“2012 was a breakthrough year for Colony Financial,” said Richard Saltzman, Colony Financial’s President and Chief Executive Officer. “The Company doubled in size from an aggregate asset and equity capitalization standpoint since year end 2011 and is now more than five times our size at IPO in September 2009. Simultaneously, our three primary investment strategies were operating on all cylinders in terms of new acquisitions and ‘day 2’ asset management successes. This most notably includes our recent foray into the acquisition of single family houses for rent in select major US markets where we now own an interest in approximately 7,000 homes. Finally, our pipeline of new potential transactions is extremely robust, including some burgeoning European opportunities, which bodes well for sustaining this trajectory in 2013 and beyond.”
Fourth Quarter Activity
- The Company increased its investment to $255 million (up from $150 million invested through the third quarter) in CSFR. At December 31, 2012, CSFR owned approximately 5,400 homes in six states and as of March 6, 2013, CSFR owned approximately 7,000 homes in seven states.
- The Company invested $19 million in a joint venture with investment funds managed by an affiliate of the Company’s Manager (“Co-Investment Fund(s)”) that acquired a portfolio of 60 performing and non-performing first mortgage recourse loans at the purchase price of approximately 53% of the portfolio’s unpaid principal balance (“UPB”) of $69 million. Our share of this investment is 50%.
- The Company invested $35 million in a joint venture with Co-Investment Funds that acquired a portfolio of first mortgage loans collateralized primarily by multifamily properties which are substantially concentrated in California and New York. The portfolio included 79 performing and non-performing loans with an aggregate UPB of approximately $95 million. The purchase price for the portfolio was approximately $69 million, or 73% of the portfolio’s UPB. The Company’s share of this investment is 50%.
- The Company invested $16 million in a joint venture with Co-Investment Funds that acquired a sub-performing first mortgage loan secured by an office tower in Phoenix, Arizona. The purchase price for the loan was approximately $32 million, or 59% of its UPB of $54 million. Our share of this investment is 50%.
- The Company invested $16 million in a joint venture with Co-Investment Funds that consummated a structured transaction with the FDIC. The joint venture acquired a 40% managing member equity interest in a newly formed limited liability company created to hold a portfolio of acquired loans, with the FDIC retaining the other 60% equity interest. The financing of the transaction included 50% leverage in the form of a $72 million zero-coupon note provided by the FDIC. The portfolio included 492 performing and non-performing loans with an aggregate UPB of $289 million, consisting of substantially all first mortgage recourse commercial real estate and acquisition, development and construction loans. The portfolio was acquired at approximately 48% of the portfolio's UPB.
- The Company committed $14 million to a joint venture with a Co-Investment Fund that originated a $28 million loan facility secured by a master-planned housing development located in Orange County, California. The loan bears interest at 10% per annum. The loan includes a 50% profit participation after the lenders and the equity sponsor have each attained a 14% annual return. Through December 31, 2012, the Company funded $8 million to the joint venture. The Company’s share of this investment is 50%.
- During the quarter, Extended Stay Hotels Inc. (“Extended Stay”), the borrower on the $37.5 million junior mezzanine loan originated in October 2010, fully paid off the outstanding loan through a refinancing. Extended Stay is a hotel chain owning properties across the United States and in Canada. The Company used the proceeds from the pay-off to reinvest in the two most junior mezzanine loan tranches of the new debt facility. The two new mezzanine loans bear interest at a blended 10.5% per annum through their maturity in December 2019 and are collateralized by equity interests in Extended Stay’s real estate portfolio, as well as the Extended Stay brands and other intangible assets.
- 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. In December, a plan of reorganization was approved by a bankruptcy court accomplishing a number of matters, including an extension of the mortgage loan which carries an interest rate of LIBOR plus 110 basis points, a change in hotel management, a sale of a minority equity interest to the new management company, and a re-flagging of the hotels with various nationally recognized brands. To date, the Company and the borrower entities have incurred approximately $10.7 million of various costs related to the foreclosure, bankruptcy and restructuring plans, of which, $8.4 million was recovered in a damages settlement. The Company’s share of the net costs post settlement was $0.8 million.
