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

Show all filings for COLONY FINANCIAL, INC.



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, as amended. 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) loans acquired at a discount to par in the secondary market; (ii) new originations; and (iii) real estate equity, including single-family homes held as rental investment properties. 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"), 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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Real estate equity, including single-family homes for rent.

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 17 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 second quarter of 2013:
Invested or committed $299 million in five new and one existing real estate debt-related investments;

Invested an additional $175 million in CAH OP which completed all outstanding capital commitments to the joint venture, thereby bringing our cumulative investment to $550 million to date;

Fully realized three real estate debt-related investments;

Continued to resolve loans within our loan portfolios;

Obtained financing on three of our loan portfolios, for net proceeds of $51.7 million, or 57% of our original equity on a blended basis;

Completed the sale of 161,085 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 half 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 and also sold 1,072,002 shares of our common stock in an at-the-market equity offering at an average price of $22.56 per share for net proceeds of approximately $23.9 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 Note 8 to our consolidated financial statements in Item 1 of this Report and "-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 investments. 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.

                                                                   June 30, 2013
(Amounts in thousands)                            Carrying Value                    Fair Value
                                                             Percentage                      Percentage
Target Asset Type                              Amount       of Portfolio       Amount       of Portfolio
Acquisitions                               $    519,625            29 %     $   553,712            30 %
Originations (1)                                652,223            37 %         655,091            35 %
Other real estate ownership (2)                  60,444             4 %          68,451             4 %
Single-family residential rentals               536,936            30 %         579,800            31 %
Total investments (3)                      $  1,769,228           100 %     $ 1,857,054           100 %

                                                                 December 31, 2012
(Amounts in thousands)                            Carrying Value                    Fair Value
                                                             Percentage                      Percentage
Target Asset Type                              Amount       of Portfolio       Amount       of Portfolio
Acquisitions                               $    524,572            48 %     $   562,466            49 %
Originations (1)                                234,988            22 %         236,252            21 %
Other real estate ownership (2)                  70,959             7 %          77,250             7 %
Single-family residential rentals               251,501            23 %         262,000            23 %
Total investments (3)                      $  1,082,020           100 %     $ 1,137,968           100 %

(1) Originations include preferred equity in real estate owning entities which earns a fixed return, with or without equity participation.

(2) Other real estate ownership includes real estate or equity interests obtained through foreclosures or deed-in-lieu of foreclosure on the collateral of target assets originally acquired or originated as debt instruments, equity securities obtained in full or partial resolution of debt and our investment in shares of common stock of First Republic Bank.

(3) The following table provides a reconciliation of total investments presented above to the amounts included in our consolidated financial statements and the accompanying notes in Item 1 of this Report:

(Amounts in thousands)                           June 30, 2013                     December 31, 2012
                                        Carrying Value      Fair Value      Carrying Value      Fair Value
Investments in unconsolidated joint
ventures                               $     1,251,878     $ 1,337,339     $       877,081     $   931,117
Loans receivable, net                          787,814         791,651             333,569         335,734
Beneficial interests in debt
securities, available-for-sale                  31,192          31,192              32,055          32,055
Other assets, net                               11,764          11,764              11,079          11,079
Less: Embedded derivative liability
associated with beneficial interests
in debt securities                              (3,245 )        (3,245 )            (3,898 )        (3,898 )
Less: Secured financing                        (84,093 )       (84,100 )          (108,167 )      (108,090 )
Less: Noncontrolling interests                (226,082 )      (227,547 )           (59,699 )       (60,029 )
Total investments                      $     1,769,228     $ 1,857,054     $     1,082,020     $ 1,137,968

