction is also accretive. Going forward, CLNY will also benefit from performance fees it could earn from new funds raised under the Colony umbrella.

 

Combined these two transactions should result in a significant improvement in pro forma financials for the re-configured company.

 

    Pre-Deals   Cobalt   Colony   Pro
Ticker   CLNY Equity   Trans.   Transaction   Forma
Last Trade   24.81           24.81
Shares Out.   123.1       29.8   152.9
Equity Value   3,054.9           3,794.7
                 
Cash   297.8           297.8
Debt   1,091.8   1,420.8       2,512.6
Minority Interest   271.1           271.1
Net Debt   1,065.1           2,485.9
                 
Enterprise Value   4,120.0   1,615.0       5,735.0
                 
Net Income   224.1   44.8   66.6   335.5
2015E EPS   $1.82           $2.19
Accretion/(Dilution) - %               $0.37
Accretion/(Dilution) per Share - %               20.5%

 

The impact of these events are two-fold. First, as a REIT, the earnings improvement will allow for a significant increase in CLNY’s dividend. Assuming a 20% dividend increase and the maintenance of a 6% dividend yield, share price improvement would be approximately $5.00 per share. Second, the significant incremental cash flow generated from these two transactions will only enhance the Company’s leverage ability and further expand its investment portfolio going forward. Assuming CLNY can identify attractive investments, the incremental cash flow generated from these transactions could have a multiplier effect on earnings. With a pro forma multiple of only 11x, this future growth and dividend expansion has not yet been incorporated into the share price.

 

Finally, the Company has announced its plans to monetize its stake in Colony American Homes. At present, the Street ascribes value to this asset at book value. However, the Company is exploring synergistic strategic transactions with the other public players that could lead to incremental value. Potential public strategic partners include American Homes 4 Rent (“AMH”), Silver Bay Realty Trust (“SBY”) and Altisource Residential (“RESI”). All of these parties could benefit from consolidation and associated economies of scale.

 

An announcement of a transaction of its Colony America segment will also direct attention toward the Company’s sum of the parts value.

 

        Multiple   Value
    Statistic   Low   High   Low   High
Colony American Homes (book value)   521.2   0.9x   1.0x   469.1   521.2
Remaining Business (adjusted for Cobalt)   267.4   10.5x   11.5x   2,807.3   3,074.6
Management Business   66.6   18.0x   20.0x   1,198.8   1,332.0
Combined Value               4,475.1   4,927.8
Pro Forma Share Value               152.949   152.949
Per Share Value               $29.26   $32.22
Premium/(Discount) to Current               17.9%   29.9%

 

 

Catalysts:

 

  1. Management internalization

  2. Monetization of Colony American Homes

  3. Adjustment of Street estimates to incorporate transaction announcements

 

Risks:

  1. Poor performance of investment portfolio

  2. Inability to identify attractive investment criteria

  3. Non-economic acquisitions

 

 

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.

Catalyst

  1. Management internalization

  2. Monetization of Colony American Homes

  3. Adjustment of Street estimates to incorporate transaction announcements

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    Description

    Investment Thesis:

     

    Colony Financial (“CLNY” or the “Company”) is currently undergoing three major strategic events that should unlock shareholder value. Pre-eminent among these events is the internalization of management. Going forward, investments into Colony Financial will effectively be into Colony Capital, the general partner. CLNY investor incentives will now be more aligned with Colony Capital principals, as well as giving CLNY investors access to the Colony Capital fee stream. The transformation dramatically enhances the investment platform from essentially a real estate loan and equity fund to a real estate fund asset manager with an extremely strong track record. Second, CLNY recently purchased the industrial portfolio of Cobalt Capital for $1.6bn in an accretive transaction, further diversifying the business mix. Third, CLNY is actively pursuing strategic alternatives for its stake in Colony American Homes through a sale, spin-off or spin/merge transaction.

    The combination of these three activities has led to some near-term confusion surrounding CLNY’s earnings power and future structure. Upon completion of the above transactions, the revaluation of the business should happen quickly as the dividend is raised to reflect the enhanced earnings power. If one excludes the value of CAH from the current share price, the stock is trading at below 10x pro forma earnings. As the dividend is raised to meet the enhanced earnings, REIT investors will be attracted to the dividend yield story.

     

    Company Overview:

     

    CLNY is a REIT focused on essentially two segments. Its core operations are primarily composed of interests in real estate and real-estate-related debt, including loans acquired at a discount to par in the secondary market and new originations. Secondary debt purchases may include performing, sub-performing or nn-performing loans. CLNY also owns a 25% in Colony American Homes, a REIT focused on renting single family home rentals. CLNY is currently externally managed by Colony Capital. CLNY has an equity market capitalization of approximately $3.0bn and an enterprise value of $4.1bn.