- The Company and Co-Investment Funds achieved various other favorable asset management accomplishments including discounted payoffs, loan modifications and sales in our small balance loan portfolios, full repayment of the restructured William Lyon Homes secured loan, and resolved an office building asset located in Berlin in one of our German loan portfolios through a receivership sale.
Activities Subsequent to Fourth Quarter 2012
- The Company increased its investment in CSFR to $375 million (up from $255 million invested through the fourth quarter) and increased its commitment by $100 million to $550 million (up from a previously announced aggregate commitment of $450 million), on the same cost basis as all other commitments raised to date by CSFR. Inclusive of the Company’s aggregate commitment, CSFR has received aggregate commitments of approximately $2.2 billion, of which an aggregate $1.1 billion has been called to date. Based on data as of March 6, 2013, the current occupancy of CSFR’s plus 180 day inventory is approximately 90%. Over the past few months, acquisition activity has outpaced leasing activity (for example, in the month of February 2013, CSFR acquired 790 homes and leased 390 homes) which has caused overall portfolio occupancy to recently trend downwards to 53%. While this trend may continue over the next few months, we believe it will ultimately reverse itself as renovation and leasing activity increases to absorb the new inventory and relative acquisition activity declines. The average cost (purchase price plus renovation costs) basis of CSFR’s owned inventory is approximately $130,000 and the net yield achieved on CSFR’s leased portfolio is in the range of 6% to 7%.
- In January, the Company invested in a joint venture with a Co-Investment Fund and a strategic partner that funded a $41 million first mortgage loan secured by a 7 acre multifamily development parcel located in Florida. The loan bears an interest rate of 12%; of which 3.5% may be paid-in-kind, with a 1.5% origination fee and a 1% exit fee. The initial term of the loan is three years. The Company’s share of the investment was 49.5%, or $20 million.
- In January, the Company invested in a joint venture with a Co-Investment Fund that originated a $22 million first mortgage loan secured by a waterfront development parcel located in Florida. The loan bears an interest rate of 14%; of which 4.5% may be paid-in-kind, with a 1% origination fee and a 1% exit fee. Additionally, upon certain conditions being achieved, the lender has the unilateral option to convert its position into subordinated development financing. The initial term of the loan is two years, plus two 6-month extensions. The Company’s share of the investment was 50%, or $11 million.
- In February, the Company invested in a joint venture with Co-Investment Funds that acquired a performing $59 million senior mortgage loan secured by a retail asset in Florida. The loan was acquired for $46 million, or 78% of the unpaid principal balance. The loan bears a 6.0% fixed interest rate with a 30-year amortization schedule and matures in May 2021. The current yield is approximately 9% based on purchase price. The Company’s share of this investment is 50%.
- In February, the Company, through a joint venture with Co-Investment Funds, de-securitized the loans held in a CMBS trust, in which the joint venture acquired the most senior bond in February 2012 for $226 million, or 73% of par. Concurrent with the unwinding of the trust, the joint venture sold a 40% participation interest in each of the approximately 220 multifamily first mortgage loans previously held in the CMBS trust to another financial institution. The Company’s share of the original purchase price was $25 million.
Full Year 2012 Operating ResultsFor the full year 2012, equity in income of unconsolidated joint ventures and interest income and other income from affiliates contributed $68.7 million and $38.4 million, respectively, to total income of $107.2 million. Total expenses for the year were $36.6 million. Administrative expenses accounted for $6.3 million. During the full year 2012, the Company reported net income attributable to common stockholders of $48.1 million, or $1.33 per basic share and $1.32 per diluted share, compared to $1.47 per basic share and $1.46 per diluted share for 2011. Core Earnings were $59.8 million, or $1.65 per basic share and diluted share for 2012, compared to $1.50 per basic share and $1.49 per diluted share for 2011.