Colony Financial to Join Real Estate Finance IPO Parade

Colony Financial (CLNY) is another commercial real estate financing company planning to go public this week. The company joins Foursquare Capital (FSQR), Apollo Commercial (ARI) and CreXus Investment Corp (CXS) in targeting the distressed commercial mortgage debt market.

Business Overview (from prospectus)

We are a newly organized real estate finance company that will acquire, originate and manage a diversified portfolio of real estate-related debt instruments. We initially intend to focus primarily on acquiring, originating and managing commercial mortgage loans, which may be performing, sub-performing or non-performing loans (including loan-to-own strategies), and other commercial real estate-related debt investments. We also may acquire other real estate and real estate-related debt assets. We collectively refer to commercial mortgage loans, other commercial real estate-related debt investments, commercial mortgage-backed securities, or CMBS, real estate owned, or REO, properties and other real estate and real estate-related assets, as discussed below, as our target assets.

Offering: 25 million shares at $20 per share. Net proceeds of approximately $482.8 million will be used to acquire target assets in a manner consistent with our investment strategies and investment guidelines described in the prospectus.

Lead Underwriters: BofA Merrill Lynch (BAC), Goldman Sachs (GS), Morgan Stanley (MS)

Financial Highlights:

As of the date of this prospectus, we have not commenced any operations and will not commence any operations until we have completed this offering and the concurrent private placement.

Competitors:

Our profitability depends, in large part, on our ability to acquire our target assets at attractive prices. We are subject to significant competition in acquiring our target assets. In particular, we will compete with a variety of institutional investors, including other REITs, specialty finance companies, public and private funds, commercial and investment banks, hedge funds, mortgage bankers, commercial finance and insurance companies, governmental bodies and other financial institutions. We may also compete with Colony Capital and its affiliates for investment opportunities. See “Risk Factors—Risks Related to Our Management and Our Relationship with Our Manager—There are various conflicts of interest in our relationship with Colony Capital and its affiliates, including our Manager, which could result in decisions that are not in the best interests of our stockholders.” In addition, there are several REITs with similar investment objectives, including a number that have been recently formed, and others may be organized in the future. These other REITs will increase competition for the available supply of commercial mortgage and other real estate-related assets suitable for purchase or origination. Some of our anticipated competitors have greater financial resources, access to lower costs of capital and access to funding sources that may not be available to us, such as funding from the U.S. Government, if we are not eligible to participate in programs established by the U.S. Government. In addition, some of our competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exemption from the 1940 Act. Furthermore, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments, or pay higher prices, than we can. Current market conditions may attract more competitors, which may increase the competition for our target assets. An increase in the competition for such assets may increase the price of such assets, which may limit our ability to generate attractive risk-adjusted returns for our stockholders, thereby adversely affecting the market price of our common stock.

Additional Resources:

• Company website
• Online road show

Comments

[Mad Hedge F...:]

ndt The vultures are circling the embattled commercial real estate industry, ready to swoop down and devour the carrion before it’s dead. A trio of REIT IPO’s have hit the market this week looking to buy real estate for pennies on the dollar, as well as the bargain basement debt of other troubled REIT’s. JP Morgan, Citibank and Barclay’s launched their Apollo vehicle (ARI). Bank of America and Morgan Stanley came out with a new security called Foursquare (FSQU). Not to be outdone, Bank of America, Merrill Lynch, Goldman Sachs, and UBS followed up with their Colony (CLNY) instrument. This is a classic example of new equity coming in and taking ownership of assets where the previous owners have gone to money Heaven. Commercial real estate lending exploded from $1 trillion in 1988 to $3.5 trillion in 2007, and some $2 trillion of that has to be refinanced this year. Takers are few, with banks reeling in leverage ratios, insurance companies gun shy, and the collaterized debt markets in intensive care. The TALF is expiring at year end. Did I hear someone shout “Bail Out?” Many listed REIT’s will only survive because their rules limited them to mere 2:1 leverage, and were able to raise $16 billion in new equity since March. That has helped propel the Dow Jones REIT Index ($DJR) up 84% from the lows. More highly leveraged private investors and regional and community banks not so constrained are choking on their holdings, and many are limping on by letting mark to market rules fall by the wayside. This is why I am not recommending bank stocks or REIT’s at these levels. The new vulture issues may be another story. I was involved in a strategy at Morgan Stanley to Hoover up Houston office buildings on the cheap in the wake of the early eighties oil bust. The lucky investors got a tenfold return on their capital.

Sep 22 10:56 AM

[Sean Ryan:]

Amazing; its easy enough to understand why underwriters are eager to peddle mortgage REIT equities, which seem to account for the majority of IPO filings this year, but not at all clear why investors would want to participate. Well, based on the post-issuance performance of most of these stocks, I guess the answer is "they don't."

Sep 22 11:12 AM