     

    Announced Events Impact on the Financials:

     

    The Cobalt transaction, which closed on January 6th, represents a $1.6bn acquisition of 256 light industrial assets. Based on information announced in late December, it is possible to estimate pro forma financials. The business was acquired for a prospective stabilized capitalization rate of 7%, implying approximately $113mm of NOI. With attractive financing set at LIBOR + 2.3%, net income contribution will be about $44mm. CLNY financed the acquisition by selling down some of the equity (retained stake of 63%) and through debt issuance. The transaction will be about 16% accretive to earnings. Street analysts have yet to include the accretion in their models, likely due to the lack of specific guidance provided by the Company.

    The internalization of management from Colony Capital is scheduled to close in the first half of 2015. The transaction was completed through the issuance of equity to Colony Capital to satisfy the acquisition price of $657mm. The key principals of Colony Capital, Thomas Barrack, JR. and Richard Saltzman, have agreed to 5-year employment agreements with Colony Financials. Upon completion, the transaction will result in the cessation of management fees being paid to Colony Capital, as well as the receipt of management fees of all Colony Capital funds. The amount of these fees has not been disclosed in the past; however, management has described them as industry standard or approximately 1.5% of AUM. With Colony Capital equity AUM of approximately $10bn, annual management fees assuming a 30% margin on management fees (in-line with other asset managers) should be about $45-50mm. In addition, Colony will save approximately 50% of the existing management fees it pays to Colony Capital, resulting in a savings of $20mm annually. Even with a slightly dilutive stock issuance this transaction is also accretive. Going forward, CLNY will also benefit from performance fees it could earn from new funds raised under the Colony umbrella.

     

    Combined these two transactions should result in a significant improvement in pro forma financials for the re-configured company.

     

        Pre-Deals   Cobalt   Colony   Pro
    Ticker   CLNY Equity   Trans.   Transaction   Forma
    Last Trade   24.81           24.81
    Shares Out.   123.1       29.8   152.9
    Equity Value   3,054.9           3,794.7
                     
    Cash   297.8           297.8
    Debt   1,091.8   1,420.8       2,512.6
    Minority Interest   271.1           271.1
    Net Debt   1,065.1           2,485.9
                     
    Enterprise Value   4,120.0   1,615.0       5,735.0
                     
    Net Income   224.1   44.8   66.6   335.5
    2015E EPS   $1.82           $2.19
    Accretion/(Dilution) - %               $0.37
    Accretion/(Dilution) per Share - %               20.5%

     

    The impact of these events are two-fold. First, as a REIT, the earnings improvement will allow for a significant increase in CLNY’s dividend. Assuming a 20% dividend increase and the maintenance of a 6% dividend yield, share price improvement would be approximately $5.00 per share. Second, the significant incremental cash flow generated from these two transactions will only enhance the Company’s leverage ability and further expand its investment portfolio going forward. Assuming CLNY can identify attractive investments, the incremental cash flow generated from these transactions could have a multiplier effect on earnings. With a pro forma multiple of only 11x, this future growth and dividend expansion has not yet been incorporated into the share price.

     

    Finally, the Company has announced its plans to monetize its stake in Colony American Homes. At present, the Street ascribes value to this asset at book value. However, the Company is exploring synergistic strategic transactions with the other public players that could lead to incremental value. Potential public strategic partners include American Homes 4 Rent (“AMH”), Silver Bay Realty Trust (“SBY”) and Altisource Residential (“RESI”). All of these parties could benefit from consolidation and associated economies of scale.

     

    An announcement of a transaction of its Colony America segment will also direct attention toward the Company’s sum of the parts value.

     

            Multiple   Value
        Statistic   Low   High   Low   High
    Colony American Homes (book value)   521.2   0.9x   1.0x   469.1   521.2
    Remaining Business (adjusted for Cobalt)   267.4   10.5x   11.5x   2,807.3   3,074.6
    Management Business   66.6   18.0x   20.0x   1,198.8   1,332.0
    Combined Value               4,475.1   4,927.8
    Pro Forma Share Value               152.949   152.949
    Per Share Value               $29.26   $32.22
    Premium/(Discount) to Current               17.9%   29.9%

     

     

    Catalysts:

     

    1. Management internalization

    2. Monetization of Colony American Homes

    3. Adjustment of Street estimates to incorporate transaction announcements

     

    Risks:

    1. Poor performance of investment portfolio

    2. Inability to identify attractive investment criteria

    3. Non-economic acquisitions

     

     

    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.

    Catalyst

    1. Management internalization

    2. Monetization of Colony American Homes

    3. Adjustment of Street estimates to incorporate transaction announcements

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