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CLNC - Colony Credit Real Estate

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Never have I read a company name that conjures such low quality assets and poor shareholder alignment.


Colony: Colony is the Tom Barrack-led real estate firm that has generated very little value for investors over time.


Credit: Credit is the lending of money to unworthy borrowers


Real Estate: Real Estate will never be used again excepting distribution centers and houses, this is a pandemic bro.


Put those three less than savory things together and you get CLNC, down about 80% from its February 2018 spin-off price (this was spun from mother CLNY, the Baupost held value trap of an asset manager/assets that just hail mary'd itself into trying to become AMT/DLR) in order to "highlight the true value" of CLNY's assets as well as turn CLNY into more of  GP than an LP (it's lower risk to charge fees on crappy assets than to actually own them).


CLNC trades for $544mm $490mm with equity (using that term rather loosely) of $1.9-$2.0 billion. CLNC owns a grab-bag, hodgepodge, cornucopia, ragtag, ramshackle, collection of levered low quality assets.


CLNC has a lot of mezz risk type of stuff that I think is the worst place to be in a crisis like the one that's developing. Where they are senior in the cap stack, they've applied some back leverage to turn that into a mezz like profile.


At book, CLNC owns about $5.2 billion of assets and has $3.2 billion of debt. On a consolidated basis, the book value gets wiped out if CLNC's assets are worth less than ~60% of what they paid. I think it's very possible for many of the individual assets to indeed be worth less than 60% of what CLNC paid.


But probably not all of them, which is important in the context of the nature of their debt (see slide 30):


In total their $3.2 billion of debt pays about 3.5%. 2/3 of the debt is at the asset level and is explicitly non-recourse to the corporate.


There is a corporate revolver ($340mm) that they just drew down for liquidity purposes (about same amount of cash on the sheet), some CMBS Repo facilities ($200mm); these are explicitly recourse, and a Master repo facility ($700mm) that is described as limited recourse.


CLNC was one of those bad actor poor risk taking rentiers that were getting margin called in March that was brought back from oblivion by our dear Federal Reserve.


Their credit facility just got amended, requiring them to

a) maintain a net worth of $1.5 billion (not much room for error, but hey they didn't lose the whole thing..yet)

b) not allowed to pay divvies / buy back (increase probability of survival)

c) restrict new investments to 1st lien (increase probability of survival)


their new CEO (what a time to inherit this!) comes from Ladder Capital/CMBS land


Mr. Mazzei has served as a member of the board of directors of Ladder Capital Corp since June 2017. Previously, Mr. Mazzei served as President of Ladder Capital from June 2012 through June 2017. From September 2009 to June 2012, Mr. Mazzei served as Global Head of the CMBS and Bank Loan Syndication Group at Bank of America Merrill Lynch. Prior to that, Mr. Mazzei served as Co-Head of CMBS and Commercial Real Estate Debt Markets at Barclays Capital from March 2004 to June 2009. Prior to Barclays Capital, Mr. Mazzei spent 20 years at Lehman Brothers, including 18 years in commercial real estate finance-related functions. Having started in commercial mortgage trading in 1984, Mr. Mazzei became the head of CMBS in 1991 and served as the Co-Head of Global Real Estate Investment Banking from March 2002 to February 2004.


Mr. Mazzei received a B.S. from Baruch College and a J.D. from St. John’s University School of Law, and is a graduate of the New York University Real Estate Institute.




This is the crap of the crap, the steamiest of things. But if they can find a few good, sale-able assets amongst the pile (such as something in their net lease portfolio perhaps) and use their liquidity to move up capital structure (for example, they could buy their own securitizations paper at large discounts) or maybe issue some dilutive equity to give them a little more breathing room, the risk/reward profile could change rapidly.


This is one of my "looked at for 30 mins" after watching from warily from afar (I did once trade the CLNY pref's thinking Baupost in the common was evidence that the pref's would be okay, but beyond that have avoided CLNY because of its complexity and poor reputation) for the past few years.


Adding to the watch/monitor lost for now. Goal would be to try to buy when it's clear corporate level liabilities are clear and there's a lot of optionality in the non-recourse stuff.


owe the bank $1 million you have a problem, owe the bank $1 billion, the  bank has a problem. in some ways CLNC is in the position of strength that many reckless borrowers have been in before. ability to do discounted pay-offs, ability to extend/pretend etc.


the next step is quantitatively laying out the grab bag and potentially trying to separate the truly awful assets from the potentially money good.







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I've look at CLNY and CLNC.  Note the following on current market valuations.  CLNY is $840MM and CLNC is $550MM.  CLNY owns 36% of CLNC.  So 36% of CLNC is $200MM and taking that into consideration of value in CLNY - I like the risk/reward on CLNY over CLNC.  Hope to provide more color on this in coming days as I continue to follow - but I think there is value here on both fronts.  Thanks for starting conversation and look forward to continued analysis on this - Akre's investment got my attention. 

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