Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34456

 

 

COLONY FINANCIAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Maryland   27-0419483

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

2450 Broadway, 6th Floor

Santa Monica, California

  90404
(Address of Principal Executive Offices)   (Zip Code)

(310) 282-8820

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   x  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨    No  x

As of August 13, 2010, 14,631,000 shares of the Registrant’s common stock, par value $.01 per share, were outstanding.

 

 

 


Table of Contents

COLONY FINANCIAL, INC.

TABLE OF CONTENTS

 

         Page
PART I. FINANCIAL INFORMATION

Item 1.

  Consolidated Financial Statements   
  Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009    3
  Consolidated Statements of Operations for the three and six months ended June 30, 2010 (unaudited)    4
  Consolidated Statements of Cash Flows for the three and six months ended June 30, 2010 (unaudited)    5
  Notes to Consolidated Financial Statements    6

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    16

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk    29

Item 4T.

  Controls and Procedures    30
PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings    31

Item 1A.

  Risk Factors    31

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds    31

Item 3.

  Defaults Upon Senior Securities    31

Item 4.

  (Removed and Reserved)    31

Item 5.

  Other Information    31

Item 6.

  Exhibits    31

SIGNATURES

   32

 

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PART I—FINANCIAL INFORMATION

 

ITEM 1. Consolidated Financial Statements.

COLONY FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

     June  30,
2010
(Unaudited)
    December 31,
2009
 

ASSETS

    

Investments in unconsolidated joint ventures

   $ 223,465      $ 129,087   

Cash and cash equivalents

     51,867        157,330   

Loan receivable, net

     10,931        —     

Other assets

     4,074        1,112   
                

Total assets

   $ 290,337      $ 287,529   
                

LIABILITIES AND EQUITY

    

Liabilities:

    

Accrued and other liabilities

   $ 937      $ 1,112   

Due to affiliate

     1,116        476   

Dividends payable

     3,072        1,024   

Deferred underwriting discounts and commissions payable to underwriters

     5,750        5,750   

Deferred underwriting discounts and commissions reimbursable to Manager

     5,750        5,750   
                

Total liabilities

     16,625        14,112   
                

Commitments and contingencies

    

Equity:

    

Stockholders’ equity:

    

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none outstanding

     —          —     

Common stock, $0.01 par value, 450,000,000 shares authorized, 14,631,000 shares issued and outstanding

     146        146   

Additional paid-in capital

     275,276        275,247   

Distributions in excess of earnings

     (1,157     (1,424

Accumulated other comprehensive loss

     (700     (592
                

Total stockholders’ equity

     273,565        273,377   

Noncontrolling interest

     147        40   
                

Total equity

     273,712        273,417   
                

Total liabilities and equity

   $ 290,337      $ 287,529   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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COLONY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

 

     Three Months Ended
June  30, 2010
    Six Months Ended
June 30, 2010
    Period from
June 23, 2009
(Date of Inception)
to June 30, 2009
 

Income

      

Equity in income of unconsolidated joint ventures

   $ 5,323      $ 9,238      $ —     

Interest income

     454        624        —     
                        

Total income

     5,777        9,862        —     
                        

Expenses

      

Base management fees

     799        1,459        —     

Investment expenses

     181        280        —     

Administrative expenses

     885        1,814        —     

Administrative expenses reimbursed to affiliate

     299        570        —     

Organization costs

     —          —          3   
                        

Total expenses

     2,164        4,123        3   

Foreign exchange loss, net of gain on foreign currency hedge of $61, $66 and $0, respectively

     (24     (52     —     
                        

Net income (loss)

     3,589        5,687        (3

Net income attributable to noncontrolling interest

     5        7        —     
                        

Net income (loss) attributable to common stockholders

   $ 3,584      $ 5,680      $ (3
                        

Net income per share:

      

Basic

   $ 0.25      $ 0.39      $ NM   
                        

Diluted

   $ 0.24      $ 0.38      $ NM   
                        

Weighted average number of common shares outstanding:

      

Basic

     14,625,000        14,625,000        1,000   
                        

Diluted

     14,912,500        14,912,500        1,000   
                        

Dividends declared per common share

   $ 0.21      $ 0.37      $ —     
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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COLONY FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Six Months Ended
June 30, 2010
    Period from
June 23, 2009
(Date of Inception)
to June 30, 2009
 

Cash Flows from Operating Activities

    

Net income (loss)

   $ 5,687      $ (3

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Amortization of nonvested common stock compensation

     29        —     

Amortization of discount on purchased loan receivable

     (276     —     

Equity in income of unconsolidated joint ventures

     (9,238     —     

Distributions of income from unconsolidated joint ventures

     6,189        —     

Foreign exchange loss

     52        —     

Changes in operating assets and liabilities:

    

Increase in other assets

     (774     —     

Increase in accrued liabilities

     162        —     

Increase in due to affiliate

     640        3   
                

Net cash provided by operating activities

     2,471        —     
                

Cash Flows from Investing Activities

    

Contributions to unconsolidated joint ventures

     (93,771     —     

Distributions from unconsolidated joint ventures

     799        —     

Purchase of participating interest in loan receivable

     (10,655     —     

Deposit on future investment

     (968  

Proceeds from settlement of foreign exchange hedges

     66        —     
                

Net cash used in investing activities

     (104,529     —     
                

Cash Flows from Financing Activities

    

Proceeds from issuance of common stock

     —          1   

Dividends paid to common stockholders

     (3,365     —     

Payment of offering costs

     (125     —     

Contributions from noncontrolling interest

     88        —     

Distributions to noncontrolling interest

     (3     —     
                

Net cash (used in) provided by financing activities

     (3,405     1   
                

Net (decrease) increase in cash

     (105,463     1   

Cash and cash equivalents, beginning of period

     157,330        —     
                

Cash and cash equivalents, end of period

   $ 51,867      $ 1   
                

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:

    

Deferred offering costs in accrued liabilities and due to affiliates

   $ —        $ 828   
                

Dividends payable

   $ 3,072      $ —     
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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COLONY FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

1. Organization

Colony Financial, Inc. (the “Company”) was organized on June 23, 2009 as a Maryland corporation for the purpose of 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. The Company completed the initial public offering (the “IPO”) and concurrent private placement of its common stock and commenced operations on September 29, 2009. The Company is managed by Colony Financial Manager, LLC (the “Manager”), a Delaware limited liability company, and an affiliate of the Company. The Company elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code commencing with its first taxable year ended December 31, 2009.

2. Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying interim financial statements have been prepared, without audit, in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements. These statements reflect all normal and recurring adjustments which, in the opinion of management, are necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. However, the results of operations for the interim period presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or any other future period. These interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Investment in Unconsolidated Joint Ventures

Since the commencement of operations on September 29, 2009, most of the Company’s investment activities have been structured as joint ventures with one or more of the private investment funds managed by affiliates of Colony Capital, LLC (“Colony Capital”), the sole member of the Manager, under the investment allocation agreement (see Note 8). The Company has evaluated the joint ventures and concluded that they are variable interest entities (“VIEs”); however, the Company is not the primary beneficiary of the VIEs. Since the Company is not the primary beneficiary and is not required to consolidate the VIEs, the Company accounts for investments in these joint ventures using the equity method. The Company initially records investments in unconsolidated joint ventures at cost and adjusts for the Company’s proportionate share of net earnings or losses, cash contributions made and distributions received, and other adjustments, as appropriate. Distributions of operating profit from joint ventures are reported as part of operating cash flows. Distributions related to a capital transaction, such as a refinancing transaction or sale, are reported as investing activities. The joint ventures’ critical accounting policies are similar to the Company’s and their financial statements are prepared in accordance with GAAP.

Loan Receivable

In April 2010, the Company purchased an interest in a senior mezzanine loan. The loan is classified as held-for-investment because the Company has the intent and ability to hold it until maturity. The loan is recorded at amortized cost, or the outstanding unpaid principal balance, net of unamortized purchase discount. Purchase discount is recognized as interest income over the remaining loan term as a yield adjustment using the interest method.

The Company evaluates loans for impairment on a quarterly basis, and recognizes impairment on a loan when it is probable that the Company will not be able to collect all amounts estimated to be collected at the time of acquisition. The Company measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral. Income recognition is suspended for loans when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. As of June 30, 2010, there was no indication of impairment on the loan.

 

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Foreign Currency Translation

Investments in unconsolidated foreign joint ventures denominated in Euro are translated at the exchange rate on the balance sheet date. Income from investments in unconsolidated foreign joint ventures is translated at the average rate of exchange prevailing during the period such income was earned. Translation adjustments resulting from this process are recorded as other comprehensive income (loss).

Income Taxes

The Company elected to be taxed as a REIT, commencing with the Company’s initial taxable year ended December 31, 2009. A REIT is generally not subject to corporate level federal and state income tax on net income it distributes to its stockholders. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement to distribute at least 90% of its taxable income to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies for taxation as a REIT, it and its subsidiaries may be subject to certain federal, state, local and foreign taxes on its income and property and to federal income and excise taxes on its undistributed taxable income.

