Friday, July 3, 2009

Pawning Off Troubled Assets: A New Player in the Game

June 30, 2009

Colony Financial REIT Files $500M IPO
By Bob Howard

CENTURY CITY, CA-A new REIT called Colony Financial Inc. that will buy distressed assets has filed a registration statement for a $500 million initial public offering and will be managed by a subsidiary of Thomas Barrack Jr.'s Colony Capital, which has a long history of investing in troubled assets. Colony Financial officials were unavailable to comment on the filing because the company is in a quiet period under SEC regulations, but Los Angeles-based analyst Craig Silvers, president of Bricks & Mortar Capital, tells that the timing appears right for such an offering and that a public offering will open up investing in distressed assets to investors who otherwise might not have the opportunity.
Colony Financial, which will be managed by a wholly owned subsidiary of Colony Capital, plans to acquire, originate and manage performing and sub-performing commercial mortgage loans, and other commercial real estate-related debt, including CMBS. The company has not made any investments as of the filing of the registration statement.

Silvers, whose Bricks & Mortar Capital invests in REITs and other publicly held real estate companies, says that this is probably a good time to raise money to acquire distressed debt because the slow economy is causing vacancy rates to rise and causing financial distress among property owners, who have debt maturities they have to meet. Colony Financial says something similar in its SEC filing, citing Property and Portfolio Research estimates that more than $1.8 trillion of commercial real estate debt will mature over the next four years, with more than $400 billion maturing in each year from 2010 through 2013. "In particular, we believe that the FDIC will provide attractive investment opportunities in mortgage loans through its liquidation of the assets of failed depository institutions for which it is appointed receiver," the Colony Financial filing states.

Silvers notes that distressed asset funds are often open only to accredited investors or qualified institutional investors. "This way, the general public can get in on it," he says. In addition, he says, private funds are generally limited as to their number of investors, but there is no limit to the number of investors in a public company.

The share price of the Colony offering has not been established, according to the SEC filing. The target assets it expects to acquire include whole mortgage loans and portfolios of mortgage loans, CMBS, mezzanine loans, loan-to-own mortgage loans (those acquired with the intent of foreclosing), lender REO, debtor-in-possession loans, junior pieces of first mortgages, bridge loans and minority equity ownership interests in commercial banks or other financial institutions whose primary assets are mortgages or REO.

The new REIT will be looking at debt secured by office buildings, industrial or warehouse properties, hotels, retail properties and apartments. It may also originate whole mortgage loans for commercial property owners and developers, the filing says.

Colony Financial arrives with a broad and deep background in acquiring distressed assets. Barrack founded privately held Colony Capital LLC in 1991 as one of the pioneers in buying distressed assets from the Resolution Trust Corp., the federal agency that was formed to dispose of the assets of failed savings and loans. Later, Colony expanded to Europe and Asia, growing to 14 offices in 10 countries.

Colony Financial may be the first publicly traded REIT to be formed for the specific purpose of acquiring distressed assets. At least one non-traded REIT has been formed to buy distressed residential land and projects, but sources interviewed by said that offhand, they knew of no other publicly traded REIT formed for the express purpose of buying distressed assets.

The $500 million figure in Colony Financial's SEC filing could be just a starting point, depending on how the markets turn and how investors perceive the offering, according to Silvers. "If they raise this $500 million and get it to work quickly, they might want to come back to the market and raise more," the Bricks & Mortar Capital president says.

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