“We are very pleased with our quarterly results and respective progress in all our business lines” said Richard Saltzman, Colony Financial’s President and Chief Executive Officer. “Our core earnings were on target exclusive of certain start-up and other one-time expenses. These anticipated charges related to the management and brand transition and pending bankruptcy exit of our Hotel Portfolio investment and the ongoing successful ramp-up of our substantial and growing investment in single family homes for rent including the build out of our management platform. Furthermore, this continues our evolution to more of a direct real estate owner in businesses that we believe have significant growth potential complementary to our very steady and established high-yielding debt platforms.”
Third Quarter Activity
- The Company increased its investment to $150 million (up from $75 million invested through the second quarter) in an investment platform to acquire single-family homes for rent. Through September 30, 2012, the platform has acquired approximately 2,400 homes in six different states and as of November 1, 2012, the platform had acquired approximately 4,200 homes.
- The Company, an investment fund managed by an affiliate of the Company’s Manager (“Co-Investment Fund”) and an unaffiliated investor, funded a $125 million preferred equity investment in a 1.4 million square foot Class-A office building located in Queens, New York. The investment earns a preferred return of 15%, of which 5.5% may be paid-in-kind, with a 1% origination fee and a 1% exit fee. The Company’s investment basis represents a value well below replacement cost of the underlying collateral. The term of the investment is approximately three years. The Company’s share of the investment was 36%, or $45 million.
- The Company invested $37 million in a joint venture with a Co-Investment Fund that acquired a portfolio of first mortgage loans collateralized by retail, industrial and land assets. The portfolio included seven performing and non-performing loans with an aggregate unpaid principal balance (“UPB”) of approximately $99.5 million. The purchase price for the portfolio was approximately $72 million, or 73% of the portfolio’s UPB. The Company’s share of this investment is 50%.
- ColFin FRB Investor, LLC ("FRB Investor"), a joint venture between the Company and investment funds managed by affiliates of the Company's manager, sold 3.0 million shares of First Republic Bank's common stock at 2.1 times the original cost basis. Following this sale, FRB Investor owned approximately 10.4 million shares (approximately 8% ownership interest) in First Republic Bank, and the Company indirectly owns approximately 616,000 shares in First Republic Bank through its interest in FRB Investor. This most recent sale represented a cumulative sale of approximately 62% of the Company’s original share holdings and returned approximately 118% of the Company’s original cost basis.
Activities Subsequent to Third Quarter 2012
- In November 2012, the Company committed to invest an additional $75 million (for a total investment of $225 million) into CSFR - our single family homes rental platform. Through November 1, 2012, CSFR had acquired approximately 4,200 homes. CSFR was formed to take advantage of the historic downturn in the U.S. housing industry by aggregating single family homes for rent on a national scale at a cyclically opportune time, with a goal to create a new institutional real estate asset class. While CSFR is presently one of the largest owners of single family homes for rent in the U.S., we are still in the start-up phase and don’t expect financial results to stabilize until the portfolio achieves more critical mass and higher occupancy.
- In October, the Company agreed to participate in the acquisition of a portfolio of 60 performing and non-performing loans with a UPB of approximately $70 million from a U.S. commercial bank. The purchase price for the portfolio was approximately $37 million, or approximately 53% of the portfolio’s UPB, and the portfolio consists of substantially all first mortgage, recourse loans. The Company’s pro rata share of the purchase price is approximately $18 million, which represents a 50% interest in the portfolio.
- In October, the Company agreed to participate in two new loan originations totaling $69 million which will bear interest at a blended current rate of approximately 11.5%. One loan also contains certain equity participation rights in the underlying real estate collateral. Both loans have an initial five year term. The Company’s pro rata share of the new originations is approximately $34 million, which represents a 50% interest.
- By means of an initial fulcrum mezzanine loan purchase and subsequent January 2012 foreclosure, the Company and a Co-Investment fund currently own equity interests and a mezzanine loan interest in a portfolio of 103 select service hotels (the “Hotel Portfolio”). Our cost basis in the portfolio is approximately $35,000 per key. On October 19th, a plan of reorganization was filed with a bankruptcy court that involves restructuring the existing mortgage debt, selling a minority equity position to a new partner, changing hotel management, and re-flagging the hotels with various nationally recognized brands. To date, the joint venture has incurred various legal, consulting and administrative costs related to the foreclosure, general litigation, bankruptcy and restructuring plans, and the Company expects many of these expenses to continue into the fourth quarter when bankruptcy proceedings are anticipated to conclude. We expect the benefits from these financial and operational changes, and the wind-down of associated expenses to implement such changes, to significantly improve portfolio cash flow and value in the future. The Company also continues to pursue litigation against the former owners and subordinate mezzanine lenders to recover costs associated with the bankruptcy.
- In October, the Company and Co-Investment Funds resolved an asset in one of our German loan portfolios through a receivership sale. The asset is an office building in Berlin, which was sold for €15 million, resulting in a €5.9 million gain. The Company’s pro rata share of the gain is €1.9 million, or $2.2 million.
Credit FacilityOn September 17, 2012, the Company amended its existing credit agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, and certain lenders. The Credit Agreement continues to provide a credit facility in the maximum principal amount of $175 million at the same interest rate and maturity date. However, the amendment expanded the types of assets and associated income qualifying for the borrowing base and modified certain limitations on the types of assets and associated income that can qualify for the borrowing base. The amendment also modified certain financial covenants to be more favorable for the Company to reflect the growth of the Company’s equity capital base since the previous amendment in September 2011. As of November 5, 2012, the Company had the ability to borrow up to approximately $161 million, of which none had been drawn.