The Company has elected or may elect to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a “TRS”). In general, a TRS of the Company may perform non-customary services for tenants of the Company, hold assets that the Company cannot hold directly and, subject to certain exceptions related to hotels and healthcare properties, may engage in any real estate or non-real estate related business. A TRS is treated as a regular corporation and is subject to federal, state, local, and foreign taxes on its income and property.

Recent Accounting Updates

On June 12, 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140,” subsequently reissued as Accounting Standards Update (“ASU”) No. 2009-16, Accounting for Transfers of Financial Assets, which updates FASB Accounting Standards Codification (“ASC”) 860, Transfers and Servicing. ASU No. 2009-16 removes the concept of a qualifying special-purpose entity (“SPE”) from FASB ASC 860 and eliminates the exception for qualifying SPEs from the consolidation guidance of FASB ASC 810, Consolidation. In addition, among other things, ASU No. 2009-16 (i) amends and clarifies the unit of account eligible for sale accounting as an entire financial asset, group of entire financial assets, or participating interest in an entire financial asset; (ii) eliminates the practicability exception for fair value measurement of assets obtained and liabilities incurred by a transferor in a transfer that meets the conditions for sale accounting; (iii) removes the special provisions in FASB ASC 860 for guaranteed mortgage securitizations; (iv) clarifies the requirements of the legal isolation analysis and the principle of effective control; and (v) requires enhanced disclosure about, among other things, a transferor’s continuing involvement with transfers of financial assets accounted for as sales, the risks inherent in transferred financial assets that have been retained, and the nature and financial effect of restrictions on the transferor’s assets that continue to be reported on the balance sheet.

In conjunction with the issuance of SFAS No. 166, the FASB also issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” subsequently reissued as ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which updates FASB ASC 810. Among other things, ASU No. 2009-17 amends certain guidance in FASB ASC 810 for determining whether an entity is a VIE, requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE, and requires enhanced disclosures about an enterprise’s involvement with a VIE. Under ASU No. 2009-17, an entity will be required to consolidate a VIE if it has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. In addition, ASU No. 2009-17 removes the current exemption for troubled debt restructurings.

The adoption of ASU No. 2009-16 and ASU No. 2009-17 effective January 1, 2010 did not have a material effect on the Company’s consolidated financial position, results of operations or disclosures.

On January 21, 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements. ASU No. 2010-06 amends FASB ASC 820, Fair Value Measurements and Disclosures, to require a number of additional disclosures regarding fair value measurements. Specifically, ASU No. 2010-06 requires entities to disclose: (1) the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; (2) the reasons for any transfers in or out of Level 3; and (3) information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, which are effective for fiscal years beginning after December 15, 2010, all the amendments to FASB ASC 820 made by ASU No. 2010-06 were effective for the Company beginning January 1, 2010. The adoption of the new disclosure requirements did not have a material effect on the Company’s disclosures, as we did not have any transfers between Level 1 and Level 2 fair value measurements and do not have any Level 3 assets or liabilities. The adoption of the remaining provisions of ASU No. 2010-06 is not expected to have a material effect on the Company’s disclosures.

 

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On April 29, 2010, the FASB issued ASU No. 2010-18, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset—a consensus of the FASB Emerging Issues Task Force. ASU No. 2010-18 amends FASB ASC 310, Receivables, such that modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. ASU No. 2010-18 is effective for the first interim or annual period ending on or after July 15, 2010, or three months ending September 30, 2010 for the Company, and will be applied prospectively. The adoption of ASU No. 2010-18 is not expected to have a significant effect on the Company’s consolidated financial position and results of operations.

On July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU No. 2010-20 amends FASB ASC 310 to require additional disclosures about the credit quality of financing receivables and the allowance for credit losses. ASU No. 2010-20 defines two levels of disaggregation – portfolio segment and class of financing receivables – and amends existing disclosure requirements to include information about the credit quality of financing receivables and allowance for credit losses at a greater level of disaggregation. It also requires disclosures on credit quality indicators, past due information, and modifications of financing receivables by class of financing receivables and significant purchases and sales by portfolio segment. The new disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010, or December 31, 2010 for the Company. The new disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010, or three months ending March 31, 2011 for the Company. ASU No. 2010-20 is not expected to have a material effect on the Company’s consolidated financial position and results of operations, but is expected to have an effect on the disclosures made by the Company and by its unconsolidated joint ventures.

3. Investments in Unconsolidated Joint Ventures

Pursuant to the investment allocation agreement between the Company, the Manager and Colony Capital (see Note 8), the Company’s recent investment activities have been structured as joint ventures with one or more funds managed by Colony Capital or its affiliates. The joint ventures are generally capitalized through equity contributions from the members, although in certain cases they have leveraged their investments through Term Asset-Backed Securities Loan Facility (“TALF”) financing or other lending arrangements. The Company believes that the joint ventures could obtain financing for their investments, if necessary, at competitive market rates. The Company’s exposure to the joint ventures is limited to amounts invested or committed to the joint ventures at inception, and neither the Company nor the other investors are required to provide financial or other support in excess of their capital commitments.

The Company has analyzed each of the joint ventures and determined that they are VIEs, but that the Company is not the primary beneficiary. In performing its analysis of whether it is the primary beneficiary, the Company considers whether it individually has the power to direct the activities of the VIE that most significantly impact the entity’s performance and also has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company also considers whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In making that determination, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to other investors; the obligation or likelihood for the Company or other investors to fund operating losses of the VIE; the Company’s and the other investors’ ability to control or significantly influence key decisions for the VIE, and the similarity and significance of the VIE’s business activities to those of the Company and the other investors. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, involve significant judgments, including estimates about the current and future fair values and performance of assets held by the VIE and/or general market conditions.

Activity in the Company’s investments in unconsolidated joint ventures for the six months ended June 30, 2010 is summarized below (in thousands):

 

     Six Months Ended
June 30, 2010
 

Balance at December 31, 2009

   $ 129,087   

Contributions

     93,771   

Distributions

     (6,988

Equity in net income

     9,238   

Equity in other comprehensive income

     764   

Foreign exchange translation loss

     (2,407
        

Balance at June 30, 2010

   $ 223,465   
        

 

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The following are the Company’s investments in various joint ventures with one or more funds managed by Colony Capital or its affiliates under the investment allocation agreement (see Note 8). The Company’s interest in each joint venture as of June 30, 2010 is as follows:

 

Joint Venture

   The Company’s
Ownership  Percentage
 

ColFin NW Funding, LLC (“NW Investor”)

   37.88

ColFin WLH Funding, LLC (“WLH Investor”)

   24.03

ColFin DB Guarantor, LLC (“DB Investor”)

   33.33

ColFin FRB Investor, LLC (“FRB Investor”)

   5.91

ColFin 666 Funding, LLC (“666 Investor”)

   33.33

Colony Funds Sants S.à r.l. (“Colonial Investor”)

   5.12

ColFin ALS Funding, LLC (“ALS Investor”)

   33.33

ColFin J-11 Funding, LLC (“J-11 Investor”)

   33.33

C-VIII CDCF CFI MBS Investor, LLC (“MBS Investor”)

   33.33

ColLaguna (Lux) S.à r.l. (“Laguna Investor”)

   33.33

Matrix Advisors BC, LLC (“BC Investor”)

   33.33

ColCrystal S.à r.l. (“Crystal Investor”)

   33.33

ColFin WLH Land Acquisitions, LLC (“WLH Land Investor”)

   24.03

Matrix CDCF-CFI Advisors VI, LLC (“Matrix Investor”)

   33.33

Colony CDCF-VIII-CFI Investor, LLC (“Deposit Funding Investor”)

   33.33

The Company made the following investments in unconsolidated joint ventures during the six months ended June 30, 2010:

 

   

On January 7, 2010, DB Investor, a joint venture with investment funds managed by affiliates of the Manager, consummated a structured transaction with the Federal Deposit Insurance Corporation (the “FDIC”). DB Investor acquired a 40% managing-member interest in a newly formed limited liability company (“DB Venture”) created to hold acquired portfolio of loans, with the FDIC retaining the remaining 60% equity interest. This portfolio of loans includes approximately 1,200 loans with an aggregate unpaid principal balance of approximately $1.02 billion, substantially all of which are first mortgage, recourse commercial real estate loans. The portfolio was effectively acquired at approximately 44% of the unpaid principal balance of the loans. The financing of the transaction includes 50% leverage ($233 million of zero-coupon notes on which interest is imputed at 3.8%) provided by the FDIC, which has a term of up to seven years and must be paid in full prior to any distributions to the equity holders. DB Venture also pays DB Investor a 50-basis point asset management fee calculated on the aggregate unpaid principal balance of the outstanding portfolio (some of which will be used to pay costs associated with primary and special servicing). The Company contributed approximately $30.2 million, exclusive of the required working capital and transaction costs, for its interest in DB Investor. In addition, the Company and other members of the joint venture committed to contribute up to an additional $5.0 million to the extent it is required, in order to support a guaranty issued by the joint venture. The Company’s share of this additional commitment is up to $1.7 million.

