It’s Looking Up For This ‘Risky’ 9% Yielder
Did you know that mobile phone manufacturer Nokia originally started out as a turn-of-the-century rubber boot maker? Before creating a chewing gum empire, Wrigley was a top supplier of soap and baking powder. And long before it became synonymous with fine jewelry, Tiffany was a simple stationery company.
The point is, many businesses find ways to branch out into new areas. Some reinvent themselves altogether. As we speak, online retailer Overstock is doing a complete 180… It’s abandoning its e-commerce roots and focusing strictly on blockchain technology (the backbone of cryptocurrencies).
Likewise, Colony Capital (NYSE: CLNY) is undergoing a dramatic makeover. This erstwhile property owner and real estate asset manager is moving wholeheartedly into digital infrastructure (fiber cable, cell phone towers, and corporate data centers.)
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.
A Recap Of The CLNY Story
For those who haven’t been following along, I wrote two pieces last year detailing both my disappointment with Colony, and my hope for a turnaround.
In August, I wondered aloud whether Colony was even worth it… My conclusion: yes, but only if you’re willing to tolerate the risk.
Then in October, I discussed the details behind the big turnaround plan.
As I stated in August, CLNY has been a rare disappointment for us over at High-Yield Investing. It’s one of only three laggards we had in 2019. The overall portfolio posted a healthy return of 27.4%, which compares favorably with the 26.5% return of the benchmark Russell 1000 Value Index. (Keep in mind, our portfolio also has exposure to preferred stocks, corporate bonds, and other fixed-income securities, which can detract from relative performance when equities are strong.)
Despite this, it’s starting to look like our hope is justified. As we discussed back in October, Colony sold its entire portfolio of industrial warehouses to Blackstone Group. The price tag was for $5.7 billion (about $700 million more than expected). That’s not the only big sale. Less than a month earlier, the company signed a deal to unload its stake in Northstar Realty Europe (NYSE: NRE). This brought in more than $160 million and a 30% gain.
These and other divestments are meant to boost liquidity, tighten up the balance sheet, and allow the company to fully pursue its new growth initiatives. Last quarter, it acquired Digital Bridge, one of the nation’s premier institutional managers of digital real estate.
And a few weeks ago, Colony made its first-ever direct investment in digital properties, spending $185 million for a 20% stake in DataBank. Databank owns 17 cutting-edge data centers leased to big enterprise clients in key business hubs such as Dallas and Atlanta.
Action To Take
I am still confident that CLNY will bounce from these lows in 2020 and beyond.
Monetizing overlooked assets is one of the surest ways to unlock shareholder value. I’m excited about the new possibilities tied to this overhaul. CEO Tom Barrack explained the pivot into digital infrastructure with an enlightening perspective, saying that the age-old real estate mantra of “location, location, location” was giving way to “connect, connect, connect.”
That’s what this transformation is all about. In the meantime, the firm’s global portfolio of hospitals, hotels and other properties is generating $101 million in quarterly funds from operation (FFO), or $0.19 per share. This adequately covers the $0.11 per share distribution — good for a 9% yield at recent prices.
In the meantime, our portfolio is starting off 2020 with an average yield of 7.3%. That’s no easy feat in this low-yield environment. And I’ve got my eye on several attractive candidates that just might bump that number even higher. If you’d like to learn more about High-Yield Investing, go here now.