Is This 9% Yield Worth The Risk?
To call a stock like Colony Capital (Nasdaq: CLNY) a disappointment would be an understatement. Since joining with Northstar Realty in early 2017 (a merger that went south almost immediately), the company has lost approximately two-thirds of its market cap.
A well-respected investment research firm just evaluated each of Colony's divisions individually, and after a sum-of-the-parts valuation concluded that CLNY is worth $11 per share. That would imply a potential upside of 100% from current levels. And for the first time in a while, the market is sensing a viable pathway to get there.
Just What Exactly Is This Company?
Part of the problem is Colony's convoluted portfolio, which has kept many analysts (and retail investors) at arm's length. Like most real estate investment trusts (REITs), it owns a collection of rent-earning properties such as hotels and warehouses. But Colony is also part asset manager and part business development company (BDC). Among other ventures, it originates real estate loans and manages both open and closed private equity funds.
Colony has $14.6 billion in balance sheet assets and manages another $28.8 billion on behalf of third-party investors for a fee. It's a difficult business to analyze and value, which is one of the reasons the company trades at a steep discount to its peers. Questionable corporate governance hasn't helped.
The surest way to unlock shareholder value is simply to unload non-core assets. Management is doing just that. The company is exploring the sale of its light industrial platform. Colony owns 450 warehouse properties (60 million square feet) that are 92% leased, mostly for last-mile e-commerce fulfillment. This is certainly a reversal in strategy. It's only been a few months since the company made a big acquisition in the warehouse space. But pressure is mounting to make a change – and this unit alone is expected to fetch upwards of $5 billion.
Elsewhere, Colony owns more than 400 healthcare facilities (senior housing communities, medical offices and hospitals) that generated $77 million in net operating income (NOI) last quarter. And then there are 170 hotels that chipped in another $82 million. Combined, the company pocketed funds from operation (FFO) of $74 million, or $0.14 per share – which supports a quarterly distribution of $0.11 per share and yield of 9%.
The Turnaround Plan
This is part of a broader restructuring to transform Colony into primarily an asset manager rather than a property owner. This business model requires less maintenance capital. It's also less susceptible to economic downturns (fee-based as opposed to rental income).
Meanwhile, CEO Tom Barrack has stepped down from his post as CEO. Activist investor Blackwells Capital (a solid shop with a good track record) is nominating three independent board members. That has helped appease the market.
But the biggest catalyst is Colony's recent foray into digital infrastructure. The company has made a bold leap into cell towers, data centers and other communications infrastructure. Fueled by the explosive growth of mobile data traffic (and the nationwide rollout of 5G service on the horizon), this has been one of the hottest corners of the real estate sector.
One forecast projects the number of internet-connected devices to soar to 28 billion by 2022 – more than three times the Earth's population. Colony has just made a big splash into this sector with the $325 million acquisition of Digital Bridge. Its CEO Marc Ganzi will soon take the helm of Colony Capital, hopefully charting a more prosperous course for shareholders.
Action To Take
With fresh leadership and a new strategic focus, I think the next two years are likely to be better than the last two for CLNY stockholders. The single-digit share price belies the value of Colony's global real estate portfolio. The company now owns or manages more than $60 billion worth of properties.
Let's forget for a moment about the asset management side of the business and the recurring fees that are flowing in. The industrial unit alone (based on average industry cash flow multiples) is worth about $1.70 per share -- and that may be a conservative estimate. The company also has a large collection of various debt and equity positions, including an 11% stake in Northstar Realty Europe (NRE). Even after write-downs, the book value of these holdings is worth $2.40 per share.
Monetizing these two units alone could be worth $4.10 per share. CLNY is currently trading at $4.52, which means the rest of the company (hotels, hospitals, etc.) is valued at just $0.30 per share. Whether sold off in pieces or bulk, asset sales should help unlock shareholder value. In the meantime, CLNY continues to dish out a generous 9% dividend yield.
I will be watching future developments closely with an eye toward adding more shares to our position over at High-Yield Investing. If you're a risk-tolerant investor looking for a rare 9% yield, then you should consider doing the same.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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