 

   

On March 5, 2010, 666 Investor, a joint venture with investment funds managed by affiliates of the Manager, acquired a $66.0 million pari-passu participation interest in a performing first mortgage loan on a Class A office building in midtown Manhattan with an aggregate unpaid principal balance of $1.2 billion. The purchase price for the pari-passu first mortgage interest was approximately $44.9 million, exclusive of transaction costs. The Company’s pro rata share of the purchase price was approximately $15.0 million, exclusive of transaction costs.

 

   

On March 8, 2010, ALS Investor, a joint venture with investment funds managed by affiliates of the Manager, originated a five-year $30.4 million recourse loan secured by first liens on two Manhattan townhomes and a photography catalog. The Company’s pro rata share of the loan funding was approximately $9.9 million, exclusive of transaction costs and net of upfront origination fee of 2.0% of the loan amount. The loan bears an interest rate of 14% per annum, of which 4% may be paid-in-kind in the first 12 months at the borrower’s option. ALS Investor is entitled to certain participation in the borrower’s photography business based on the amount of free cash flow generated.

 

   

On May 7, 2010, MBS Investor, a joint venture with investment funds managed by affiliates of the Manager, acquired a $31.2 million senior bond for approximately $13.1 million, or 42% of the unpaid principal balance. The senior bond has a coupon of 5.6% and is secured by a pool consisting primarily of seasoned commercial mortgage-backed securities issued prior to 2005, U.S. Treasury bonds, and one commercial real estate B-note. The Company’s pro rata share of the purchase price was approximately $4.3 million. The security is classified as available-for-sale. MBS Investor is managed by a third-party joint venture partner with a 2% noncontrolling interest.

 

   

On May 17, 2010, BC Investor, a joint venture with an investment fund managed by an affiliate of the Manager, originated a two-year $9.8 million first mortgage loan to finance the discounted payoff of eight related non-performing commercial real estate loans at 39% of the aggregate unpaid principal balance of the loans. The loan is secured by a first

 

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mortgage interest in a mixed-use development in the Midwest. The loan bears an interest rate of 14% per annum, of which 6.0% may be paid-in-kind. The Company’s pro rata share of the loan funding was approximately $3.3 million, exclusive of transaction costs. In addition, BC Investor committed to fund an additional $4.1 million within 180 days to finance a related discounted payoff on an adjoining property at 43% of the unpaid principal balance. The Company’s share of this additional commitment is approximately $1.4 million.

 

   

On May 20, 2010, Crystal Investor, a joint venture with investment funds managed by affiliates of the Manager, acquired a German portfolio of 211 primarily first mortgage non-performing commercial real estate loans with an aggregate unpaid principal balance of approximately €43.1 million. The effective purchase price for the portfolio was approximately €8.2 million, excluding transaction costs, or approximately 19% of the unpaid principal balance of the loans. Our pro rata share of the purchase price was approximately $3.5 million.

 

   

On June 30, 2010, FRB Investor, a joint venture with investment funds managed by affiliates of the Manager, completed its previously announced acquisition of a 21.8% interest in First Republic Bank (formerly Sequoia Acquisition, Inc.), with the remaining 78.2% interest acquired by a group of third party investors. The Company’s pro rata share of the total equity investment by FRB Investor was $24.0 million.

Combined condensed balance sheets and statements of operations are presented below for all unconsolidated joint ventures:

Combined Condensed Balance Sheets of Unconsolidated Joint Ventures (in thousands)

 

     June 30, 2010    December 31, 2009

Assets:

     

Cash

   $ 9,579    $ 2,458

Loans held for investment–net

     872,327      371,907

Available-for-sale investment securities

     53,395      37,580

Investments in unconsolidated joint ventures

     607,146      220,227

Other assets

     75,102      21,149
             

Total assets

   $ 1,617,549    $ 653,321
             

Liabilities:

     

Debt

   $ 241,723    $ 31,856

Other liabilities

     7,874      14,104
             

Total liabilities

     249,597      45,960
             

Owners’ equity

     1,218,680      607,361

Noncontrolling interest

     149,272      —  
             

Total liabilities and equity

   $ 1,617,549    $ 653,321
             

Company’s equity

   $ 223,465    $ 129,087
             

Combined Condensed Statements of Operations of Unconsolidated Joint Ventures (in thousands)

 

     Three Months Ended
June  30, 2010
   Six Months Ended
June 30, 2010

Income:

     

Interest income

   $ 22,684    $ 41,090

Income from joint ventures

     5,281      10,706

Other

     1,141      1,781
             

Total income

     29,106      53,577
             

Expenses:

     

Interest expense

     2,218      4,478

Transaction costs

     306      2,012

Other

     3,110      6,056
             

Total expenses

     5,634      12,546
             

Net income

     23,472      41,031

Net income attributable to noncontrolling interest

     1,342      1,512
             

Net income attributable to members

   $ 22,130    $ 39,519
             

Company’s share of transaction costs

   $ 102    $ 670
             

Company’s equity in net income

   $ 5,323    $ 9,238
             

 

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The accounting policies of the joint ventures are similar to those of the Company. Loans originated by the joint ventures are recorded at amortized cost, or the outstanding unpaid principal balance of the loan, net of unamortized acquisition premiums or discounts and unamortized costs and fees directly associated with the origination of the loan. Net deferred loan fees and origination costs are recognized in interest income over the loan term as a yield adjustment using the effective interest method or a method that approximates a level rate of return over the loan term. Loans acquired at a discount to face value where, at the acquisition date, the joint venture expects to collect less than the contractual amounts due under the terms of the loan based, at least in part, on the assessment of the credit quality of the borrower are recorded at the initial investment in the loan and subsequently accreted to the estimate of cash flows at acquisition expected to be collected. Costs and fees directly associated with acquiring loans with evidence of deteriorated credit quality are expensed as incurred. Loans are considered impaired when it is deemed probable that the joint venture will not be able to collect all amounts due according to the contractual terms of the loan or, for loans acquired at a discount to face value, when it is deemed probable that the joint venture will not be able to collect all amounts estimated to be collected at the time of acquisition. No loans held by the joint ventures were impaired at June 30, 2010.

As of June 30, 2010, approximately $156.8 million, or 54% of total assets, of the Company’s investments in unconsolidated joint ventures consisted of four investments.

4. Loan Receivable

On April 30, 2010, the Company purchased a one-third interest in a performing $39.0 million second mezzanine loan. The Company’s pro rata share of the unpaid principal balance is approximately $13.0 million. The loan is collateralized by a pledge of equity in an entity that indirectly owns a portfolio of 103 limited service hotels located in twelve states across the country. The Company’s pro rata share of the purchase price was approximately $10.7 million, or 82% of the unpaid principal balance, excluding transaction costs. The loan bears interest at 2.75% over the 30-day London Interbank Offered Rate and matures in August 2011. The remaining two-thirds interest in the mezzanine loan was purchased by an investment fund managed by an affiliate of our Manager. All costs associated with the purchase of the loan were prorated according to the ownership interests.

At June 30, 2010, the components of net loan receivable are as follows (in thousands):

 

     June 30, 2010  

Principal

   $ 12,994   

Unamortized discount

     (2,063
        
   $ 10,931   
        

5. Derivative Instruments

The Company has investments in three unconsolidated joint ventures denominated in Euro that expose the Company to foreign currency risk. The Company generally uses collars (consisting of caps and floors) without upfront premium costs to hedge the foreign currency exposure of its net investments. At June 30, 2010, the total notional amount of the collars is approximately €12.9 million with termination dates ranging from December 2010 to December 2012.

The fair values of derivative instruments included in the Company’s balance sheets as of June 30, 2010 and December 31, 2009 are as follows (in thousands):

 

     June 30,
2010
   December  31,
2009

Assets

     

Foreign exchange contracts designated as hedging instruments

   $ 1,766    $ 697
             

Liabilities

     

Foreign exchange contracts designated as hedging instruments

   $ 281    $ 439
             

6. Fair Value Measurements

The Company values certain assets and liabilities using the methods of fair value as described in FASB ASC 820. FASB ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The three levels of inputs that may be used to measure fair value are as follows:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2 —Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.

 

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Level 3 —Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used.

The Company has certain assets and liabilities that are required to be recorded at fair value on a recurring basis in accordance with GAAP. These include cash equivalents and financial derivative instruments. The following table summarizes those assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009 (in thousands):

 

     June 30, 2010    December 31, 2009
     Level 1    Level 2    Level 3    Total    Level 1    Level 2    Level 3    Total

Assets:

                       

Money market funds

   $ 10,033    $ —      $ —      $ 10,033    $ 36,015    $ —      $ —      $ 36,015

Derivative instruments (see Note 5)

     —        1,766      —        1,766      —        697      —        697
                                                       

Total assets

   $ 10,033    $ 1,766    $ —      $ 11,799    $ 36,015    $ 697    $ —      $ 36,712
                                                       

Liabilities:

                       

Derivative instruments (see Note 5)

   $ —      $ 281    $ —      $ 281    $ —      $ 439    $ —      $ 439
                                                       

Total liabilities

   $ —      $ 281    $ —      $ 281    $ —      $ 439    $ —      $ 439
                                                       

The carrying value for money market funds approximates fair value because of the immediate or short-term maturity of these financial instruments. Money market funds are included in cash and cash equivalents on the Company’s balance sheets.

GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the financial statements, for which it is practicable to estimate the value. In cases where quoted market prices are not available, fair values are estimated using inputs such as discounted cash flow projections, market comparables, dealer quotes and other quantitative and qualitative factors. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, estimated fair values are not necessarily indicative of the amount the Company could realize on disposition of the financial instruments. The use of different assumptions or methodologies could have a material effect on the estimated fair value amounts.

The carrying values of accrued and other liabilities approximate their fair values due to their short term nature.

The following table presents the estimated fair values of the Company’s financial instruments not carried at fair value on the consolidated balance sheets as of June 30, 2010 and December 31, 2009.

 

     June 30, 2010    December 31, 2009
     Fair Value    Carrying Value    Fair Value    Carrying Value

Financial Assets:

           

Investments in unconsolidated joint ventures

   $ 246,800    $ 223,465    $ 129,170    $ 129,087

Loan receivable, net

   $ 11,000    $ 10,931    $ —      $ —  

7. Earnings per Share

The Company calculates basic earnings per share using the two-class method which allocates earnings per share for each share of common stock and nonvested shares containing nonforfeitable rights to dividends and dividend equivalents treated as participating securities. The following table reconciles the numerator and denominator of the basic and diluted per-share computations for net income available to common stockholders (in thousands, except share and per share data):

 

     Three Months Ended
June  30, 2010
    Six Months Ended
June 30, 2010
 

Numerator:

    

Net income

   $ 3,589      $ 5,687   

Net income attributable to noncontrolling interest

     (5     (7
                

Net income available to common stockholders

   $ 3,584      $ 5,680   

Net income allocated to participating securities (nonvested shares)

     (1     (2
                

Numerator for basic and diluted net income allocated to common stockholders

   $ 3,583      $ 5,678   
                

Denominator:

    

Basic weighted average number of common shares outstanding

     14,625,000        14,625,000   

Weighted average effect of dilutive shares—common stock issuable for reimbursement of Manager’s payment of initial underwriting discounts and commissions

     287,500        287,500   
                

Diluted weighted average number of common shares outstanding

     14,912,500        14,912,500   
                

Earnings per share:

    

Net income available to common stockholders per share—basic

   $ 0.25      $ 0.39   
                

Net income available to common stockholders per share—diluted

   $ 0.24      $ 0.38   
                

8. Related Party Transactions

Management Agreement

The Company entered into a management agreement with the Manager pursuant to which the Manager provides the day-to-day management of the Company’s operations and earns base management and incentive fees.

Pursuant to the management agreement, the Manager is reimbursed for expenditures related to the Company incurred by the Manager, including legal, accounting, financial, due diligence and other services. The Company does not reimburse the Manager for the salaries and other compensation of its personnel. However, pursuant to a secondment agreement between the Company and Colony Capital, the Company is responsible for Colony Capital’s expenses incurred in employing the Company’s chief financial officer. The Company is also required to pay its pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of the Manager and its affiliates required for the Company’s operations.

 

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The following table summarizes the amounts incurred by the Company and reimbursable to the Manager or its affiliates (in thousands):

 

     Three Months Ended
June  30, 2010
   Six Months Ended
June 30, 2010
   Period from
June 23, 2009
(Date of Inception)
to June 30, 2009

Base management fees

   $ 799    $ 1,459    $ —  

Salaries pursuant to secondment agreement

     226      453      —  

Allocated and direct administrative expenses

     73      117      —  

Investment-related costs

     151      261      —  

Organization costs

     —        —        3
                    
   $ 1,249    $ 2,290    $ 3
                    

Investment Allocation Agreement

Concurrently with the closing of the IPO, the Company, the Manager and Colony Capital entered into an investment allocation agreement, which provides for the Company to co-invest in investment vehicles that are substantially similar to the Company’s target assets with certain current or future private investment funds managed by Colony Capital or its affiliates (including Colony Distressed Credit Fund, L.P., Colony Investors VIII, L.P. and related funds, and Colyzeo Investors, II, L.P.). Under the investment allocation agreement, the Company is entitled (but not obligated) to contribute (subject to the Company’s investment guidelines, its availability of capital and maintaining its qualification as a REIT for U.S. federal income tax purposes and its exemption from registration under the Investment Company Act of 1940) at least one-third of the capital to be funded by such co-investment vehicles until the termination of the commitment period of Colony Distressed Credit Fund, L.P. in July 2010, and thereafter, at least one-half the capital to be funded by co-investment vehicles in assets secured by U.S. collateral. In the event that the Company does not have sufficient capital to contribute at least one-third (or one-half, as applicable) of the capital required for any proposed investment by such investment vehicles, the investment allocation agreement provides for a fair and equitable allocation of investment opportunities among all such vehicles and the Company, in each case, taking into account the suitability of each investment opportunity for the particular vehicle and the Company and each such vehicle’s and the Company’s availability of capital for investment.

The Company does not incur any additional fees payable to Colony Capital, the Manager or any of their affiliates in connection with investments made pursuant to the investment allocation agreement. The Company is required to pay its pro rata portion (based upon percentage of equity) of transaction and other investment-level expenses incurred in connection with such co-investment.

9. Stock-Based Compensation

In connection with the IPO, the Company granted 6,000 shares of its restricted common stock under its 2009 Non-Executive Director Stock Plan to the Company’s three independent directors, which shares vest ratably on each of the first and second anniversaries of the IPO, subject to the directors’ continued service on the board of directors. Notwithstanding the vesting schedule set forth above, the shares will vest in full upon termination of such director’s service due to death or disability. For the three and six months ended June 30, 2010, the Company recognized compensation cost of $14,000 and $29,000, respectively, related to the restricted stock awards. As of June 30, 2010, total compensation cost related to unvested restricted stock not yet recognized was $73,000.

 

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10. Other Comprehensive Income (Loss)

The components of comprehensive income (loss) are as follows (in thousands):

 

     Three Months Ended
June  30, 2010
    Six Months Ended
June 30, 2010
    Period from
June 23, 2009
(Date of Inception)
to June 30, 2009
 

Net income (loss)

   $ 3,589      $ 5,687      $ (3

Other comprehensive income:

      

Equity in other comprehensive income of unconsolidated joint venture

     216        764        —     

Unrealized gain on fair value of derivative instruments designated as hedges, net of tax effect of $27, $98 and $0, respectively

     784        1,128        —     

Foreign currency translation loss, net of tax effect of $87, $303 and $0, respectively

     (1,420     (2,104     —     

Realized foreign exchange loss reclassified from accumulated other comprehensive loss

     85        118        —     
                        

Comprehensive income (loss)

     3,254        5,593        (3

Comprehensive income attributable to noncontrolling interest

     (9     (22     —     
                        

Comprehensive income (loss) attributable to the Company

   $ 3,245      $ 5,571      $ (3
                        

The components of accumulated other comprehensive loss attributable to the Company are as follows (in thousands):

 

     June 30,
2010
    December 31,
2009
 

Equity in accumulated other comprehensive income (loss) of unconsolidated joint venture

   $ 617      $ (132

Unrealized gain on fair value of derivative instruments designated as hedges, net of tax

     1,386        258   

Unrealized loss on foreign currency translation, net of tax

     (2,703     (718
                
   $ (700   $ (592
                

11. Income Taxes

The Company’s TRSs subject to corporate level federal, state, foreign and local income taxes are Colony Financial Holdco, LLC and Colony Financial TRS, LLC, which directly and indirectly hold the Company’s investments in FRB Investor, Crystal Investor and Laguna Investor. The Company’s TRSs did not have significant tax provisions for the three and six months ended June 30, 2010.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred tax assets and liabilities of the TRSs relate primarily to differences in the book and tax income of TRSs and operating loss carryforwards for federal and state income tax purposes, as well as the tax effect of accumulated other comprehensive income of TRSs. A valuation allowance for deferred tax assets is provided if the Company believes it is more likely than not that all or some portion of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent on the Company generating sufficient taxable income in future periods.

In connection with TRS activities, deferred tax assets and deferred tax liabilities were as follows (in thousands):

 

     June 30,
2010
   December  31,
2009

Deferred tax assets

   $ 325    $ —  
             

Deferred tax liabilities

   $ 126    $ —  
             

Deferred tax assets are included in other assets and deferred tax liabilities are included in accrued and other liabilities.

 

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12. Commitments and Contingencies

On December 2, 2009, the Company committed to invest a total of $13.3 million in Colonial Investor. Through June 30, 2010, the Company had invested $12.5 million for the purchase and customary and ordinary operating costs of the joint venture, leaving a $0.8 million commitment for future fundings.

In connection with its investment in DB Investor, the Company committed to contribute up to an additional $1.7 million, to the extent it is required, in order to support a guaranty issued by the joint venture.

In connection with its investment in BC Investor, the Company committed to contribute up to an additional $1.4 million in order to fund an additional loan committed by the joint venture.

