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CLNY > SEC Filings for CLNY > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for COLONY FINANCIAL, INC.

Form 10-Q for COLONY FINANCIAL, INC.


9-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

In this quarterly report on Form 10-Q (this "Report") we refer to Colony Financial, Inc. as "we," "us," "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our manager, Colony Financial Manager, LLC, as our "Manager," and the parent company of our Manager, Colony Capital, LLC, together with its consolidated subsidiaries (other than us), as "Colony Capital."

The following discussion should be read in conjunction with our unaudited consolidated financial statements and the accompanying notes thereto, which are included in Item 1 of this Report, as well as the information contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, which is accessible on the Securities and Exchange Commission's (the "SEC") website at www.sec.gov.

IMPORTANT INFORMATION RELATED TO FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Report constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and we intend such statements to be covered by the safe harbor provisions contained in Section 21E of the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," or "potential" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of our strategy, plans or intentions.

While forward-looking statements reflect our good faith beliefs, assumptions and expectations, they are not guarantees of future performance. Furthermore, we disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. We caution investors not to place undue reliance on these forward-looking statements and urge you to carefully review the disclosures we make concerning risks in sections entitled "Risk Factors," "Forward-Looking Statements," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.

Overview

We are an externally managed real estate investment and finance company that was organized in June 2009 primarily to acquire, originate and manage a diversified portfolio of real estate-related debt and equity investments at attractive risk-adjusted returns. Our investment portfolio and target assets are primarily composed of interests in: (i) secondary loans acquired at a discount to par;
(ii) new loan originations; and (iii) equity in single family homes to be held for investment and rented to tenants. Secondary debt purchases may include performing, sub-performing or non-performing loans (including loan-to-own strategies). See "Business-Our Target Assets" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for additional information about our target assets.

We elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes, commencing with our initial taxable year ended December 31, 2009. We also intend to continue to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940 (the "1940 Act").

Business Objective and Outlook

Our objective is to provide attractive risk-adjusted returns to our investors through a diversified portfolio of real estate-related debt and equity investments, including single family homes to be rented to tenants. The total return profile of our investments is composed of both current yield, which is distributed through regular-way dividends, and capital appreciation potential, which is distributed through regular-way and/or special dividends. Our investments typically fall within three general categories: 1) Loan Acquisitions
- the purchase of performing, sub-performing and/or non-performing commercial real estate debt, often at significant discounts to par; 2) Loan Originations - the origination of structured senior and subordinate debt secured by mortgages and/or equity interests in commercial real estate with a bias towards current yield; and 3) Single Family Homes - the acquisition of single family homes to be rented to tenants. We also may pursue other real estate-related special situation investments including CMBS, sale/leasebacks, triple net lease investments and minority equity interests in banks. Our investments are diversified across a wide spectrum of commercial real estate property types - office, industrial, retail, multifamily, hospitality and single-family residential - and geographically, with investments across the United States and Europe.

Significant dislocation has occurred in global real estate credit markets since the financial downturn, and while the market has begun the process of recovery, we continue to find opportunities to acquire financial and real estate assets that we believe are mispriced relative to intrinsic value of the underlying collateral. We believe the recovery will occur in two general phases: phase one


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will involve many loan acquisition opportunities as financial institutions around the globe deleverage and divest of troubled assets, and phase two will involve an increasing number of loan originations and property acquisitions as commercial real estate fundamentals continue to stabilize and commercial real estate assets are refinanced or acquired with new capital based on revised underwriting, valuation and operating metrics. We believe phases one and two are actively underway in the United States, whereas Europe is lagging and is currently producing mostly loan acquisition opportunities. We believe that we are well positioned to capitalize on such opportunities sourcing transactions through the numerous relationships enjoyed by our Manager through its two decade history in the real estate investment business. We also believe that our Manager's in-depth understanding of commercial real estate and real estate-related investments (including our target assets), and in-house underwriting and asset management capabilities, enable us to acquire assets with attractive risk-adjusted return profiles and the potential for meaningful capital appreciation.