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

(Amounts in
millions)                                    Balance at June 30, 2013
                      Date of
                      Initial         Investment                                      Investment Description/
Our Investments      Investment   Carrying Value (1)    Committed Equity (2)          Status at June 30, 2013
Single-Family          Mar-12     $          536.9     $                   -     Investment in CAH OP, an
Residential                                                                      investment vehicle created for
Rentals                                                                          the purpose of acquiring and
                                                                                 renting single-family homes
National Hotel         May-13                174.5                         -     Mezzanine loan origination
Portfolio                                                                        secured by equity interests in an
Mezzanine Loan                                                                   entity owning a diversified
                                                                                 portfolio of 152 full service,
                                                                                 limited service, and extended
                                                                                 stay hotels located throughout
                                                                                 the U.S.
Lifestyle Athletic     Mar-13                123.1                       8.3     First mortgage loan origination
Club Mortgage                                                                    secured by 11 athletic lifestyle
Participation                                                                    clubs located in California
Centro Mezzanine       Jun-11                 60.0                         -     Participation in mezzanine loans
Loans                                                                            secured by equity interests in
                                                                                 107 retail centers located in 27
Multifamily            Mar-13                 55.0                       2.5     Preferred equity investment in an
Portfolio                                                                        entity that acquired a
Preferred Equity                                                                 multifamily portfolio composed of
                                                                                 approximately 3,700 units located
                                                                                 in Georgia, Florida and Texas
One Court Square       Jul-12                 47.6                         -     Preferred equity investment in an
Preferred Equity                                                                 entity that acquired a Class A
                                                                                 office tower located in Long
                                                                                 Island City, New York
CRE FDIC Portfolio     Aug-11                 39.8                         -     475 performing and non-performing
                                                                                 loans acquired in a structured
                                                                                 transaction with the FDIC,
                                                                                 secured mostly by commercial real
                                                                                 estate, and 21 REO properties
Extended Stay          Dec-12                 37.8                         -     Performing originated mezzanine
Mezzanine B&C                                                                    loan to Extended Stay Hotels,
Loans                                                                            which includes a 680 hotel
Bulls Loan             Jun-11                 35.0                         -     412 performing and non-performing
Portfolio                                                                        acquired loans consisting of
                                                                                 substantially all first mortgage
                                                                                 recourse commercial real estate
                                                                                 loans and 8 REO properties
Luxury Destination     May-12                 34.7                         -     First mortgage loan
Club Recourse Loan                                                               collateralized by 252 high-end
II                                                                               units at 26 resorts in the US and
                                                                                 various international
DB FDIC Portfolio      Jan-10                 33.7                       1.7     509 performing and non-performing
                                                                                 loans acquired in a structured
                                                                                 transaction with the FDIC,
                                                                                 secured mostly by commercial real
                                                                                 estate and 122 REO properties
U.S. Life              Dec-09                 33.1                         -     16 performing acquired first
Insurance Loan                                                                   mortgages secured by commercial
Portfolio                                                                        real estate
Boston Retail          May-13                 32.4                       9.0     First mortgage loan origination
First Mortgage                                                                   secured by a regional mall
                                                                                 located in MA.
Hotel Portfolio        Apr-10                 30.5                         -     Equity interests in and senior
                                                                                 mezzanine loan receivable from
                                                                                 entities owning a portfolio of
                                                                                 103 limited service hotels
Multifamily            Jun-11                 28.0                         -     Senior interest in tax-exempt
Tax-Exempt Bonds                                                                 bonds secured by a multifamily
                                                                                 residential property located in
                                                                                 Atlanta, GA
Luxury Destination     Sep-11                 27.0                         -     Performing first mortgage secured
Club Recourse Loan                                                               by 41 properties located
I                                                                                primarily in Manhattan, NY and
California First       Apr-13                 25.9                         -     43 performing and 9
Mortgage Portfolio                                                               non-performing acquired first
I                                                                                mortgage loans secured by
                                                                                 commercial and residential real
German Loan            Jul-11                 25.2                         -     2 non-performing commercial real
Portfolio IV                                                                     estate loans and 1 REO property
Ashford Notes          Feb-12                 24.4                         -     2 most junior mortgage
                                                                                 participation interests secured
                                                                                 by 5 full-service hotels
Florida Retail         Feb-13                 23.2                         -     Performing acquired senior
First Mortgage                                                                   mortgage loan secured by a retail
                                                                                 property in Florida
California First       Jun-13                 22.9                         -     41 performing acquired first
Mortgage Portfolio                                                               mortgage loans secured by
II                                                                               commercial and residential real
Boca Raton             Jan-13                 20.3                         -     First mortgage loan origination
Multifamily Land                                                                 secured by a multifamily
Loan                                                                             development parcel located in
Class A Manhattan      Mar-10                 18.2                         -     First mortgage pari-passu
Office Loan                                                                      participation interest secured by
Participation                                                                    Class A midtown Manhattan office

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(Amounts in
millions)                              Balance at June 30, 2013
                      Date of       Investment
                      Initial     Carrying Value       Committed           Investment Description/
Our Investments      Investment         (1)           Equity (2)           Status at June 30, 2013
Project London         Sep-12              16.7                 -     7 performing and non-performing
Loan Portfolio                                                        acquired loans secured by
                                                                      commercial real estate
ADC FDIC Portfolio     Dec-12              16.2                 -     430 performing and non-performing
II                                                                    loans acquired in a structured
                                                                      transaction with the FDIC, mostly
                                                                      secured by commercial real estate
                                                                      and 5 REO properties
Phoenix Corporate      Dec-12              16.1                 -     First mortgage loan acquisition;
Tower Loan                                                            pursuing foreclosure on a
                                                                      high-rise office tower located in
                                                                      Phoenix, AZ
Southern               May-11              15.6                 -     First mortgage loan secured by a
California Land                                                       Southern California master
Loan                                                                  planned development and equity
. . .
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