13. Subsequent Events

The Company has evaluated all subsequent events through the filing date of this Quarterly Report on Form 10-Q (this “Report”) with the Securities and Exchange Commission to ensure that this Report includes appropriate disclosure of events both recognized in the consolidated financial statements as of June 30, 2010, and events that occurred subsequent to June 30, 2010 but were not recognized in the consolidated financial statements. From the balance sheet date through the filing date of this Report, the Company invested and committed a total of $18.9 million in connection with the acquisition of a 4.5% interest in an entity holding a 40% managing-member interest in a structured transaction with the FDIC, a participation interest in a mortgage and mezzanine debt for a hotel group, and a 10.6% interest in an entity that acquired a German portfolio of 18 primarily first mortgage non-performing commercial real estate loans.

 

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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 for the fiscal year ended December 31, 2009, 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Overview

We are a real estate finance company that was organized in June 2009 as a Maryland corporation to acquire, originate and manage a diversified portfolio of real estate-related debt instruments. We completed the initial public offering, or IPO, and concurrent private placement of our common stock on September 29, 2009. We 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 our target assets.

We are managed by our Manager, a Delaware limited liability company and a wholly-owned subsidiary of Colony Capital. The Manager is an affiliate of the Company. We elected to qualify as a real estate investment trust, or REIT, for U.S. federal income tax purposes, commencing with our initial taxable year ended December 31, 2009. We also intend to operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, or the 1940 Act.

Business Objective and Outlook

Our objective is to provide attractive risk-adjusted returns to our investors, primarily through dividends and secondarily through capital appreciation. We intend to achieve this objective through investments in, and active management of, a diversified investment portfolio of performing, sub-performing and non-performing commercial mortgage loans and other attractively priced real estate-related debt investments. We believe there are abundant opportunities among our target assets that currently present attractive risk-return profiles. We believe that events in the financial markets have created significant dislocation between price and intrinsic value in certain of our target assets and that attractive investment opportunities will be available for a number of years. We believe that we are well positioned to capitalize on such opportunities as well as to remain flexible to adapt our strategy as market conditions change. We also believe that our Manager’s and its affiliates’ 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.

 

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Recent Developments

Investment Activities

From the closing of our IPO on September 29, 2009 to June 30, 2010, most of our investment activities have been structured as joint ventures with one or more private investment funds managed by Colony Capital or its affiliates (including Colony Distressed Credit Fund, L.P., Colony Investors VIII, L.P. and related funds, and Colyzeo Investors, II, L.P., which funds are collectively referred to herein as the “Co-Investment Funds”). For more information about our investment allocation agreement and conflicts of interest that may arise in connection with these co-investments, see “Business—Conflicts of Interest and Related Policies” and “Business—Co-Investment Funds” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

As of June 30, 2010, we had entered into agreements or consummated transactions representing net investments or commitments to invest approximately $256 million, or 93% of the net proceeds from our IPO and the private placement. The following summaries provide information on our investments for the six months ended June 30, 2010 as of each of their respective acquisition or origination date.

 

   

On January 7, 2010, we, together with investment funds managed by affiliates of our Manager, consummated a structured transaction with the Federal Deposit Insurance Corporation, or FDIC. Deutsche Bank, or DB, served as advisor to the FDIC in connection with this transaction. As a result, we and such investment funds acquired a 40% managing-member interest in a newly formed limited liability company created to hold the acquired loans, with the FDIC retaining the remaining 60% equity interest. This portfolio of loans, which we refer to as the DB FDIC portfolio, included approximately 1,200 loans (of which approximately 29% were performing and approximately 71% were non-performing by allocated purchase price and which collectively had a weighted-average seasoning of 39 months at acquisition) with an aggregate unpaid principal balance of approximately $1.02 billion, substantially all of which are first mortgage, recourse commercial real estate loans. The DB FDIC portfolio was effectively acquired at approximately 44% of the unpaid principal balance of the loans. The average interest rate on the performing loans in the DB FDIC portfolio was 5.9% exclusive of scheduled amortization payments, and the weighted-average remaining term for the performing loans was 57 months. The financing of the transaction includes 50% leverage ($233 million of zero-coupon notes) provided by the FDIC, which has a term of up to seven years and must be paid in full prior to any distributions to the equity holders. The newly formed limited liability company also pays the managing member a 50-basis point asset management fee calculated on the aggregate unpaid principal balance of the outstanding portfolio (some of which will be used to pay costs associated with primary and special servicing). Our pro rata share of the managing-member interest is 33.3%, or approximately $30.2 million, exclusive of our pro rata share of the required working capital and transaction costs. In addition, we, together with investment funds managed by affiliates of our Manager, committed to contribute up to an additional $5.0 million to the extent it is required, in order to support a guaranty issued by our subsidiary. Our share of this additional commitment is up to $1.7 million.

 

   

On March 5, 2010, we, together with investment funds managed by affiliates of our Manager, acquired a $66.0 million pari-passu participation interest in a performing first mortgage on a Class A office building in midtown Manhattan with an aggregate unpaid principal balance of $1.2 billion from a real estate investment firm. The loan is currently in special servicing, although there has been no specific event, failure or default under the loan at this time. The purchase price for the pari-passu first mortgage interest was approximately $44.9 million, excluding transaction costs. Our pro rata share of the purchase price was approximately $15.0 million (exclusive of our pro rata share of transaction costs), which represents a 33.3% ownership interest. The unleveraged current cash yield on the loan, net of the special servicing fee, is approximately 9.0% based upon the purchase price (and would be approximately 9.5% if the loan were to be transferred out of special servicing), which was at approximately 68% of the unpaid principal balance of the pari-passu first mortgage interest.

 

   

On March 8, 2010, we, together with investment funds managed by affiliates of our Manager, originated a five-year $30.4 million recourse loan to a world-renowned celebrity photographer. We invested approximately $10.1 million, before origination fees, for a 33.3% economic interest in the loan. The loan is secured by first liens on two West Village Manhattan townhomes and a photography catalog. The loan bears an interest rate of 14% per annum, of which 4% may be paid-in-kind in the first 12 months at the borrower’s option, and includes an upfront origination fee of 2.0% of the loan amount. The lender is also entitled to certain participation in the borrower’s photography business based on the amount of free cash flow generated.

 

   

On April 30, 2010, we, together with an investment fund managed by an affiliate of our Manager, acquired a performing senior mezzanine loan in a $327 million multi-tier financing secured by equity interests in a special purpose vehicle that indirectly owns a portfolio of 103 limited service hotels (6,623 keys) with an unpaid principal balance of $39.0 million, a maturity date of August 2011 and a floating interest rate of 2.75% over the 30-day London Interbank Offered Rate, or LIBOR. The purchase price for the loan was approximately $32 million, excluding transaction costs. Our pro rata share of the purchase price was approximately $10.7 million (exclusive of our pro rata share of transaction costs), which represents a 33.3% ownership interest. At maturity, some mezzanine tranches may not be refinanceable, which could necessitate a restructuring. We expect to capture full value of the purchase price discount either at maturity or subsequent to the maturity date through a restructured interest in the loan and/or collateral.

 

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On May 7, 2010, we, together with investment funds managed by affiliates of our Manager, acquired a $31.2 million senior bond in a CMBS–resecuritization for approximately $13.1 million. The senior bond has a coupon of 5.6% and is secured by a pool consisting primarily of seasoned CMBS bonds issued prior to 2005, U.S. Treasury bonds, and one commercial real estate B-note. Our pro rata share of the purchase price was approximately $4.3 million, which represents a 32.7% ownership interest. The unleveraged cash yield on the senior bond is approximately 13.3% based upon the purchase price, which was at approximately 42% of the unpaid principal balance.

 

   

On May 17, 2010, we, together with an investment fund managed by an affiliate of our Manager, originated a two-year $9.8 million first mortgage to finance the discounted payoff of eight related non-performing commercial real estate loans at 39% of the aggregate unpaid principal balance of the loans. The loan is secured by a first mortgage interest in a mixed-use development (59% multifamily and 41% retail) in the Midwest. We funded $3.3 million for a 33.3% economic interest in the loan. The loan bears an interest rate of 14% per annum, of which 6.0% may be paid-in-kind. In addition, we and the co-investing investment fund committed to fund an additional $4.1 million within 180 days to finance a related discounted payoff on an adjoining property at 43% of the unpaid principal balance. Our pro-rata share of this additional commitment is approximately $1.4 million.

 

   

On May 20, 2010, we, together with investment funds managed by affiliates of our Manager, acquired a portfolio of 211 primarily first mortgage German non-performing commercial real estate loans with an aggregate unpaid principal balance of approximately €43.1 million. The effective purchase price for the portfolio was approximately €8.2 million, excluding transaction costs, or approximately 19% of the unpaid principal balance of the loans. Our pro rata share of the purchase price was approximately $3.5 million (exclusive of our pro rata share of transaction costs), which represents a 33.3% ownership interest in the portfolio.

 

   

On June 30, 2010, we acquired our $24 million participation in the previously announced acquisition of First Republic Bank (“FRB”) from Merrill Lynch Bank & Trust Company, a subsidiary of Bank of America Corporation. Our Manager, alongside General Atlantic LLC, co-led a group of investors in supporting First Republic Bank’s founding management team in the $1.86 billion transaction, which was first announced on October 21, 2009. Our investment in FRB will be recorded using the equity method of accounting.

