Brightspire Capital Inc (BRSP) 2018 Q2 法說會逐字稿

Greetings and welcome to the Colony Credit Real Estate Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It's now my pleasure to introduce your host Lasse Glassen with Addo Investor Relations. Thank you. Mr. Glassen, you may begin.

Good morning, everyone, and welcome to Colony Credit Real Estate, Inc.'s second quarter 2018 earnings conference call. We will refer to Colony Credit Real Estate, Inc. as CLNC, Colony Credit Real Estate or the company throughout this call. With us today are the company's President and Chief Executive Officer, Kevin Traenkle; and Chief Financial Officer Sujan Patel. Neale Redington, the company's Chief Accounting Officer, is also on the line to answer questions.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties, and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, August 7, 2018, and the company does not intend and undertakes no duty to update for future events or circumstances.

In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release and supplemental presentation, which was released this morning and is available on the company's website, presents reconciliation to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

And now I'd like to turn the call over to Kevin Traenkle, President and Chief Executive officer of Colony Credit Real Estate. Kevin?

Thank you, Lasse. I want to thank everyone for joining Colony Credit Real Estate's second quarter earnings conference call. I'll provide a brief overview of our recent financial and operational highlights along with an update on our key management priorities for the second half of the year. Our CFO Sujan Patel will then discuss the details of our second quarter financial performance, including specifics on our deployment activity, investment portfolio, balance sheet, and liquidity position.

Before jumping into comments about our second quarter financial performance, there are a few company announcements that I'd like to make. First thing, connection with our sponsors name change to Colony Capital Inc. Our Board of Directors similarly authorized the changing of our name to Colony Credit Real Estate, Inc. effective June 25.

Second, I'm also pleased to report that Colony Credit Real Estate was added to the U.S. Small-cap Russell 2000 Index during the Indexes' annual reconstitution on June 25th. As a result, trading volume and support in our stock has increased significantly since our addition was made public on June 8. Becoming a member of the Russell 2000 affirms the breadth of the business we have established and is a great result for CLNC shareholders.

Now let's turn to our financial and operational results for the second quarter. Overall, it was a productive quarter for the company, particularly on the new deployment front as we continue to focus on one of our primary corporate objectives, which has been to invest our excess liquidity.

During the second quarter, we reported GAAP net income of $16 million or $0.12 per share and core earnings of $40.3 million or $0.31 per share. As will be further discussed during the call, due to a number of factors, we believe these results do not reflect CLNC's normalized core earnings run-rate. Most notably, the earnings we are reporting today do not include the full impact of approximately $460 million of capital deployed during the second quarter and additional $380 million of capital already deployed subsequent to the second quarter, not to mention an additional $475 million of capital that has already been committed or allocated to be committed during the third quarter. This deployment will have significant positive impact on core earnings in future quarters, which Sujan will discuss in more detail shortly.

As of today, our portfolio has approximately $5 billion in total at-share assets, which includes a diversified and seasoned mix of loans, preferred equity, CMBS, net lease real estate, and other noncore assets. Moreover, our balance sheet continues to possess considerable liquidity which today totals $419 million between cash on hand and availability under our corporate revolving credit facility. This does not include leverage capacity that resides within our under-levered assets, which could generate $350 million or more of additional liquidity. Ultimately, we remain confident in our ability to deploy our available liquidity in our targeted asset classes and continue to drive earnings growth in future period.

During the quarter, we declared and paid a monthly cash dividend of $0.145 per common share for the month of April, May, and June. Subsequent to quarter-end, we also declared a $0.145 per share dividend for the month of July and August. Our dividend has remained consistent at this level since our formation and represents an annualized dividend of $1.74 per share. Based on yesterday's closing stock price, this reflects a very attractive current annualized yield of over 8%.

Turning to the economy, U.S. macroeconomic conditions are quite healthy with regard to demand for real estate, employment figures, and solid corporate profit. From our vantage point, the investment landscape remains favorable and is well-aligned with Colony Credit Real Estate's diversified and flexible investment mandate, which we believe allows us to achieve attractive risk-adjusted returns throughout various points of the economic and real estate cycle.

Within the commercial real estate sector, market fundamentals including property-level operating income, supply/demand dynamics and continued capital market liquidity have driven sustained support for robust valuations and overall transaction volumes. Our ability to source price and execute new transactions across asset classes, geographies, and property types is a key competitive advantage that we believe will continue to differentiate CLNC in the marketplace over the long term.

