šŸ”“Unlocking Value in a Beaten-Down REIT – Colony Capital (w/ John Jannarone)

Welcome to trade ideas
I’m Jake Merle sitting down with John Jay neurone editor-in-chief of IPO edge John great to have you back on the show. Thanks Jake
So what are we looking at today? What’s your trade idea? Well, my idea today is colony capital. This is an interesting company
It’s real hodgepodge of different assets its structure it as a REIT what happened is in early 2017
The current company was formed through a three-way merger, and it was pretty much a disaster from the beginning
The stock was trading around 15 bucks then and it fell off a cliff almost immediately. It’s now around $5 a share
So it’s down, you know 60 70 percent in you know, 8 to 18 months or so
So what’s happened over the past few years that this company has actually struggled so much
Well, I think that the whole merger was misguided to begin with they were talking about, you know
Top-notch governance and synergies happening, and it just didn’t materialize
They’ve struggled and in the beginning they blamed some of the legacy assets from the other two companies that were part of the merger
But the reality is that these things don’t really match up that well, they’d probably be better off separately
So why do you think now is a good time to get involved?
Why do you think things are finally going to turn around for the company?
what happened earlier this year is an activist investor Blackwell’s capital got involved and
They convinced the company to undergo a strategic review process, which they’ve been doing though. Not much has happened yet
They’ve also put on three independent directors who are good people and I think experienced in real estate and probably have the right approach
but what I’m predicting will happen and this is based on my sources who are close to Blackwell’s is that if the company doesn’t do
Something drastic like start selling some assets run a real auction process
They’re gonna try to replace, you know, the remaining directors in the board. So essentially are you saying that the value of the assets are
Disconnected with the actual share price. Yes, absolutely. So
It’s trading a little bit over $5
but based on the sum of the parts analysis that I did and I went through very meticulously through all seven different groups of
The company the thing is worth
I think at least eleven dollars a share and
could be a result of a number of things someone could buy the whole company or it could be broken off into little pieces or
Someone could buy half of it and if you look at these assets and you put reasonable multiples on them
You there’s a lot of value there. So it’s trading a very steep discount
So, can you please break down some of those assets and why you’re so bullish? Yeah
So let’s just take one of the Reid assets
So there are three REITs within this read and one is its most interesting to me
I think is the industrial read and these are real hot thing right now
I mean, it’s not the sexiest topic I guess but it’s right
It’s just warehouse space but it is a big deal because people are doing Amazon kind of stuff. So more and more retailers are
storing in massive facilities rather than you know having
Storefronts and they’re getting shipped out. So they’re trading at very very low cap rates
Which means you see if you flip it over at cap rates like a high multiple
So if you put a reasonable cap rate comparable to some of the recent transactions, that’s a pretty valuable asset
So what other assets are you looking at? Well, the other one that I think is interesting is the asset management piece
So that’s kind of like a black stone or an ox as if where it you know
They are the company that manages
assets and there are a few of those a trade and what’s interesting is that there are a few other players out there like say
Carlisle that doesn’t have much in the way of real estate focused asset management so a
Carlisle might say all of a sudden we can become more like Blackstone if we pick this thing up by the same token
Blackstone might just want more real estate, but I think that you know
The brand of colony capital is still strong and that asset manager really should be
You know getting more value than it is in the market right now. So this company has a lot of different moving parts
How did this company first get created?
Well, you know this company has been around for quite some time
and I think it’s 20 or 30 years, but in its current form the most drastic change it’s happened recently is
The dealer closed in early 2017. That was two
Different also listed companies which had a hodgepodge of assets and that’s how you kind of wound up with this thing
That’s got a lot of you know traditional read kind of real estate
But then there’s also I mean I didn’t even get into this other part
There’s this just lump of LP interests in all kinds of different funds. So this is a very very diverse
Company and I think that’s part of the reason why it’s misunderstood
