Blackwells Capital LLC (together with its affiliates “Blackwells”),
an alternative investment management firm which owns shares of
Colony Credit Real Estate, Inc. (NYSE: CLNC) (“Colony Credit” or
the “Company”) directly and indirectly through its ownership of
Colony Capital, Inc. (NYSE: CLNY) (“Colony Capital”), today issued
an open letter to the Company’s Board of Directors, calling for
change in the leadership of Colony Credit.
“Colony Credit is ideally positioned to deliver strong
shareholder returns – with a broad mandate and diversified
portfolio in a strong commercial real estate environment – but for
a management team that has consistently failed to deliver on this
opportunity,” said Jason Aintabi, Chief Investment Officer of
Blackwells. “Under the leadership of CEO Kevin Traenkle and
Colony Capital Executive Chairman Tom Barrack, Colony Credit has
repeatedly written down its assets and cut its dividend
dramatically. Unsurprisingly, investors have lost confidence in
this team and the stock now trades at a significant discount to
book value, while public peers trade at a premium.”
Mr. Aintabi continued, “We call on the Colony Credit Board to
act in the interests of shareholders by insisting that Colony
Capital provide competent investment managers or move its
management contract to a known credit manager that has such a
team. To ‘internalize’ the current failing team provided by
Colony Capital, as proposed last month by Mr. Barrack, would simply
enshrine Colony Credit’s history of failure for the foreseeable
future.”
Despite its conflicts of interest, the Colony Credit Board must
act in the best interests of Colony Credit shareholders. Blackwells
will continue to engage with the independent directors of Colony
Credit and work to ensure that proper and necessary actions are
taken.
The full text of the letter is below:
December 9, 2019
The Board of Directors Colony Credit Real Estate, Inc.515 South
Flower Street, 44th FloorLos Angeles, CA 90071
Dear Directors:
Blackwells Capital LLC, together with its affiliates
(“Blackwells”), is a shareholder of Colony Credit Real Estate, Inc.
(NYSE: CLNC) (“Colony Credit” or the “Company”). We are also
shareholders of Colony Capital, Inc. (NYSE: CLNY) (“Colony”), which
owns 37% of Colony Credit and serves as its external manager.1
Colony Credit shareholders have suffered meaningfully since the
company was formed and publicly listed in February 2018.
Management has consistently disappointed investors with
extraordinary book value impairments, repeated earnings misses and
a drastic dividend cut.
Colony Credit, like other commercial real estate credit REITs,
originates and acquires secure cash flow streams tied to commercial
real estate, using a combination of equity and leverage, passing
the net income from those borrowers and tenants to
stockholders. The Company’s stated mission is to
“consistently provid[e] attractive risk-adjusted returns to the
Company stockholders … primarily through cash distributions and the
preservation of invested capital ...”2
The other commercial real estate credit REITs fulfill that
mission well. Starwood Property Trust (“Starwood”), for
example, aims to generate income for its shareholders while
preserving its investors’ capital. It has successfully generated
annualized returns above 10% over the last five years and 32% in
2019 alone.3 Blackstone Mortgage Trust (“Blackstone”) has
similarly generated annualized returns over 13% over the last five
years and has generated a 21% return to-date in 2019.3 Both
of these peer companies have had stable tangible book values per
share, as they invest carefully in income-generating, real
estate-backed financial instruments with the same goal as Colony
Credit: predictable and recurring cash dividend distributions and
the preservation of invested capital.
By contrast, the performance of Colony Credit since its public
listing in February 2018, measured against its own stated objective
and its publicly traded peers, is nothing short of a total
fiasco.
In less than two years, Colony Credit’s share price has lost 35%
of its value. Tangible book value per share has declined by
nearly 30%. And, in its short life as a public company,
Colony Credit has cut its dividend by more than 30%.
As a result, shareholders have lost confidence – Colony Credit
currently trades at a remarkable 25% discount to the stated value
of the Company’s net assets.4 By contrast, both Starwood
Property Trust and Blackstone Mortgage Trust trade at a premium to
book value (and have consistently maintained their dividends since
Colony Credit’s listing).
Since Colony Credit’s public share listing, the S&P 500,
MSCI US REIT Index, and Colony Credit’s commercial mortgage REIT
peers have returned approximately +15%, +28%, and +42%,
respectively. Colony Credit shares had a negative 22% total return
over the same period.5 In fact, Colony Credit is the only
publicly traded commercial mortgage REIT that has posted a negative
shareholder return among its peers in the period since the
Company’s public listing.
This absolute and relative underperformance is vexing.
Colony Credit has the same broad mandate and healthy real estate
market in which to invest – and the advantage of having a more
diverse portfolio – as most of its publicly traded peers.
