Blackwells Capital LLC (together with its affiliates “Blackwells”),
an alternative investment management firm and a significant owner
of 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 disclosed a letter it sent to the Company’s Board of
Directors on February 7, 2020.
“Colony Credit has not yet provided us with a
substantive response to the issues and concerns we have raised,”
said Jason Aintabi, Chief Investment Officer of Blackwells.
“As a large shareholder who believes the Board, management
and investment team has materially underperformed at Colony Credit,
we expect the Company to respond to our concerns and suggestions on
the upcoming earnings call.”
The full text of the letter is below:
February 7, 2020
The Board of Directors Colony Credit Real Estate,
Inc. 515 South Flower Street, 44th Floor Los Angeles, CA
90071
Re: Colony Credit Real Estate, Inc.’s Strategic
Direction and Mismanagement
Dear Directors:
As you know, Blackwells Capital LLC (together with
certain of its affiliates, “Blackwells”) is an alternative
investment management firm and shareholder of Colony Credit Real
Estate, Inc. (“Colony Credit” or the “Company”), both directly and
indirectly through its ownership of shares of Colony Capital, Inc.
(“Colony Capital”). We write in furtherance of our letters to
you dated December 9, 2019 (the “December 9 Letter”) and December
27, 2019 (the “December 27 Letter”), and in further response to
your letter dated December 16, 2019 (the “December 16
Letter”).
On a number of occasions, Blackwells has engaged
with Colony Credit’s board of directors (the “Board”) to outline
our concerns with the Company’s significant underperformance and
disappointing financial results since it was formed and publicly
listed in February 2018, and the lack of meaningful steps the Board
has taken to address the steep and persistent loss of shareholder
confidence and market value. To date, those efforts have
produced little in the way of action by the Board to actually
ferret out and correct the obvious issues underlying the Company’s
disastrous performance.
The Company’s underperformance is the result of not
only poor investment decisions and leadership, but also the Board’s
complacency and failure to appropriately exercise its fiduciary
obligations on behalf of the Company and its shareholders. To
make matters worse, at a time when the Board should be refraining
from saddling the Company with additional long-term obligations,
the Board is instead actively considering rewarding those
responsible for steering Colony Credit’s portfolio into ruin and
shattering investors’ confidence by directly hiring the same Colony
Capital personnel to officially run the Company. We believe
that any such action constitutes an egregious breach of the Board’s
obligations for which we intend to hold it fully
accountable.
The Loss of Value to Shareholders is
Staggering
As set forth in our December 9 Letter, in less than
two years since its formation, the Company, under the stewardship
of Chief Executive Officer (“CEO”) Kevin Traenkle, Tom Barrack and
the management team at Colony Capital, has experienced a
catastrophic destruction of shareholder value. This has
occurred during the strongest commercial real estate market in
postwar history.
The Company’s financial and share price performance
has been abysmal. For instance, the Company’s share price has
plummeted by 35%; its tangible book value per share has declined by
nearly 30%, with the stock now trading at more than a 25% discount
to (an already written down) book value; and dividends to
shareholders have been slashed by more than 30%. By contrast,
other publicly traded commercial real estate REITs have performed
admirably. As two examples, Starwood Property Trust has
achieved annualized returns exceeding 10% over the last five years,
and a return of more than 32% in 2019 alone, while Blackstone
Mortgage Trust has generated annualized returns of more than 13%
over the past five years, including gains of more than 21% in
2019. Both of those peer companies are externally managed
but. unlike Colony Credit, their stocks trade at a premium to their
stated book values and the companies have grown their shareholder
dividends.
The Board’s Response Has Been
Inadequate
Notwithstanding Colony Credit’s staggeringly poor
performance history in both absolute and relative terms during an
undeniable boon within the commercial and credit real estate
investment markets, the Board has failed to take any tangible
corrective action. Indeed, in response to our concerns, the
Board’s December 16 Letter urges investors simply to “[r]est
assured that we are fully focused on the best interests of our
shareholders and are working hard toward enhancing the long-term
value of your investment in the Company.” The Company’s
record completely belies that assertion.
For example, our December 9 Letter recounts that
Blackwells previously suggested the name of an outside,
exceptionally well-qualified, industry professional and former
public company CEO with a strong track record of value creation
that the Board should consider hiring as the Company’s CEO.
One Board member even acknowledged that a change of CEOs may be
warranted given the Company’s poor performance and agreed to meet
with the potential candidate. Subsequently, that Board member
canceled the meeting at the eleventh hour with no explanation and
without proposing an alternative time. And, despite our
subsequent request that the Board member reconsider, no meeting has
since been scheduled. In fact, the Board’s December 16 Letter
fails to so much as acknowledge that request.
Instead, the Board’s December 16 Letter in
purported response to our concerns indicates only that it “has
formed a special committee of independent and disinterested
directors which is considering a possible internalization of the
Company’s management in response to a non-binding letter from
Colony Capital, Inc. seeking to explore such a transaction.”