I mean, you’ve got three sell-side analysts who look at it, and it doesn’t really fit in any industry group, you know, so
It’s some it’s a little bit of you know, it’s a little bit lost out there
So you’re saying when you add up all these different parts of the business you get $11 per share not $5 per share
So what’s the catalyst that you see it getting to $11 per share?
Well, I think that you know the pressure from Blackwell’s the activists is really enough to be a catalyst
My you know, my hunch is that these guys are probably going to selling something in a significant way
I have a source close to Blackwell’s who also told me that the steps they’ve taken so far
Which is to sell a little bit of real estate which happened the last few weeks actually since my article posted is not sufficient
They want much much more significant change
I mean, I think they want to see you know
They want to see this thing approaching what the sum of the parts value is, you know
And that’s you know over a hundred percent higher than the current price and so in terms of timing
How long do you see this playing out?
Well, so, you know we could get big good news any day now, but the reality is that come October November
That’s the director nomination window if these guys have not done something that makes Blackwell’s happy the rest of the board
Could get pushed out and I can see you know, I could see them winning that proxy fight
This thing is I mean even the analysts who don’t love the stock have an nav net asset value
I mean considerably higher than this not eleven dollars a share mine’s more bullish than theirs is but I mean
You’ve got some pretty disgruntled investors out there
So if they don’t get their act together
I mean the rest of the board including the chairman Tom barek who founded the company
You know could could lose a spot
So this is this is serious and so in terms of putting on an actionable trade idea
How do you suggest traders play the current set up?
Well look Jake the thing about this that I really like is that the downside is super limited and this thing yields
You know around ten percent, right? So, you know, especially with interest rates going down
I mean it can’t fall that much more
I mean maybe you could argue that some of their assets need to be marked down a little bit
But I mean the downside is pretty limited
So I mean I would just say
You know you along the common stock and what would you say is the biggest risk to this trade?
Well, I think the biggest risk is that we get into a nasty fight and then that could last a while, right?
So, you know
I I did say that I think that if there was a proxy fight that Blackwell’s would would prevail but you know
It could take a long time
You know, I mean there could be a lot of back-and-forth and you know
my guess is that the see that see the CEO tom barrack is not gonna be happy if you know he has to get if
he says if someone tries to take his company away from them and would you have a stop-loss just in case things don’t go your
Way, yeah, I mean I suppose so but I it’s like I said, I think that the downside is limited here
I mean, I I just if it went I mean if things really started to fall apart and felt, you know to
350 or something. I guess I cut my losses, but I really don’t think that’s gonna happen
Well, John, we’ll see how it plays out in the months to come. Thanks so much for joining us. Thanks Jake
So John is bullish on Colony Capital
Specifically, he likes buying ticker symbol CL NY at five dollars with a stop loss at 350 pcs upside potential
To eleven dollars over the next year. However, he take profits along the way at eight dollars
That was John Jay neurone of IPO edge and four-wheel vision. I’m Jake Morrell

7 thoughts on “šŸ”“Unlocking Value in a Beaten-Down REIT – Colony Capital (w/ John Jannarone)

  1. Iā€™m sure this dude is smart and far more rich than I will ever be, respect. That said, this guy looks like he got beat up…a LOT, which is why he started lifting in college and (Iā€™m guessing) started practicing BJJ.

  2. So this company is bleeding cash. Over half a billion dollars in 2018. But the price-to-book ratio is 0.45. Not sure how much analysis really went into this. Rather than his "painstaking process" to get his fair valuation, he could have just taken the current share price and divided it by the P/B ratio and gotten a very similar number of fair value. But what good is fair value today, if the battle ensues for a year and they bleed another half a billion? Then you've got a significantly lower fair value number until you get 0. If the disagreements is sorted out quickly, then sure, it's a really quick way to double your money… but it's very high risk. You better have some insider info on this or skip this trade.

  3. 11 billion in debt and higher ups making millions…and i seem to recall the founders name coming up in the panama papers….good luck

  4. The sign of a great investor, I care more about what can go wrong over the upside. Making money is easy, losing it is easier. This guy is selling.

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