Real estate investment trust (REIT) Colony Capital (NYSE: CLNY) is going through a complete makeover. While the shift management is making appears to be in the right direction, investment wise, there are a lot of moving parts here. With more work yet to be completed, and some very notable issues for REIT investors to consider, Colony Capital could be a millionaire maker. Only you'll need the fortitude to stick around through the transition before there's any hope of investment success.
Not the same company
Colony Capital has always been something of a complicated real estate investment trust. First, before the current facelift, it owned multiple asset types, including health care, industrial, and hospitality properties. It also had an asset management business in which it invested in real estate on behalf of others on the individual and institutional levels. It was not an easy REIT to understand.
That said, Colony Capital has decided to throw out the old gameplan. It brought in a new CEO in 2019, after buying the company he previously ran, to oversee a shift toward digital investments. Thus, Colony Capital has been selling its older businesses and buying newer digitally focused assets. It's a massive change, but one that appears to fit with the increasing importance of digital properties.
The new focus is on owning cellphone towers, fiber optic cable, and data centers. Colony Capital is basically looking to become a digital infrastructure REIT. And it's moving fast, inking seven deals between Dec. 2019 and July 2020 to support its new approach. The company described these moves as transformative and highlighted that the total value of what it has done is roughly $20 billion.
The fly in the ointment
So far the direction in which Colony Capital is moving sounds reasonable. But investors don't appear to be all that keen on what's going on here, which is a long-term trend. For example, the shares peaked in 2015 and were off by about 70% by December of last year, when it started the string of deals highlighted above. Clearly investors weren't too excited about Colony Capital leading up to this big shift. But the stock is off by more than a third since the start of the dealmaking in December. So investors don't seem all that enthusiastic about the changes being made today, either.
It's worth noting that the average REIT, using Vanguard Real Estate Index ETF (NYSEMKT: VNQ) as a proxy is only off by around 17% over the same span. So Colony is lagging well behind the REIT sector as it works to overhaul its portfolio. The fact that the REIT suspended its dividend when it announced first quarter earnings probably hasn't helped, even though it's understandable given the overhaul and the broad economic impact of COVID-19. That said, the laggard performance is where the chance for big gains comes in.
With the stock down so much, investors are clearly betting that the turnaround doesn't work out as well as management suggests it will. Aggressive investors willing to bet on a turnaround story could see material upside, of the millionaire-maker kind, if Colony Capital pulls off a successful transition. That, however, is a big bet that Wall Street clearly isn't willing to make. Which means you should go in with your eyes wide open to the risks here. In fact, moderate and conservative investors would likely be better off waiting on the sidelines until the transition is further along and a new performance track record has been laid down.
Maybe, but you'll need faith
It's not unusual for companies to make strategic shifts, but Colony Capital is really reinventing itself. And it isn't wasting any time in the effort, which increases the risk of mistakes. Assuming the transition to a new business model works, the REIT could end up being very successful. But right now the transition is still a work in progress. Only aggressive types should be betting on this name right now, even though the potential upside is significant.