As we evaluate new transactions, we typically favor markets and sub-markets with strong growth potential, favorable supply/demand fundamentals, and higher barriers to entry. As we'll discuss shortly, we're also seeing compelling opportunities in Europe, where we believe there is less competitive pressures and we believe the current cycle is several years behind the U.S.

The Colony franchise enjoys a decade-long investment track record, significant investment management infrastructure, and best-in-class deal sourcing capabilities in Europe. As always, across all markets, we are committed to transactions with strong sponsors that have a track record of executing successful business plans and that have structures that provide meaningful downside protection for our investment. In terms of property types, we continue to believe strongly in for-rent housing, office, industrial and hospitality, although under the right circumstances, we can be a creative capital partner for other asset classes as well.

We are very pleased by the pace of our recent investment activity, where our affiliation with Colony Capital continues to provide significant competitive advantages with respect to the sourcing and underwriting synergies that clearly differentiate Colony Credit in the marketplace. Year-to-date we have allocated $1.6 billion of capital for investments that have closed or in advanced stages of execution, including our first allocation to European investments which totaled approximately $400 million. We remain confident in our ability to continue to source transactions with an investment level return on equity in the low double-digits, which is consistent with the yields we are achieving across our recent investment.

Looking ahead to the second half of the year, our current pipeline remains very robust and includes over $1 billion of actionable transaction. Based upon this pipeline and our recent pace of deployment, we expect to be able to invest our current available liquidity in accretive transactions by the end of the year.

And now I'll turn the call over to Sujan for a more detailed explanation of our second quarter operational and financial results.

Thank you, Kevin, and good morning, everyone. I'm happy to speak with you all today on our second quarter 2018 earnings call. As I'm going over financial results for the quarter, I want to draw your attention to our supplemental financial report which is available on our website. We believe this supplement will help investors and research analysts to understand our company better given the granular data it provides on each of our business segments.

For the second quarter, CLNC reported GAAP net income of $16 million or $0.12 per share and core earnings of $40.3 million or $0.31 per share. As Kevin noted earlier, these results do not fully reflect the run-rate earnings of our portfolio due to the timing of investment closings.

During the second quarter, we invested $460 million of capital. To-date in the third quarter, we have already invested an additional $380 million of capital with another $475 million allocated, but not yet funded to existing and identified investments. Together, these investments have a weighted average expected levered current yield of approximately 11% and total IRR of approximately 13%.

Once fully deployed, this investment activity is expected to contribute approximately $0.05 per share to future quarterly core earnings on a run rate basis net of any expected repayments and any anticipated draws under our corporate revolving credit facility.

We continue to maintain our historic dividend rate of $0.145 per common share per month or $1.74 per share on an annualized basis and we remain focused on maximizing capital deployment from all of our available liquidity sources. As Kevin mentioned, our balance sheet has considerable dry powder, totaled $419 million between cash on hand and availability under our corporate revolving credit facility.

This has not included additional embedded leverage capacity at many of our assets, which we expect to generate an additional $350 million in liquidity. We expect to deploy this available liquidity over the coming quarters and further increase our run rate earnings as we execute on our business plan and enhance our dividend coverage.

Overall, we are comfortable with our current dividend, and we are confident it will be fully covered on a fully invested steady state basis.

We're also exploring several additional strategies including noncore asset monetizations and investment recapitalizations, which could contribute positively to our run rate earnings. One example of this includes the potential modification and/or restructuring of a $261 million unlevered first mortgage in mezzanine investment secured by a New York City hotel, which is now on nonaccrual status and negatively impacting CLNC's quarterly core earnings by approximately $0.03 per share. Ultimately, we believe this asset's performance will improve as the New York City hospitality market emerges from recent oversupply issues.

Through the first 6 months of this year, the asset is already seeing positive top and bottom line growth and its 2018 projected NOI has increased approximately 70% from the beginning of the year. On the investment side, as Kevin noted, we had a very productive quarter. During the second quarter, we allocated and initially funded $592 million and $460 million of capital respectively including 16-year loans totaling $440 million; one mezzanine and one preferred equity investment totaling $130 million; and 4 CMBS bonds totaling $22 million.

Subsequent to quarter end, we allocated and initially funded $855 million and $380 million of capital, respectively, including 2 net lease investments totaling $620 million, including one property in Europe; 2 senior loans totaling $160 million; one European preferred equity investment totaling $70 million and 2 CMBS bonds totaling $6 million.

Taking into account second quarter deployments and all subsequent events, year-to-date we had allocated over $1.6 billion of total capital to new investments. The mix of these allocations is approximately 47% senior loans; 38% net lease; 10% preferred equity; 3% mezzanine loans; and 2% CMBS.