Recent Developments

Investment Activities

During the quarter ended September 30, 2012, we invested approximately $81 million in two new assets and increased our equity in the Colony Capital-sponsored single-family residential ("SFR") rental platform by another $75 million. See "-Our Investments" for our recent investment activities and updates relating to our existing investments. Many of our investments have been structured as joint ventures with one or more of the private investment funds managed by Colony Capital or its affiliates (collectively, "Co-Investment Funds"). For more information about our investment allocation agreement and conflicts of interest that may arise in connection with these co-investments, see "Business-Co-Investment Funds" and "Risk Factors-Risks Related to Our Management and Our Relationship with Our Manager" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Common Stock Offering

In September 2012, we completed a sale (the "September 2012 Common Stock Offering") of 8,050,000 shares of our common stock to an underwriter at a price of $18.53 per share. The net offering proceeds, after deducting underwriting discounts and commissions and offering costs payable by us, were approximately $149 million.

Preferred Stock Offering

In March 2012, we completed an underwritten public offering (the "March 2012 Preferred Stock Offering") of 5,800,000 shares of our 8.50% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.01 per share ("Series A Preferred Stock"), including a partial exercise of the overallotment option by the underwriters. The net offering proceeds, after deducting underwriting discounts and commissions and offering costs payable by us, were approximately $140 million.

In July 2012, we completed an underwritten public offering (the "July 2012 Preferred Stock Offering") of 4,280,000 shares of our Series A Preferred Stock, including a partial exercise of the overallotment option by the underwriters at a premium to par that translated to a strip yield of 8.3%. The net offering proceeds, after deducting underwriting discounts and commissions and offering costs payable by us, were approximately $106 million.


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Our Investments

The following table is a summary of investments we owned as of September 30,
2012:



