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CLNY > SEC Filings for CLNY > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for COLONY FINANCIAL, INC.


12-Nov-2013

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 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, 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) real estate and real estate-related debt, including loans acquired at a discount to par in the secondary market and new originations; and (ii) real estate equity, including single-family homes held as rental investment properties. 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 two broad categories:
Real estate debt investments, including loan acquisitions and originations:

            Loan acquisitions include the purchase of performing, sub-performing
             and/or non-performing commercial real estate debt, often at
             significant discounts to par. Secondary debt purchases may include
             performing, sub-performing or non-performing loans (including
             loan-to-own strategies)


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              Originations include structured senior and subordinate debt
             secured by mortgages and/or equity interests in commercial real
             estate with a bias towards current yield


      Real estate equity, which include single-family homes for rent and other
       real estate equity:


            Single-family homes for rent held through our investment in CAH
             Operating Partnership, L.P. ("CAH OP"), which is externally managed
             by an affiliate of our Manager


            Other real estate equity, which include real estate acquired in
             settlement of loans, common equity in real estate or related
             companies, and certain preferred equity investments with profit
             participation meeting certain risk or return profiles.

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 occurred in global real estate credit markets during the financial downturn, and while these markets are in various stages 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. U.S. markets are now in a later stage of recovery which are producing an increasing number of loan origination and property acquisition opportunities, 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. On the other hand, European markets are in an earlier stage of recovery and producing many loan acquisition opportunities as financial institutions continue to deleverage and divest of troubled assets. We believe that we are well positioned to capitalize on such opportunities sourcing transactions globally 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 three reportable segments: real estate debt investments, single-family residential ("SFR") rentals and other real estate equity investments. The real estate debt investments segment includes our investments in originated and acquired commercial real estate debt, mortgage-backed securities, and other debt-related investments. The SFR rental segment represents our investment in CAH OP. The other real estate equity investments includes real estate acquired in settlement of loans, common equity in real estate or related companies, and certain preferred equity investments with profit participation meeting certain risk or return profiles. 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 third quarter of 2013:
Invested or committed $214 million of capital in six new real estate debt investments, including a loan portfolio acquisition that closed shortly after quarter end;

Invested or committed $46 million in an existing real estate equity investment;

Fully realized two real estate debt investments and two real estate equity investments, including the sale of the remaining 173,495 shares of common stock of First Republic Bank;

Obtained financing on two of our loan portfolios, for net proceeds of $28.2 million, or 56% of our original equity on a blended basis;


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Fully repaid the purchase money notes on two of our loan portfolios acquired from the Federal Deposit Insurance Corporation ("FDIC"). To date, we have fully paid off or defeased the purchase money notes on seven out of eight FDIC loan portfolios.

See "-Our Investments" and "-Results of Operations" for more detailed information about our recent investment activities and financial results. Financing Activities
During the first three quarters of 2013, we completed an offering of 11,500,000 shares of our common stock for net proceeds of approximately $232 million and also sold 1,790,558 shares of our common stock in an at-the-market equity offering for net proceeds of approximately $38.5 million. See "-Liquidity and Capital Resources-Equity Offering" for more detailed information.
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.
In August 2013, we obtained a new secured revolving credit facility to replace the existing credit facility. The new credit facility has an initial maximum principal amount of $360 million, subject to certain conditions and limitations. See Note 6 to our consolidated financial statements in Item 1 of this Report and "-Liquidity and Capital Resources-Credit Facility" 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.

                                                                 September 30, 2013
(Amounts in thousands)                            Carrying Value                    Fair Value
                                                             Percentage                      Percentage
Target Asset Type                              Amount       of Portfolio       Amount       of Portfolio
Acquisitions                               $    466,665            27 %     $   502,548            27 %
Originations (1)                                555,295            32 %         560,384            30 %
Single-family residential rentals               533,925            31 %         606,500            33 %
Other real estate equity investments (2)        168,687            10 %         178,918            10 %
Total investments (3)                      $  1,724,572           100 %     $ 1,848,350           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 %
Single-family residential rentals               251,501            23 %         262,000            23 %
Other real estate equity investments (2)         70,959             7 %          77,250             7 %
Total investments (3)                      $  1,082,020           100 %     $ 1,137,968           100 %

(1) Originations include preferred equity earning a fixed return.

(2) Other real estate equity investments include 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 preferred equity earning a fixed return plus equity participation.


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(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)                        September 30, 2013                   December 31, 2012
                                        Carrying Value      Fair Value      Carrying Value      Fair Value
Investments in unconsolidated joint
ventures                               $     1,334,699     $ 1,455,958     $       877,081     $   931,117
Loans receivable, net                          646,036         650,986             333,569         335,734
Beneficial interests in debt
securities, available-for-sale                  31,123          31,123              32,055          32,055
Other assets, net                               10,804          10,804              11,079          11,079
Less: Embedded derivative liability
associated with beneficial interests
in debt securities                              (3,423 )        (3,423 )            (3,898 )        (3,898 )
Less: Secured financing                        (78,467 )       (78,500 )          (108,167 )      (108,090 )
Less: Noncontrolling interests                (216,200 )      (218,598 )           (59,699 )       (60,029 )
Total investments                      $     1,724,572     $ 1,848,350     $     1,082,020     $ 1,137,968