 

   

On July 2, 2010, we, together with investment funds managed by affiliates of our Manager, consummated our second structured transaction with the FDIC. Barclays Capital served as advisor to the FDIC in connection with this transaction. As a result, we and such investment funds acquired a 40% managing member equity interest in a newly formed limited liability company (the “LLC”) created to hold the acquired loans, with the FDIC retaining the remaining 60% equity interest. This portfolio of loans, which we refer to as the Barclays FDIC Portfolio, includes approximately 1,660 loans (of which approximately 66% were performing and approximately 34% were non-performing by preliminary allocated purchase price with an aggregate unpaid principal balance of approximately $1.85 billion, consisting of substantially all first mortgage recourse commercial real estate loans. The Barclays FDIC Portfolio was effectively acquired at approximately 59% of the unpaid principal balance of the loans, with an aggregate cash contribution of approximately $218.2 million (excluding working capital and transaction costs) for the 40% equity interest. The average interest rate on the performing loans was 6.4% exclusive of scheduled amortization payments, and the weighted-average remaining term for the performing loans was 78 months. The FDIC offered 1:1 leverage financing with a term of up to 7 years and has agreed to guarantee Purchase Money Notes issued by the LLC in the original principal amount of $563 million, inclusive of a capitalized guarantee fee. The newly formed LLC also pays the managing member a 50-basis point asset management fee calculated on the aggregate unpaid principal balance of the outstanding portfolio (some of which will be used to pay costs associated with primary and special servicing). Our pro rata share of the managing member interest is 4.5%, or approximately $9.8 million, exclusive of our pro rata share of the required working capital and transaction costs. In addition, we, together with investment funds managed by affiliates of our Manager, committed to contribute up to an additional $7.5 million to the extent it is required, in order to support a guaranty issued by our subsidiary. Our share of this additional commitment, based upon our ownership interest in the managing member of the LLC, is approximately $0.3 million.

 

   

On July 9, 2010, we acquired a participation interest in a performing mezzanine loan in the recently restructured debt of Hilton Worldwide for $3.3 million, which is owned solely by the Company. The last dollar of debt in our mezzanine tranche equates to 10.7x net debt to trailing twelve month EBITDA (Earnings Before Interest, Taxes, Depreciation, & Amortization) and debt service coverage is 2.3x. The current unleveraged cash yield on the floating rate loan is approximately 6% and is expected to increase to approximately 15% prior to the fully extended maturity date of November 2015 based on a scheduled 225 basis points increase of the credit spread and the projected forward LIBOR curve.

 

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On July 15, 2010, we, together with investment funds managed by affiliates of our Manager, acquired a portfolio of 18 primarily first mortgage non-performing commercial real estate loans with an aggregate unpaid principal balance of approximately €107 million. The effective purchase price for the portfolio was approximately €38.6 million, excluding transaction costs, or approximately 36% of the unpaid principal balance of the loans. Our pro rata share of the purchase price was approximately $5.3 million (exclusive of our pro rata share of transaction costs), which represents an 11% ownership interest in the portfolio.

As required by FASB ASC Topic 825, Financial Instruments, we estimate and report in our financial statements the fair value of our investments on a quarterly basis, using inputs such as discounted cash flow projections, market comparables, dealer quotes and other quantitative and qualitative factors. As of June 30, 2010, the estimated fair value of our investments in joint ventures and loan receivable was $257.8 million and the carrying value was $234.4 million.

The following table sets forth certain information as of the acquisition or commitment date regarding the investments consummated and committed to as of June 30, 2010:

 

(Dollars in thousands)

Our Investments

  Invested(1)   Committed(1)
   Total    Our
Economic
Ownership(2)
    Total
Colony
Funds
Investment
    Unpaid
Principal
Balance
  

Description

U.S. Life Insurance Loan Portfolio

  $ 49,700   $ —      $ 49,700    37.9   $ 131,300      $ 174,700    25 performing, fixed rate first mortgages secured by commercial real estate

WLH Secured Loan

    48,000     —        48,000    24.0     199,800        206,000    Senior secured term loan secured by first mortgages on residential land and security interests in cash and other assets

DB FDIC Portfolio

    33,000     1,700      34,700    33.3     103,900        1,020,000    Approximately 1,200 performing and non-performing loans secured mostly by commercial real estate

First Republic Bank

    24,000     —        24,000    5.9     406,000        NA    Equity stake in financial institution with approximately $20 billion of assets

Class A Manhattan Office Loan Participation

    15,000     —        15,000    33.3     44,900        66,000    First mortgage pari-passu participation interest secured by Class A midtown Manhattan office building

Spanish REOC/Colonial Loan(3)

    12,500     800      13,300    5.1     259,900        658,700    Syndicated senior secured loan to a Spanish commercial real estate company

Hotel Portfolio Loan

    10,700     —        10,700    33.3     32,000        39,000    Senior mezzanine loan indirectly secured by a portfolio of 103 limited service hotels

Barclays FDIC Portfolio

    —       10,300      10,300    4.5     229,900        1,849,200    Approximately 1,660 performing and non-performing loans consisting of substantially all first mortgage recourse commercial real estate loans

West Village Loan

    9,900     —        9,900    33.3     29,800        30,400    Recourse loan secured by first liens on two West Village Manhattan townhomes and a photography catalogue

U.S. Commercial Bank Loan Portfolio

    6,700     —        6,700    33.3     20,100        33,000    10 performing and one delinquent, fixed rate first mortgages secured by commercial real estate

German Loan Portfolio

    5,300     —        5,300    33.3     16,000        91,000    94 primarily first mortgage non-performing commercial real estate loans

German Loan Portfolio III

    —       5,300      5,300    10.6     49,900        135,500    18 non-performing commercial real estate loans

Midwest Multifamily/Retail Loan

    3,300     1,300      4,600    33.3     13,900        9,800    First mortgage interest in a mixed-use development

CMBS-Related Bond(3)

    4,300     —        4,300    32.7     13,100        31,200    Senior bond secured by seasoned CMBS bonds, U.S. Treasuries and a B-note

German Loan Portfolio II

    3,500     —        3,500    33.3     10,500        53,300    211 non-performing commercial real estate loans

WLH Land Acquisition

    3,400     —        3,400    24.0     14,000        NA    Approximately 1,100 residential lots in a sale/easement

Hilton Mezzanine Debt

    —       3,300      3,300    100.0     3,300        NA    Performing mezzanine loan in newly restructured capital stack

Westlake Village Loan

    2,500     —        2,500    33.3     7,600        11,300    First mortgage commercial loan

AAA CMBS Financed with TALF(3)

    2,000     —        2,000    32.7     6,100        40,000    AAA CMBS security financed with five-year TALF
                            

Total Committed & Invested

  $ 233,800   $ 22,700    $ 256,500          
                            

 

(1)

Invested and committed amounts include our share of transaction costs and working capital and are net of origination fees.

 

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(2)

Represents our share of the acquisition entities formed by us with investment funds managed by affiliates of our Manager except for the Colonial Loan, the CMBS-Related Bond and AAA CMBS Financed with Term Asset-Backed Securities Loan Facility, or TALF; refer to note 3.

(3)

The acquisition entities for the Colonial Loan, the CMBS-Related Bond and AAA CMBS Financed with TALF include a 33.3%, 2.0% and 2.0% co-investment, respectively, from third parties. The amounts stated in Our Economic Ownership, Total Colony Funds Investment and Unpaid Principal Balance include these third parties’ co-investments. Our economic interests in the Colonial Loan, the CMBS-Related Bond and the AAA CMBS Financed with TALF, excluding such third party co-investments, are 7.7%, 33.3% and 33.3%, respectively.

Regulatory Developments

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Bill, was passed by Congress. This legislation aims to restore responsibility and accountability to the financial system. It is unclear how this legislation may impact the investing environment, borrowing environment, and derivatives market that impact our business, as much of the Dodd-Frank Bill’s implementation has not yet been defined by the regulators.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. There have been no material changes to our critical accounting policies or those of our unconsolidated joint ventures since the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, except for changes resulting from our adoption of the provisions of Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, effective January 1, 2010. The adoption of ASU No. 2009-17 did not have a material effect on our consolidated financial position, results of operations or disclosures.

Investment in Unconsolidated Joint Ventures

The Company analyzes each of its joint ventures to determine whether they are variable interest entities, or VIEs. In performing our analysis of whether it is the primary beneficiary, the Company considers whether it individually has the power to direct the activities of the VIE that most significantly impact the entity’s performance and also has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company also considers whether it is a member of a related party group that collectively meets the power and benefits criteria and, if so, whether the Company is most closely associated with the VIE. In making that determination, the Company considers both qualitative and quantitative factors, including, but not limited to: the amount and characteristics of its investment relative to other investors; the obligation or likelihood for the Company or other investors to fund operating losses of the VIE; the Company’s and the other investors’ ability to control or significantly influence key decisions for the VIE, and the similarity and significance of the VIE’s business activities to those of the Company and the other investors. The determination of whether an entity is a VIE, and whether the Company is the primary beneficiary, involve significant judgments, including estimates about the current and future fair values and performance of assets held by the VIE and/or general market conditions.