Turning to our employees portfolio, our loan book at quarter ends at $2.6 billion and continues to be the largest segment within our portfolio. Over 97% of our senior loan portfolio and approximately 72% of our total loan portfolio is floating rate and thus positively exposed to increases in LIBOR. Our triple-net lease portfolio had an un-depreciated carrying value of $691 million as of June 30 and consists primarily of industrial and office properties.

We view the net lease segment as a core business of CLNC and as previously mentioned, subsequent to quarter-end we closed on or committed to 2 new net lease transactions totaling $620 million of capital. These assets provide long duration stable cash flows for our portfolio with the potential of a capital appreciation and pro forma for these new acquisitions, our weighted average lease term remaining has increased from 3.8 years to over 9 years.

Moving to CRE debt securities, our portfolio had a $342 million carrying value at quarter-end and is predominantly investment grade. We continue to source CMBS bonds that meet our underwriting criteria including non-rated B-piece opportunities. In addition to generating attractive yields, our CRE debt securities portfolio provides CLNC with liquidity options within our investment portfolio and access to efficient borrowing.

Turning to our noncore assets, we have mentioned this before, but it bears repeating this quarter, these assets were contributed as part of the merger with 2 legacy non-traded REITs and are not part of our long-term targeted asset classes. That said, these assets are performing with stable cash flows and we will look to opportunistically exit this investments while maximizing value for shareholders.

Within our noncore assets, the other real estate has an underappreciated carrying value of $762 million. This portfolio consists of predominately office, multifamily and student-housing properties and its finance of long-term non-recourse asset level financing. Our other noncore holding consists of our interest in real estate private equity funds with a total carrying value of $241 million at quarter-end.

The weighted average life of this portfolio is approximately 1.2 years and as these positions liquidate in the near term, we plan to redeploy the excess liquidity into our higher-yielding targeted asset classes. During the quarter, our PE interest contributed approximately $3 million to core earnings or a 4.8% yield on our average carrying value which was below our expectations for the second quarter and was driven largely by timing delays and asset realization events in the underlying funds in which we own interests. So as the difference is largely timing-related, we expect to make up the shortfall in later periods.

Moving on to our balance sheet, as of June 30, our total at-share assets was approximately $5 billion with a total at-share debt balance of $1.7 billion. Our debt-to-assets ratio was 35% at the end of the quarter, which is significantly lower than our peer group and our expected long-term target. Despite the uptick in leverage this quarter, we still have an under-leveraged capital structure and we can realize on significant embedded growth opportunities by optimizing the right side of our balance sheet.

And discussed, our current liquidity stands at approximately $419 million between cash on hand and availability under our revolving credit facility. Inclusive of a new $250 million facility with $2 billion in total master repurchase facilities and our current access point capacity of $1.3 billion provides ample liquidity to fund our senior loan originations pipeline. While not stabilized on a run-rate basis, the second quarter of 2018 represents our first full earnings quarter. Significant work remains ahead for the rest of 2018.

However, we are pleased with our overall performance, particularly on the capital deployment front which will be additive to our future quarter's earnings. We look forward to continuing to expand our portfolio with attractive opportunities and based on our strong pipeline, we feel we are well-positioned to achieve our operational goals and strategic objectives for the year.

I'd like to thank you all for your time today. And we'll now ask the operator to please open the line for question.

(Operator Instructions) Our first question comes from the line of Steve Delaney with JMP Securities.

Kevin, I was wondering if you could provide a little color on the large European net lease transaction that you closed in the quarter?

So yes, the net lease transaction is an office complex. It's the headquarters for a major European multinational corporation, so it kind of provides all the things that we're looking for in our net lease investments, kind of long-term lease, stable cash flows. It actually came with financing that's in place that are pretty attractive rates, so our levered cash on cash yields are pretty attractive. So kind of we're down the center of the net for our net lease investment strategy.

Which country is it based in? And what was the size of that investment?

Yes, it was in Norway and the ultimate size $330 million.

And when you do these larger net lease transactions, what type of -- do you have like a step-up lease that's somewhat indexed to inflation to protect you there?

Yes. So every lease is a little bit different, but in this particular lease we do have that built into this lease term where we get on an annual basis kind of gets reset for an inflation -- inflator, but all the leases are a little bit different, but this one we do have that.

And Sujan, one for you, you had a nice pop in un-depreciated tangible book value, it's went up from $23.45 that we had at March 31 to $23.80. You -- from a GAAP standpoint you obviously under-earned the dividend, so you could comment a little bit on what was driving the increase, fair value marks, incremental depreciation, how did we get to $23.80?

