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CLNY > SEC Filings for CLNY > Form 10-Q on 9-May-2013All Recent SEC Filings

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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, as amended, for the fiscal year ended December 31, 2012, which is accessible on the Securities and Exchange Commission's (the "SEC") website at
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. 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 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). We invest in single-family homes through our investment in CAH Operating Partnership, L.P. ("CAH OP," formerly known as CSFR Operating Partnership, L.P.), which is externally managed by an affiliate of our Manager. See "Business-Our Target Assets" in our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2012 for additional information about our target assets. We are organized and conduct our operations to qualify as a real estate investment trust ("REIT"), and generally are not subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our taxable income to stockholders and maintain qualification as a REIT, although we are subject to U.S. federal income tax on income earned through our taxable subsidiaries. We also operate our business in a manner that will permit us to maintain our exemption from registration as an investment company under the Investment Company Act of 1940, as amended (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:
Acquisitions-the purchase of performing, sub-performing and/or non-performing commercial real estate debt, often at significant discounts to par;

        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

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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 commercial real estate-backed securities ("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 is in 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 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.
Our Investment Guidelines
In March 2013, we amended the terms of our investment guidelines described in "Business-Our Investment Guidelines" of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2012.
Pursuant to the terms of the amended investment guidelines, any investment of our capital of up to $10 million requires the approval of our chief executive officer; any investment in excess of $10 million but less than $150 million requires the approval of our Investment Committee; and any investment greater than or equal to $150 million requires the approval of our board of directors. Segments
We operate in two reportable segments: real estate debt investments and single-family residential ("SFR") rentals. The real estate debt investments segment includes our investments in originated and acquired commercial real estate debt, real estate acquired in settlement of loans, mortgage-backed securities, and other debt-related investments. The SFR rental segment represents our investment in CAH OP. Prior to 2012, our operating activities were exclusively within the real estate debt investments segment. For operating and financial information about segments, see Note 16 to our consolidated financial statements included in this Report and "-Results of Operations." Recent Developments
Investment Activities
The following are highlights of our investment activities during the first quarter of 2013:
Invested or committed $231 million in six new real estate debt-related investments;

Increased our commitment to CAH OP by $295 million, bringing our total committed capital to CAH OP to $550 million, of which $120 million was funded during the period;

Continued to resolve loans within our loan portfolios;

Fully defeased the purchase money notes on two of our loan portfolios acquired from the Federal Deposit Insurance Corporation (the "FDIC"). We have fully paid off or defeased the purchase money notes on five out of eight FDIC loan portfolios;

Completed the sale of 281,352 shares of common stock of First Republic Bank.

See "-Our Investments" and "-Results of Operations" for more detailed information about our recent investment activities and financial results. Financing Activities
During the first quarter of 2013, we completed an offering of 11,500,000 shares of our common stock at a price of $20.20 per share for net proceeds of approximately $232 million. See "-Liquidity and Capital Resources-Equity Offering" for more detailed information.

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In April 2013, we issued $200 million principal amount of 5% Convertible Senior Notes (the "Convertible Notes") due April 15, 2023, at a discount of 3% to the underwriters, resulting in net proceeds to us of approximately $194 million. See "-Liquidity and Capital Resources-Convertible Debt" for more detailed information.
Our Investments
The following tables summarize the carrying and fair values of our investment portfolio by our target asset type, shown net of investment-specific financing and amounts attributable to noncontrolling interests. Fair values presented below have been determined in accordance with accounting principles generally accepted in the United States of America ("GAAP"), assuming we had elected the fair value option for all of our financial assets. Many of our investments have been structured as joint ventures with one or more private investment funds or other investment vehicles managed by Colony Capital or its affiliates (each a "Co-Investment Fund") and are held through unconsolidated joint ventures. 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, as amended, for the fiscal year ended December 31, 2012.