Recent Accounting Updates

Recent accounting updates are included in Note 2 to the consolidated financial statements in “Item 1. Consolidated Financial Statements” of this Report.

 

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Results of Operations

Equity in Income of Unconsolidated Joint Ventures

Net income (loss) from our unconsolidated joint ventures for the three and six months ended June 30, 2010 included $102,000 and $670,000, respectively, of one-time investment transaction costs expensed in connection with the initial acquisition of the investments. Net income (loss) from our unconsolidated joint ventures before and after these transaction costs is summarized below (in thousands):

 

     Three Months Ended June 30, 2010     Six Months Ended June 30, 2010  
     Net Income
(Loss)  From
Unconsolidated

Joint
Ventures Before
Transaction Costs
    Transaction
Costs
   Net Income
(Loss) from
Unconsolidated

Joint Ventures
    Net Income
(Loss) from
Unconsolidated

Joint
Ventures Before
Transaction Costs
    Transaction
Costs
   Net Income
(Loss) from
Unconsolidated

Joint Ventures
 

ColFin NW Funding, LLC (“NW Investor”)

   $ 1,322      $ —      $ 1,322      $ 2,724      $ —      $ 2,724   

ColFin WLH Funding, LLC (“WLH Investor”)

     1,890        —        1,890        3,737        —        3,737   

ColFin DB Guarantor, LLC (“DB Investor”)

     312        —        312        712        555      157   

ColFin 666 Funding, LLC (“666 Investor”)

     486        —        486        636        13      623   

Colony Funds Sants S.à r.l. (“Colonial Investor”)

     263        —        263        501        —        501   

ColFin ALS Funding, LLC (“ALS Investor”)

     345        —        345        440        —        440   

ColFin J-11 Funding, LLC (“J-11 Investor”)

     216        —        216        419        —        419   

C-VIII CDCF CFI MBS Investor, LLC (“MBS Investor”)

     257        —        257        363        —        363   

ColLaguna (Lux) S.à r.l. (“Laguna Investor”)

     140        —        140        40        —        40   

Matrix Advisors BC, LLC (“BC Investor”)

     85        28      57        85        28      57   

ColCrystal S.à r.l. (“Crystal Investor”)

     (40     74      (114     (40     74      (114

ColFin WLH Land Acquisitions, LLC (“WLH Land Investor”)

     74        —        74        145        —        145   

Matrix CDCF-CFI Advisors VI, LLC (“Matrix Investor”)

     75        —        75        146        —        146   
                                              
   $ 5,425      $ 102    $ 5,323      $ 9,908      $ 670    $ 9,238   
                                              

Interest Income

For the three and six months ended June 30, 2010, we earned $110,000 and $280,000, respectively, of interest from our cash and cash equivalents on deposit at various financial institutions. During the three months ended June 30, 2010, we earned $344,000 of interest income from the senior mezzanine loan purchased on April 30, 2010, of which $276,000 was amortization of purchase discount.

Expenses

For the three and six months ended June 30, 2010, expenses consisted primarily of administrative expenses of approximately $1.2 million and $2.4 million, respectively. Of these amounts $299,000 and $570,000, respectively, was reimbursed to an affiliate. Administrative expenses included directors’ and officers’ insurance costs of $260,000 and $597,000, respectively; professional fees of $306,000 and $668,000, respectively; and salary, bonus and benefit costs of $226,000 and $453,000, respectively.

For the three and six months ended June 30, 2010, the Company incurred base management fees of $799,000 and $1.5 million, respectively, pursuant to the management agreement with the Manager.

Investment expenses of $181,000 and $280,000 for the three and six months ended June 30, 2010, respectively, included $127,000 and $177,000, respectively, of costs associated with unsuccessful deals.

 

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For the period from June 23, 2009 to June 30, 2009, our operations were limited to organization expenses amounting to approximately $3,000, which was paid by Colony Capital on our behalf and was reimbursed to Colony Capital by us.

Investments in Unconsolidated Joint Ventures and Loan Receivable

As of June 30, 2010, our interest in each unconsolidated joint venture was as follows:

 

Joint Venture

   The  Company’s
Ownership
Percentage
 

ColFin NW Funding, LLC

   37.88

ColFin WLH Funding, LLC

   24.03

ColFin DB Guarantor, LLC

   33.33

ColFin FRB Investor, LLC

   5.91

ColFin 666 Funding, LLC

   33.33

Colony Funds Sants S.à r.l.

   5.12

ColFin ALS Funding, LLC

   33.33

ColFin J-11 Funding, LLC

   33.33

C-VIII CDCF CFI MBS Investor, LLC

   33.33

ColLaguna (Lux) S.à r.l.

   33.33

Matrix Advisors BC, LLC

   33.33

ColCrystal S.à r.l.

   33.33

ColFin WLH Land Acquisitions, LLC

   24.03

Matrix CDCF-CFI Advisors VI, LLC

   33.33

Colony CDCF-VIII-CFI Investor, LLC

   33.33

Four of our largest investments in unconsolidated joint ventures made up approximately $156.8 million, or 54%, of our total assets at June 30, 2010.

The following tables summarize certain characteristics of the loans receivable held by the Company and the joint ventures and our proportionate share as of June 30, 2010 and December 31, 2009 (amounts in thousands):

 

     June 30, 2010
     Total Portfolio    Company’s Proportionate Share

Collateral Type

   Unpaid
Principal
Balance
   Amortized
Cost
   Unpaid
Principal
Balance
   Amortized
Cost
   Weighted
Average
Coupon
    Current
Interest Yield
on Cost
    Weighted
Average
Maturity in
Years

Performing loans

                  

Residential

   $ 244,629    $ 235,147    $ 60,740    $ 58,879    13.8   14.4   4.4

Retail

     175,728      122,136      49,189      35,998    6.2   8.7   8.2

Office

     165,969      114,683      51,133      36,083    6.2   8.9   6.6

Industrial

     65,685      46,572      17,926      13,164    6.1   8.4   6.8

Hospitality

     41,244      26,419      18,199      13,647    4.1   5.5   4.5

Multifamily

     20,355      12,690      3,870      2,505    9.9   12.2   4.2

Land

     35,866      17,255      4,782      2,301    5.5   10.3   1.3

Other commercial

     74,317      37,457      9,909      4,994    5.7   10.2   5.9
                                  

Total performing

     823,793      612,359      215,748      167,571    8.2   10.6   6.0
                                  

Non-performing loans

                  

Residential

     76,125      29,011      12,260      4,541       

Retail

     94,976      39,829      13,703      5,484       

Office

     31,625      15,049      4,727      2,170       

Industrial

     36,893      14,129      5,772      2,148       

Hospitality

     56,955      24,832      8,346      3,465       

Multifamily

     103,839      39,376      22,864      6,955       

Land

     326,224      82,247      45,792      11,565       

Other commercial

     82,280      26,426      12,588      3,804       
                                  

Total non-performing

     808,917      270,899      126,052      40,132       
                                  

Total loans

   $ 1,632,710    $ 883,258    $ 341,800    $ 207,703       
                                  

 

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Table of Contents
     December 31, 2009
     Total Portfolio    Company’s Proportionate Share

Collateral Type

   Unpaid
Principal
Balance
   Amortized
Cost
   Unpaid
Principal
Balance
   Amortized
Cost
   Weighted
Average
Coupon
    Current
Interest Yield
on Cost
    Weighted
Average
Maturity in
Years

Performing loans

                  

Residential

   $ 206,000    $ 200,145    $ 49,502    $ 48,095    14.0   14.4   4.8

Retail

     92,176      68,146      34,430      25,532    6.1   8.3   9.3

Office

     65,893      49,066      24,219      18,075    6.1   8.2   7.1

Industrial

     37,716      28,215      14,287      10,687    6.2   8.3   7.3

Hospitality

     5,876      2,585      2,226      979    6.4   14.5   8.0

Mixed use

     14,803      9,706      4,934      3,236    6.2   9.5   8.1
                                  

Total performing

     422,464      357,863      129,598      106,604    9.1   11.1   6.9
                                  

Non-performing loans

                  

Residential

     8,780      1,533      2,927      511       

Retail

     7,939      1,063      2,646      354       

Industrial

     9,923      2,279      3,308      760       

Hospitality

     3,771      946      1,257      315       

Multifamily

     39,003      4,075      13,001      1,358       

Land

     15,106      3,264      5,035      1,088       

Other

     5,765      884      1,922      295       
                                  

Total non-performing

     90,287      14,044      30,096      4,681       
                                  

Total loans

   $ 512,751    $ 371,907    $ 159,694    $ 111,285       
                                  

 

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The following tables summarize the geographical dispersion of the real estate properties collateralizing the loans held by the Company and the joint ventures and our proportionate share as of June 30, 2010 and December 31, 2009 (amounts in thousands):

 

     June 30, 2010  
     Unpaid Principal Balance     Amortized Cost  
     Total    Company’s
Proportionate  Share
    Total    Company’s
Proportionate  Share
 