But that is no response at all.
The Board’s letter itself acknowledges that the
formation of a special committee is old news and provides no more
information than was announced by the Company nearly a month and a
half earlier, on November 7, 2019. Moreover, the letter
provides no transparency whatsoever regarding the identity of the
special committee members or the true scope of the special
committee’s mandate.
The lack of meaningful information regarding the
composition and authority of the special committee is made all the
more troublesome by the lone sentence in the Board’s December 16
Letter regarding the special committee process—namely, that “the
Board is considering a possible internalization of the Company’s
management in response to a non-binding letter from Colony Capital,
Inc. seeking to explore such a transaction.” This is a
significant potential transaction and one that is rife with
conflicts. Current management and the Board have proven that
they are not capable of evaluating a transaction of this magnitude
and importance—one need look no further than the 2015
internalization that resulted in the creation of Colony Capital,
the 2017 tri-party merger with Colony Capital and Northstar
entities, and the 2017/2018 combination/listing that created Colony
Credit to conclude as much.
Colony Credit’s Senior Leadership, Not its
Management Structure, Is the Problem
As we previously have explained, “[t]he external
management structure of Colony Credit is not the problem.”
(December 9 Letter, at 5).
Rather, the problem lies with Mr. Barrack, Mr.
Traenkle and the rest of the executive leadership team at Colony
Capital who have been managing the Company’s portfolio through the
Company’s external manager. The current management team at
Colony Capital has proven utterly incapable of delivering on the
Company’s stated investment objective and of generating shareholder
value. There is no reason to believe that employing those
same managers directly will change anything.
Over the past two years, these investment managers
have captained Colony Credit to the brink of ruin and there is no
reason to believe that will change. In fact, while the Board
continues to sit on its hands, the passage of time has only further
highlighted the ineptitude of Colony Credit’s leadership and
investment management team as evidenced by the fact that the
Company’s stock has declined by an additional 7% since our December
9 Letter compared to continued gains in the stock price of its peer
companies.
The Board is Conflicted and Actively
Harming the Company and its Shareholders
While inexcusable, the Board’s plain unwillingness
to seriously consider breaking ties with Colony Capital and
replacing Mr. Traenkle and the rest of the Company’s senior
management team with competent personnel is perhaps understandable
given their close relationships—of the seven members of the Board,
at least five are or were previously employed by Colony Capital or
its predecessors. This includes Colony Capital’s prior CEO
who was terminated from that post in 2018, presumably for poor
performance, but inexplicably was allowed to retain his position as
Chairman of Colony Credit.
Accordingly, following receipt of your December 16
Letter, our December 27 Letter requested additional information
regarding the identity of the so-called “independent and
disinterested directors” serving on the special committee, as well
as clarity regarding the precise contours of what the full Board
authorized the purportedly disinterested group of directors to
do. Incredibly, over a month later, neither the Board nor the
special committee has bothered to provide any response to those
basic questions.
Given current leadership’s value destructive track
record and consistent pattern of over-promising and
under-delivering, we believe the Company has lost the right to
allocate and invest additional shareholder capital.
Additionally, given Colony Credit’s continued abysmal performance,
the Board’s clear conflicts of interest, and its demonstrated
reticence to consider sensible avenues for replacing ineffective
leadership and portfolio managers with competent personnel, the
Board should immediately put a moratorium on allocating capital to
new loans and investments, and cease any consideration or
negotiation of Colony Capital’s proposal to “internalize” the
Company’s management by hiring Colony Capital personnel.
The Colony Capital Board May Soon be
Reconstituted
Colony Capital’s board may be re-constituted in
several months should Colony Capital shareholders elect our
nominees to that board. Accordingly, we believe it is irresponsible
for Colony Credit to evaluate and negotiate a potential transaction
with Colony Capital at this time, especially given that a new
Colony Capital board may take a markedly different view of any
potential internalization, management changes, and strategic
alternatives at Colony Credit. As such, the Company should
immediately pause any evaluation of the current internalization
proposal until after the Colony Capital annual meeting, when there
will be clarity on the go-forward leadership team at Colony
Capital.
As the Company’s public filings make perfectly
clear: “[t]he Manager’s role as Manager will be under the
supervision and direction of the Company’s board of
directors.” (Colony Credit, Form 10-Q filed Nov. 8, 2019, at
47). We intend to hold the Board fully accountable for any
and all harm that befalls shareholders as a result of any
internalization transaction or long-term management agreement
struck with Colony Capital, and any other harm that results from
continuing to shirk your fiduciary obligations to Colony Credit’s
shareholders in favor of the whims of Colony Capital and the
incumbent management team.
|
Very truly
yours, |
|
/s/ |
|
Jason Aintabi |
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.
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