                                                                   March 31, 2013
(Amounts in thousands)                            Carrying Value                    Fair Value
                                                             Percentage                      Percentage
Target Asset Type                              Amount       of Portfolio       Amount       of Portfolio
Single loans-first mortgages               $    110,238             8 %     $   111,848             8 %
Single loans-subordinated debt (1)               35,388             3 %          37,000             3 %
FDIC loan portfolios                            126,569             9 %         146,823            10 %
Other loan portfolios                           184,932            13 %         195,500            13 %
CMBS/bonds                                       48,231             4 %          48,710             3 %
German non-performing loan portfolios            26,491             2 %          33,400             2 %
Equity via debt (2)                              44,522             3 %          52,400             4 %
Total acquisitions                              576,371            42 %         625,681            43 %
Senior & whole mortgage loans                   228,024            16 %         228,336            16 %
Subordinated debt (1)                           207,075            15 %         209,898            14 %
Total originations                              435,099            31 %         438,234            30 %
Other real estate debt-related
investments (3)                                  20,304             1 %          20,344             1 %
Single-family residential rentals               367,137            26 %         384,000            26 %
Total investments                          $  1,398,911           100 %     $ 1,468,259           100 %

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                                                                 December 31, 2012
(Amounts in thousands)                            Carrying Value                    Fair Value
                                                             Percentage                      Percentage
Target Asset Type                              Amount       of Portfolio       Amount       of Portfolio
Single loans-first mortgages               $     87,277             8 %     $    89,239             8 %
Single loans-subordinated debt (1)               35,150             3 %          36,700             3 %
FDIC loan portfolios                            128,474            12 %         143,070            13 %
Other loan portfolios                           188,952            18 %         198,959            17 %
CMBS/bonds                                       55,360             5 %          58,564             5 %
German non-performing loan portfolios            29,359             3 %          35,934             3 %
Equity via debt (2)                              47,742             4 %          53,600             5 %
Total acquisitions                              572,314            53 %         616,066            54 %
Senior & whole mortgage loans                    62,906             6 %          63,440             6 %
Subordinated debt (1)                           172,082            16 %         172,812            15 %
Total originations                              234,988            22 %         236,252            21 %
Other real estate debt-related
investments (3)                                  23,217             2 %          23,650             2 %
Single-family residential rentals               251,501            23 %         262,000            23 %
Total investments                          $  1,082,020           100 %     $ 1,137,968           100 %

(1) Subordinated debt includes B-notes, mezzanine loans, and preferred equity.

(2) Equity via debt includes real estate or equity interests obtained through foreclosures or deed-in-lieu of foreclosure on the collateral on target assets originally acquired or originated as debt instruments.

(3) Other investments include equity securities obtained in full or partial resolution of debt and our investment in shares of common stock of First Republic Bank.

Additional details and recent developments about our individual investments are provided in the following table and discussion:

(Amounts in
millions)                                                              Balance at March 31, 2013
                   Date of     Original Invested                          Proportionate            Company's              Investment Description/
                   Initial       and Committed                           Share of Current    Proportionate Share of    Portfolio Status at March 31,
Our Investments   Investment       Equity(1)          Investment(2)           UPB(3)             Real Estate(3)                    2013
Single-Family       Mar-12     $          550.0     $         367.1     $              -     $              285.8     Investment in CAH OP, an
Residential                                                                                                           investment vehicle created for
Rentals                                                                                                               the purpose of acquiring and
                                                                                                                      renting single-family homes
Lifestyle           Mar-13                130.8               123.1                123.4                        -     First mortgage loan origination
Athletic Club                                                                                                         secured by 11 lifestyle
Mortgage                                                                                                              athletic clubs located in
Participation                                                                                                         California
Centro              Jun-11                 60.0                60.0                 60.0                        -     Participation in mezzanine
Mezzanine Loans                                                                                                       loans secured by equity
                                                                                                                      interests in 107 retail centers
                                                                                                                      located in 27 states
One Court           Jul-12                 44.6                46.9                    -                        -     Preferred equity investment in
Square                                                                                                                an entity that acquired a Class
Preferred                                                                                                             A office tower located in Long
Equity                                                                                                                Island City, New York
CRE FDIC            Aug-11                 33.4                38.7                 67.5                      3.7     519 performing and
Portfolio                                                                                                             non-performing loans acquired
                                                                                                                      in a structured transaction
                                                                                                                      with the FDIC, secured mostly
                                                                                                                      by commercial real estate, and
                                                                                                                      22 real estate owned ("REO")
Extended Stay       Dec-12                 37.5                37.8                 37.5                        -     Performing originated mezzanine
Mezzanine B&C                                                                                                         loan to Extended Stay Hotels,
Loans                                                                                                                 which includes a 664 hotel