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

(Amounts in millions)                          Balance at September 30, 2013
                          Date of
                          Initial     Investment Carrying                                  Investment Description/
Our Investments          Investment        Value (1)          Committed Equity (2)      Status at September 30, 2013
Real Estate
Debt-Acquisitions
CRE FDIC Portfolio         Aug-11     $             39.3     $                   -     446 performing and
                                                                                       non-performing loans acquired
                                                                                       in a structured transaction
                                                                                       with the FDIC, secured mostly
                                                                                       by commercial real estate, and
                                                                                       19 real estate owned ("REO")
                                                                                       properties
Luxury Destination         May-12                   34.7                         -     First mortgage loan
Club Recourse Loan II                                                                  collateralized by 248 high-end
                                                                                       units at 26 resorts in the US
                                                                                       and various international
                                                                                       destinations
U.S. Life Insurance        Dec-09                   33.4                         -     15 performing acquired first
Loan Portfolio                                                                         mortgages secured by commercial
                                                                                       real estate
Bulls Loan Portfolio       Jun-11                   32.5                         -     383 performing and
                                                                                       non-performing acquired loans
                                                                                       consisting of substantially all
                                                                                       first mortgage recourse
                                                                                       commercial real estate loans
                                                                                       and 12 REO properties
DB FDIC Portfolio          Jan-10                   29.4                       1.7     484 performing and
                                                                                       non-performing loans acquired
                                                                                       in a structured transaction
                                                                                       with the FDIC, secured mostly
                                                                                       by commercial real estate and
                                                                                       117 REO properties
Multifamily Tax-Exempt     Jun-11                   28.2                         -     Senior interest in tax-exempt
Bonds                                                                                  bonds secured by a multifamily
                                                                                       residential property located in
                                                                                       Atlanta, GA
German Loan Portfolio      Jul-11                   26.5                         -     2 non-performing commercial
IV                                                                                     real estate loans and 1 REO
                                                                                       property
Ashford Notes              Feb-12                   24.6                         -     2 most junior mortgage
                                                                                       participation interests secured
                                                                                       by 5 full-service hotels
Florida Retail First       Feb-13                   23.4                         -     Performing acquired senior
Mortgage                                                                               mortgage loan secured by a
                                                                                       retail property in Florida
Class A Manhattan          Mar-10                   18.7                         -     First mortgage pari-passu
Office Loan                                                                            participation interest secured
Participation                                                                          by Class A midtown Manhattan
                                                                                       office building
Project London Loan        Sep-12                   17.5                         -     8 performing and non-performing
Portfolio                                                                              acquired loans secured by
                                                                                       commercial real estate
ADC FDIC Portfolio II      Dec-12                   16.6                         -     401 performing and
                                                                                       non-performing loans acquired
                                                                                       in a structured transaction
                                                                                       with the FDIC, mostly secured
                                                                                       by commercial real estate and 7
                                                                                       REO properties
Other acquisitions        various                  141.9                       0.7     20 investments, each with less
                                                                                       than $15 million of current
                                                                                       investment balance
Total acquisitions                                 466.7                       2.4


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(Amounts in millions)                      Balance at September 30, 2013
                          Date of
                          Initial     Investment Carrying      Committed          Investment Description/
Our Investments          Investment        Value (1)          Equity (2)       Status at September 30, 2013
Real Estate
Debt-Originations
National Hotel             May-13                 174.7                 -     Mezzanine loan origination
Portfolio Mezzanine                                                           secured by equity interests in
Loan                                                                          an entity owning a diversified
                                                                              portfolio of 152 full service,
                                                                              limited service, and extended
                                                                              stay hotels located throughout
                                                                              the U.S.
Lifestyle Athletic         Mar-13                  90.0               8.3     First mortgage loan origination
Club Mortgage                                                                 secured by 11 athletic
Participation                                                                 lifestyle clubs located in
                                                                              California
One Court Square           Jul-12                  48.3                 -     Preferred equity investment in
Preferred Equity                                                              an entity that acquired a Class
                                                                              A office tower located in Long
                                                                              Island City, New York
Boston Retail First        May-13                  32.3               9.0     First mortgage loan origination
Mortgage                                                                      secured by a regional mall
                                                                              located in MA.
Luxury Destination         Sep-11                  27.1                 -     Performing first mortgage
Club Recourse Loan I                                                          secured by 41 properties
                                                                              located primarily in Manhattan,
                                                                              NY and Maui
Boca Raton Multifamily     Jan-13                  20.7                 -     First mortgage loan origination
Land Loan                                                                     secured by a multifamily
                                                                              development parcel located in
                                                                              Florida
Mexico Luxury Resort       Aug-13                  20.1                 -     Participation in junior first
Junior Mortgage                                                               mortgage interest secured by a
Participation                                                                 luxury beach resort in Mexico
New York Student           Aug-13                  20.0               2.2     First mortgage loan secured by
Housing Loan                                                                  a student housing community in
                                                                              New York
St. Barths Hotel and       Sep-13                  15.9                 -     First mortgage loans secured by
Villa Mortgage Loan                                                           a partially constructed hotel
                                                                              and residential development
                                                                              project located in St. Barths
Southern California        May-11                  15.8                 -     First mortgage loan secured by
Land Loan                                                                     a Southern California master
. . .
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