I think right now your number had the deferred tax asset deducted from it, and that's why I think you're showing a lower number. And if I were to deduct that from our $23.80, it goes down by about $0.20.

That's my bad on not having apples to apples there. And I guess my last question would be, Kevin, you were suggesting that sort of the goal for the second half of the year is to get to -- have yourself largely fully deployed with that incremental cap which you have available by the end of the year. At that point would you expect based on the return on that deployment, do you think that you would be at full coverage of the current dividend with core earnings by the time you get through the fourth quarter or at least -- not asking for guidance, but would that be a reasonable goal for you and expectation for investors?

Well, I think if we just deployed the current cash that we have on hand today and through our credit lines and some of the cash that we have, we'd be close by the end of the year, but I think what we'll have to do to get the full coverage, we'll probably have to leverage up some of our other assets that are un-levered, so which will happen through the first and second quarter of the following years to get up to the full dividend coverage.

So maybe -- realistically maybe a mid-2019 would be more realistic to make sure -- to be -- have confidence that you would have done all the deployment in the engineering, if you will, to fully cover?

Yes, I think that's about right. Plus or minus kind of mid-2019, after we have fully deployed all the liquidity, plus levered up the balance sheet the way that we want to get it levered up, our projections are showing around that time that's when we'd be kind of fully covering our dividend.

(Operator Instructions) Our next question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

Sujan, I guess a quick follow-up, I think it was in your comments you mentioned earnings -- core earnings would benefit by $0.05. Was that in reference to the full quarter impact of the 2Q new investments as well as the new investments subsequent to quarter-end or exactly what did the $0.05 improvement core earnings relate to?

Good question. That's correct. So that's the full impact of the second quarter as well as the subsequent transactions that we referenced in third quarter year-to-date. And that's -- one clarification, that's a net number, net of repayments as well.

Touching base and really following up on Steve's last question about capital deployment and in relation to the noncore assets and the other real estate equity, is there a plan as far as how you're looking to monetize those investments and reallocate capital? Is it something that will get more focus once you have the available liquidity deployed by the end of the year? Obviously that the real estate assets are generating cash -- positive cash flow and solid occupancy, so can you comment about a time line or kind of how we should expect that capital to be reallocated over the next 18 months?

That's a great question. So I guess we are focused on deploying the immediate liquidity at hand, but as soon as that's done, I think we're going to start turning to some of these other assets that might be fine investments, stable investments but just yielding something a little bit lower than what our business model is suggesting. So once we're fully deployed, I think we're going to start turning a little bit more to these other assets. That said, we are selling some of these noncore assets as we speak. We're kind of doing it on an opportunistic basis that we're getting great prices, we're pulling the trigger and executing them, but by no means are we in kind of buy or sell mode just trying to get them off our balance sheet to generate even more liquidity while we're putting out our cash right now.

And then my last question really on the PE assets and the duration, I think, 1.2 years, about 5 quarters remaining. Sujan, I think you mentioned in your prepared remarks that the contribution this quarter was a little below expectations, although it's timing-related specially even out, is there an income number we should expect that rolls through over the next 5 quarters as far as our model? Or how should we think about the PE interest maturing over the next 5 quarters, the income contribution for that?

Yes, and as I think we've spoken about before, I mean these are good investments, but tough in a yield-oriented vehicle which is why we've identified it as noncore. So there is some volatility, quarter-to-quarter in how we account for the income from that investment. And the 1.2 years, that's a weighted average, so please keep in mind that there will be some assets that pay off beyond that date. We identified the 5% yield in our -- approximately 5% yield in our remarks because that's clearly low relative to where we are able to redeploy. But if you look back at the prior quarter, we generated a low double-digits return on those investments as well. So it's a little bit for all the quarter-to-quarter and market kind of is more of like a straight line basis, the market rates people acquire those interests that are kind of around in the low double-digit return, but we're more focused on the cash we receive each quarter and how we account for them.

Yes, and a follow up -- that's a good point on the weight -- it's an average, it's a-- is there a maturity -- what does the curve on the maturity of those funds look like around that 1.2 weighted average? Is it mostly detail or kind of what's the maturity for that?

Yes, it's -- most of it occurs next year and then there's a small portion that's got a little bit longer tail.

There are no further questions. I'd like to hand the call back to management for closing comments.

Okay. On behalf of the entire team at Colony Credit Real Estate, we thank you for dialing in today. We look forward to updating you on our progress when we report our third-quarter results in early November. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.