                                                                                   Company's
                                          Original                               Proportionate          Company's
($ in millions)            Date of      Invested and           Current             Share of           Proportionate
                           Initial        Committed            Equity               Current           Share of Real
Our Investments           Investment     Equity (1)         Investment(2)           UPB (3)            Estate (3)         Description
Colony American Homes       Mar-12      $       150.0      $         147.5                   NA      $         120.2      Investment entity
                                                                                                                          created for the
                                                                                                                          purpose of acquiring
                                                                                                                          and renting single
                                                                                                                          family homes
Centro Mezzanine Loans      Jun-11               60.0                 60.0                 60.0                   -       Participation in
                                                                                                                          mezzanine loans
                                                                                                                          secured by equity
                                                                                                                          interests in 107
                                                                                                                          retail centers
                                                                                                                          located in 27
                                                                                                                          states.
One Court Square            Jul-12               44.6                 45.5                   NA                   -       Preferred equity
Preferred Equity                                                                                                          investment in the
                                                                                                                          acquisition entity
                                                                                                                          that acquired a
                                                                                                                          Class A office tower
                                                                                                                          located in Long
                                                                                                                          Island City, New
                                                                                                                          York
WLH Secured Loan            Oct-09               48.0                 45.2                 50.5                   -       Senior secured term
                                                                                                                          loan secured by
                                                                                                                          first mortgages on
                                                                                                                          residential land and
                                                                                                                          security interests
                                                                                                                          in cash and other
                                                                                                                          assets
Bulls Loan Portfolio        Jun-11               65.1                 41.3                 88.0                  0.8      494 performing and
                                                                                                                          non-performing loans
                                                                                                                          consisting of
                                                                                                                          substantially all
                                                                                                                          first mortgage
                                                                                                                          recourse commercial
                                                                                                                          real estate loans
                                                                                                                          and 4 REO properties
DB FDIC Portfolio           Jan-10               34.7                 38.8                 70.3                 10.3      667 performing and
                                                                                                                          non-performing loans
                                                                                                                          secured mostly by
                                                                                                                          commercial real
                                                                                                                          estate and 124 REO
                                                                                                                          properties
Extended Stay Loan          Oct-10               37.4                 37.4                 37.5                   -       Performing mezzanine
                                                                                                                          loan to Extended
                                                                                                                          Stay Hotels, which
                                                                                                                          includes a 664 hotel
                                                                                                                          portfolio
CRE FDIC Portfolio          Aug-11               33.4                 37.1                 79.7                  2.5      588 performing and
                                                                                                                          non-performing loans
                                                                                                                          secured mostly by
                                                                                                                          commercial real
                                                                                                                          estate and 15 REO
                                                                                                                          properties
Project London Loan         Sep-12               36.6                 36.5                 49.7                   -       Acquisition of 7
Portfolio                                                                                                                 performing and
                                                                                                                          non-performing loans
                                                                                                                          secured by
                                                                                                                          commercial real
                                                                                                                          estate
U.S. Life Insurance         Dec-09               49.7                 35.9                 46.1                   -       18 fixed-rate first
Loan Portfolio                                                                                                            mortgages secured by
                                                                                                                          commercial real
                                                                                                                          estate
Luxury Destination          May-12               34.3                 34.9                104.7                   -       First mortgage loan
Club Recourse Loan II                                                                                                     collateralized by
                                                                                                                          261 high-end units
                                                                                                                          at 26 resorts in the
                                                                                                                          US and various
                                                                                                                          international
                                                                                                                          destinations
Hotel Portfolio (4)         Apr-10               23.9                 30.8                   NA                 78.0      Equity interests in
                                                                                                                          and senior mezzanine
                                                                                                                          loan receivable from
                                                                                                                          entities owning a
                                                                                                                          portfolio of 103
                                                                                                                          limited service
                                                                                                                          hotels
Multifamily Tax-Exempt      Jun-11               27.9                 28.5                 27.9                   -       Senior interest in
Bonds                                                                                                                     tax-exempt bonds
                                                                                                                          secured by a
                                                                                                                          multifamily
                                                                                                                          residential property
                                                                                                                          located in Atlanta,
                                                                                                                          GA
German Loan Portfolio       Jul-11               30.0                 28.5                132.4                  4.2      3 non-performing
IV                                                                                                                        commercial real
                                                                                                                          estate loans and 1
                                                                                                                          REO property
Luxury Destination          Sep-11               45.8                 26.9                 27.2                   -       Performing first
Club Recourse Loan I                                                                                                      mortgage secured by
                                                                                                                          41 properties
                                                                                                                          located primarily in
                                                                                                                          Manhattan and Maui
Ashford                     Feb-12               24.5                 24.5                 25.4                   -       Two most junior
                                                                                                                          mortgage
                                                                                                                          participation
                                                                                                                          interests in a newly
                                                                                                                          restructured first
                                                                                                                          mortgage secured by
                                                                                                                          five full-service
                                                                                                                          hotels
MF5 CMBS                    Feb-12               25.0                 22.4                 29.1                  0.3      Most senior bond and
                                                                                                                          interest-only
                                                                                                                          certificate in a
                                                                                                                          CMBS trust that owns
                                                                                                                          233 performing and
                                                                                                                          non-performing first
                                                                                                                          mortgage loans and 4
                                                                                                                          REO properties


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                                                                                     Company's
                                            Original                               Proportionate          Company's
                            Date of       Invested and           Current             Share of           Proportionate
($ in millions)             Initial        Committed             Equity               Current           Share of Real
Our Investments            Investment      Equity(1)          Investment(2)           UPB(3)              Estate(3)              Description
Class A Manhattan            Mar-10                15.0                 17.1                 22.0                   -       First mortgage
Office Loan                                                                                                                 pari-passu
Participation                                                                                                               participation
                                                                                                                            interest secured by
                                                                                                                            Class A midtown
                                                                                                                            Manhattan office
                                                                                                                            building
California Master            May-12                15.9                 15.6                   NA                   -       Equity interests
Planned Communities                                                                                                         acquired through
                                                                                                                            deed-in-lieu in two
                                                                                                                            partially developed
                                                                                                                            master planned
                                                                                                                            communities located
                                                                                                                            in California
Southern California          May-11                13.4                 14.8                 14.6                   -       First mortgage loan
Land Loan                                                                                                                   secured by a Southern
                                                                                                                            California master
                                                                                                                            planned development
                                                                                                                            and equity
. . .
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