Yet, the Company hasn’t even come close to matching the performance
of its competitors, who are successfully identifying and investing
in stable, income-producing assets on behalf of their shareholders
and generating attractive total shareholder returns.
Quarter after quarter, Colony Credit’s executive team has
assured investors that the Company’s assets were properly valued on
its balance sheet. For instance, in February 2019 Colony
Credit Chief Executive Officer Kevin Traenkle told investors on an
earnings call, “We believe these impairments are now behind
us.”6 When queried by a sell-side analyst regarding the risk
of additional write-downs during the same conference call, Mr.
Traenkle stated confidently:
“The risks are very low. We've gone through the portfolio pretty
extensively kind of asset by asset, loan by loan.”5 |
Then in May 2019, Colony Credit Chief Financial Officer Neil
Reddington reiterated Mr. Traenkle’s view, saying, “We don’t see
any additional impairments.”7 Just months later, the Company
wrote down its assets by $273 million.8
In its short life as a public company, Colony Credit has
taken more impairment charges than all other public commercial real
estate credit REITs, combined.
Despite repeated assurances from the Company’s CEO of the
dividend’s sustainability, Colony Credit shocked investors when its
dividend was cut in November. In fact, Mr. Traenkle told
investors only eight months prior that “[w]e expect to generate
core earnings run rate that fully covers our dividend by the year
end 2019.”5 In May 2019, he further assured that “[o]ur
models show us covering the dividend on a run rate basis by the end
of the year”9 and in August 2019, he emphasized that “dividend
coverage … is our #1 priority.”7 Despite these repeated
assurances, Colony Credit reduced its monthly dividend from $0.145
per share to $0.10 per share, which contributed to a more than 20%
decline in the Company’s share price last month.
The problems at Colony Credit inexorably sit at the feet of its
investment managers and executive leaders, who have made harrowing
investment decisions, questionable valuation determinations and
value-destructive portfolio management judgments.
The Board of Colony Credit has a duty to demand that Colony
Capital immediately change course. Colony Credit deserves
competent executive management with proven publicly traded
commercial mortgage real estate experience and with a history
profitable investing. And so, the Board should insist that
Colony Capital replace the senior investment personnel and
leadership team that have destroyed so much value at Colony
Credit.
Once Colony Capital changes the investment team responsible for
Colony Credit and restores confidence among Colony Credit
shareholders, the gap between Colony Credit’s stock price and
Colony Credit’s book value should close. By virtue of its
equity stake in Colony Credit, Colony Capital and its shareholders
will also benefit. It is imperative for both companies to
eschew the incumbent bad managers and decisions of the past and to
install a new team to oversee Colony Credit.
Unfortunately, Colony Capital has recently proposed a different
reform scheme. Last month, Tom Barrack, Colony Capital’s
Chairman and CEO, sent a letter to the Company’s Board proposing
that Colony Credit “internalize” its management by directly hiring,
from Colony Capital, the very people who have incompetently managed
the Colony Credit portfolio for years. This makes no sense
for either organization’s shareholders.
Mr. Barrack wrote that his proposal would position Colony Credit
“as one of the world’s most powerful, differentiated, and effective
credit real estate brands and publicly-held investment vehicles
worldwide.”10 No one could possibly believe that, given that
Colony Credit has the worst track record in its industry by a
country mile.
The external management structure of Colony Credit is not the
problem. There are many successful publicly traded commercial
real estate credit REITs that have performed well over the last two
years while being externally managed, including both Starwood and
Blackstone. At this point, they – not Colony
– are the “world’s most powerful, differentiated and effective
credit real estate brands.”
This is not the first time Mr. Barrack and his
“athletes” attempt the internalization play. We wish they
would learn from prior disastrous results.
In April 2015, when Colony Capital’s stock price was trading in
the mid $20s, Colony Capital LLC was internalized into publicly
traded Colony Financial Inc. (and re-branded as Colony
Capital).11 Less than two years later, Mr. Barrack
internalized the management of the publicly traded NorthStar
entities with Colony Capital as part of a three-way merger that
closed in early 2017, when Colony’s share price was $14.
Colony Capital’s stock is now worth less than $5 per
share.
We hope that despite this Board’s many current and prior
connections with Colony Capital, you recognize your fiduciary
duties are to Colony Credit shareholders. Two of you are
current employees of Colony Capital. Two others were
previously with NorthStar entities that merged with Colony
Capital.12 A fifth, current Chairman Saltzman, was most
recently CEO and an Executive Director of Colony Capital.
Notwithstanding these entanglements, the directors of Colony
Credit must do what is right for Colony Credit and refuse to be
saddled with ineffectual investment managers, whether they are at
Colony Capital or on the Colony Credit payroll. It is up to
this Board to demand the responsible alternative: Colony
Capital must provide capable stewardship, or it should move its
management contract to an organization that will.