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(Amounts in
millions)                        Original                           Balance at March 31, 2013
                   Date of     Invested and                                  Company's              Company's            Investment Description/
                   Initial       Committed                              Proportionate Share    Proportionate Share    Portfolio Status at March 31,
Our Investments   Investment     Equity(1)         Investment(2)         of Current UPB(3)      of Real Estate(3)                 2013
Bulls Loan          Jun-11          65.1                       37.6               74.9                   1.5         439 performing and
Portfolio                                                                                                            non-performing acquired loans
                                                                                                                     consisting of substantially all
                                                                                                                     first mortgage recourse
                                                                                                                     commercial real estate loans
                                                                                                                     and 5 REO properties
Project London      Sep-12          36.6                       37.4               49.5                     -         7 performing and non-performing
Loan Portfolio                                                                                                       acquired loans secured by
                                                                                                                     commercial real estate
DB FDIC             Jan-10          34.7                       37.0               56.9                   9.3         555 performing and
Portfolio                                                                                                            non-performing loans acquired
                                                                                                                     in a structured transaction
                                                                                                                     with the FDIC, secured mostly
                                                                                                                     by commercial real estate and
                                                                                                                     119 REO properties
Luxury              May-12          34.3                       34.7              100.5                     -         First mortgage loan
Destination                                                                                                          collateralized by 257 high-end
Club Recourse                                                                                                        units at 26 resorts in the US
Loan II                                                                                                              and various international
Multifamily         Mar-13          34.3                       34.4                  -                     -         Preferred equity investment in
Portfolio                                                                                                            an entity that acquired a
Preferred                                                                                                            multifamily portfolio composed
Equity                                                                                                               of approximately 2,200 units
                                                                                                                     located in Georgia and Texas
Metro Loan          Dec-12          35.3                       33.9               44.5                     -         79 performing and
Portfolio                                                                                                            non-performing acquired loans
                                                                                                                     secured by commercial real
U.S. Life           Dec-09          49.7                       32.9               42.2                     -         16 performing acquired first
Insurance Loan                                                                                                       mortgages secured by commercial
Portfolio                                                                                                            real estate
Hotel Portfolio     Apr-10          23.9                       29.3                  -                  73.7         Equity interests in and senior
                                                                                                                     mezzanine loan receivable from
                                                                                                                     entities owning a portfolio of
                                                                                                                     103 limited service hotels
Multifamily         Jun-11          27.9                       28.5               27.9                     -         Senior interest in tax-exempt
Tax-Exempt                                                                                                           bonds secured by a multifamily
Bonds                                                                                                                residential property located in
                                                                                                                     Atlanta, GA
Luxury              Sep-11          45.8                       27.0               27.2                     -         Performing first mortgage
Destination                                                                                                          secured by 41 properties
Club Recourse                                                                                                        located primarily in Manhattan,
Loan I                                                                                                               NY and Maui
German Loan         Jul-11          30.0                       24.5               99.0                   4.2         2 non-performing commercial
Portfolio IV                                                                                                         real estate loans and 1 REO
Ashford Notes       Feb-12          24.5                       24.4               25.0                     -         Two most junior mortgage
. . .
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