In recent months, one of your directors, in discussions with us,
agreed that given the Company’s poor performance, a potential CEO
change was necessary. Working in good faith, we suggested the
Company meet with a certain highly respected and accomplished
commercial real estate credit REIT executive who would be able to
provide expert leadership and restore investor confidence.
Although the director accepted and scheduled a meeting with our CEO
candidate, the director cancelled that meeting at the last
moment. We continue to encourage you to reconsider and act
upon this opportunity.
In the meantime, the Colony Credit Board should put in place a
moratorium on any loans or investments. Capital should be
solely allocated to accretive share repurchases until the discount
of the share price to the book value per share is eliminated.
As we noted in our August 29th letter to Colony Capital’s Board,
the deployment of one dollar of new capital at Colony Credit, only
to have it valued at a considerable discount in the public market,
is a fool’s game.
Blackwells believes that Colony Credit has the potential to
generate sustainable and attractive shareholder returns under new
leadership and new investment managers. We intend to continue
to work with shareholders and insist that the Board provide
independent and objective oversight of the external manager.
We look forward to discussing these topics in greater detail
with the independent directors of Colony Credit at their earliest
convenience.
Sincerely, /s/Jason AintabiBlackwells Capital
About Blackwells Capital
Blackwells Capital was founded in 2016 by Jason Aintabi, its
Chief Investment Officer. Since that time, it has made
investments in public securities, engaging with management and
boards, both publicly and privately, to help unlock value for
stakeholders, including shareholders, employees and communities.
Throughout their careers, Blackwells’ principals have invested
globally on behalf of leading public and private equity firms and
have held operating roles and served on the boards of media,
energy, technology, insurance and real estate enterprises.
For more information, please visit www.blackwellscap.com
Contact:Gagnier CommunicationsDan Gagnier /
Jeffrey Mathews 646-569-5897Blackwells@gagnierfc.com
Disclaimer
This material does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities described
herein in any state to any person. In addition, the
discussions and opinions in this press release are for general
information only, and are not intended to provide investment
advice. All statements contained in this press release that
are not clearly historical in nature or that necessarily depend on
future events are “forward-looking statements,” which are not
guarantees of future performance or results, and the words
“anticipate,” “believe,” “expect,” “potential,” “could,”
“opportunity,” “estimate,” and similar expressions are generally
intended to identify forward-looking statements. The
projected results and statements contained in this press release
that are not historical facts are based on current expectations,
speak only as of the date of this press release and involve risks
that may cause the actual results to be materially different.
Certain information included in this material is based on data
obtained from sources considered to be reliable. No
representation is made with respect to the accuracy or completeness
of such data, and any analyses provided to assist the recipient of
this presentation in evaluating the matters described herein may be
based on subjective assessments and assumptions and may use one
among alternative methodologies that produce different
results. Accordingly, any analyses should also not be viewed
as factual and also should not be relied upon as an accurate
prediction of future results. All figures are unaudited
estimates and subject to revision without notice. Blackwells
disclaims any obligation to update the information herein and
reserves the right to change any of its opinions expressed herein
at any time as it deems appropriate. Past performance is not
indicative of future results.
1 Colony Credit Real Estate, Inc. 13-D filing, November 7,
2019.
2 Colony NorthStar Credit Real Estate, Inc., Form S-4/A,
December 4, 2017, at page 199.
3 Bloomberg data as of November 29, 2019.
4 Colony Credit Real Estate, Inc. Supplemental Financial Report,
Third Quarter 2019, November 7, 2019 and CLNC closing price per
Bloomberg on November 29, 2019.
5 Bloomberg data as of November 29, 2019.
6 Colony Credit Real Estate, Inc. 4Q 2018 earnings call,
February 28, 2019.
7 Colony Credit Real Estate, Inc. 2Q 2019 earnings call, August
8, 2019.
8 Colony Credit Real Estate, Inc. 3Q 2019 earnings press
release, November 7, 2019.
9 Colony Credit Real Estate, Inc. 1Q 2019 earnings call, May 8,
2019.
10 Colony Credit Real Estate, Inc. 13-D filing, November 6,
2019.
11 Colony Financial, Inc. press release, April 2, 2015.
12 Colony Credit Real Estate, Inc. 2019 proxy, March 27,
2019.
Two photos accompanying this announcement are available
at:
https://www.globenewswire.com/NewsRoom/AttachmentNg/86899998-9cf6-4987-b0ed-45561e63c179
https://www.globenewswire.com/NewsRoom/AttachmentNg/aca964d3-bd78-42ce-9e9f-dadffbf325eb
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