Region

      $    %        $    %  

Northeast

   $ 140,433    $ 46,930    14   $ 106,100    $ 35,729    17

Mideast

     58,991      15,794    5     34,701      11,036    5

Southeast

     541,259      88,167    26     232,309      42,520    21

East North Central

     96,636      26,330    8     63,933      19,385    9

West North Central

     37,531      8,771    2     21,315      5,790    3

Southwest

     25,700      6,070    2     14,492      4,110    2

Mountain

     282,704      49,431    14     131,788      27,610    13

Pacific

     358,466      69,977    20     258,562      54,837    27

Europe

     90,990      30,330    9     20,058      6,686    3
                                        

Total

   $ 1,632,710    $ 341,800    100   $ 883,258    $ 207,703    100
                                        

 

     December 31, 2009  
     Unpaid Principal Balance     Amortized Cost  
     Total    Company’s
Proportionate  Share
    Total    Company’s
Proportionate  Share
 

Region

      $    %        $    %  

Northeast

   $ 36,598    $ 13,863    9   $ 26,342    $ 9,978    9

Mideast

     21,384      8,100    5     16,691      6,322    6

Southeast

     46,126      15,974    10     29,084      10,116    9

East North Central

     39,288      14,882    9     29,373      11,126    10

West North Central

     15,397      5,832    4     11,890      4,504    4

Southwest

     9,336      3,537    2     7,549      2,859    2

Mountain

     78,826      22,646    14     70,600      19,736    18

Pacific

     177,959      45,581    29     166,741      42,098    38

Europe

     87,837      29,279    18     13,637      4,546    4
                                        

Total

   $ 512,751    $ 159,694    100   $ 371,907    $ 111,285    100
                                        

As of June 30, 2010, the joint ventures’ performing loan portfolio comprises fixed rate loans bearing interest rates ranging from 3.25% to 18% with an aggregate unpaid principal balance of $709.0 million and variable rate loans bearing interest rates ranging from 1.25% to 8.0% with an aggregate unpaid principal balance of $114.8 million. Maturity dates of performing loans range from 2010 to 2038. Scheduled maturities based on unpaid principal balance of performing loans as of June 30, 2010 are as follows (in thousands):

 

     June 30, 2010

Less than one year

   $ 24,246

Greater than one year and less than five years

     398,435

Greater than or equal to five years

     401,112
      

Total

   $ 823,793
      

 

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Liquidity and Capital Resources

Our financing sources include the net proceeds from our IPO and the private placement. Subject to maintaining our qualification as a REIT and our 1940 Act exemption, we also may attempt to secure corporate-level credit facilities (including term loans and revolving facilities), if available, to finance our assets and provide a funding source for future investments. In addition, the joint venture between us and investment funds managed by affiliates of our Manager, on the one hand, and the FDIC, on the other hand, acquired the DB FDIC portfolio and the Barclays FDIC portfolio, in part, with leverage provided by the FDIC, and one of our co-investments with investment funds managed by affiliates of our Manager utilized funds made available under the TALF. We also may attempt to secure investment-level financing, if available, including term loans, securitizations, warehouse facilities, repurchase agreements and the issuance of debt and equity securities. We also expect to continue to invest in a number of our assets through co-investments with other investment vehicles managed by affiliates of our Manager and/or other third parties, which may allow us to pool capital to access larger transactions and diversify investment exposure. For more information about the conflicts of interest that may arise in connection with these co-investments, see “Business—Conflicts of Interest and Related Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Our primary uses of cash are to fund acquisitions of our target assets and related ongoing commitments, to fund our operations, including overhead costs and the management fee to our Manager, to fund distributions to our stockholders and, to the extent we utilize leverage to acquire our target assets, to repay principal and interest on our borrowings. We expect to meet our capital requirements using cash on hand, cash flow generated from our operations, and principal and interest payments received from our investments. However, because of distribution requirements imposed on us to qualify as a REIT, which generally require that we distribute to our stockholders 90% of our taxable income, our ability to finance our growth must largely be funded by external sources of capital. As a result, we will have to rely on third-party sources of capital, which may or may not be available on favorable terms or at all.

Our Manager is exploring a variety of additional means of financing our continued growth, including debt financing through bank lines of credit and additional equity offerings. However, there can be no assurance as to how much additional financing capacity such efforts will produce, what form the financing will take or that such efforts will be undertaken at all and if so, whether they will be successful. At August 12, 2010, we had cash and cash equivalents of approximately $33.4 million, some of which is subject to existing funding commitments. If we are unable to obtain additional financing on favorable terms or at all, we may have to curtail our investment activities, which could limit our growth prospects, any we may be forced to dispose of assets at inopportune times in order to maintain our REIT qualification and 1940 Act exemption.

Cash and Cash Flows

At August 12, 2010, we had cash and cash equivalents of approximately $33.4 million, which is sufficient to satisfy all of our existing obligations.

For the six months ended June 30, 2010, net cash provided by operating activities was approximately $2.5 million. Cash flows from operating activities resulted primarily from distributions of earnings from unconsolidated joint ventures offset by payment of administrative expenses.

For the six months ended June 30, 2010, net cash used in investing activities was approximately $104.5 million, primarily for contributions to unconsolidated joint ventures and purchase of a one-third interest in a senior mezzanine loan as described in “Recent Developments—Investment Activities,” offset by distributions of capital from unconsolidated joint ventures.

For the six months ended June 30, 2010, net cash used in financing activities was approximately $3.4 million, primarily for the payment of dividends and the payment of previously accrued offering costs in connection with our IPO.

Risk Management

Risk management is a significant component of our strategy to deliver consistent risk-adjusted returns to our stockholders. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the 1940 Act, our Manager closely monitors our portfolio and actively manages risks associated with, among other things, our assets and interest rates. Prior to investing in any particular asset, our Manager’s underwriting team, in conjunction with third party providers, undertakes a rigorous asset-level due diligence process, involving intensive data collection and analysis, to ensure that we understand fully the state of the market and the risk-reward profile of the asset. In addition to evaluating the merits of any particular proposed investment, our Manager evaluates the diversification of our portfolio of assets. Prior to making a final investment decision, our Manager determines whether a target asset will cause our portfolio of assets to be too heavily concentrated with, or cause too much risk exposure to, any one borrower, real estate sector, geographic region, source of cash flow for payment or other geopolitical issues. If our Manager determines that a proposed acquisition presents excessive concentration risk, it may determine not to acquire an otherwise attractive asset.

 

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For each asset that we acquire, Colony Capital’s in-house asset management team engages in active management of the asset, the intensity of which depends on the attendant risks. Once an asset manager has been assigned to a particular asset, the manager works collaboratively with the underwriting team to formulate a strategic plan for the particular asset, which includes evaluating the underlying collateral and updating valuation assumptions to reflect changes in the real estate market and the general economy. This plan also generally outlines several strategies for the asset to extract the maximum amount of value from each asset under a variety of market conditions. Such strategies vary depending on the type of asset, the availability of refinancing options, recourse and maturity, but may include, among others, the restructuring of non-performing or sub-performing loans, the negotiation of discounted pay-offs or other modification of the terms governing a loan, and the foreclosure and intense management of assets underlying non-performing loans in order to reposition them for profitable disposition. As long as an asset is in our portfolio, our Manager and its affiliates continuously track the progress of an asset against the original business plan to ensure that the attendant risks of continuing to own the asset do not outweigh the associated rewards. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the 1940 Act, we currently expect that we will typically hold assets that we originate or acquire for between three and ten years. However, in order to maximize returns and manage portfolio risk while remaining opportunistic, we may dispose of an asset earlier than anticipated or hold an asset longer than anticipated if we determine it to be appropriate depending upon prevailing market conditions or factors regarding a particular asset. We can provide no assurances, however, that we will be successful in identifying or managing all of the risks associated with acquiring, holding or disposing of a particular asset or that we will not realize losses on certain assets.

Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the 1940 Act, we intend to mitigate the risk of interest rate volatility through the use of hedging instruments, such as interest rate swap agreements and interest rate cap agreements. The goal of our interest rate management strategy is to minimize or eliminate the effects of interest rate changes on the value of our assets, to improve risk-adjusted returns and, where possible, to lock in, on a long-term basis, a favorable spread between the yield on our assets and the cost of financing such assets. In addition, because we are exposed to foreign currency exchange rate fluctuations, we may employ foreign currency risk management strategies, including the use of, among others, currency hedges. We can provide no assurances, however, that our efforts to manage interest rate and foreign currency exchange rate volatility will successfully mitigate the risks of such volatility on our portfolio.

Leverage Policies

Other than borrowings under government sponsored debt programs, such as the TALF and seller financing provided by the FDIC, we have not used leverage to finance our investments. However, while we believe we can achieve attractive yields on an unleveraged basis, we may use prudent amounts of leverage to increase potential returns to our stockholders and/or to finance future investments. To that end, subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption from registration under the 1940 Act, we may attempt to secure corporate-level credit facilities (including term loans and revolving credit facilities). Given current market conditions, to the extent that we use borrowings to finance our assets, we currently expect that such leverage would not exceed, on a debt-to-equity basis, a 3-to-1 ratio, except with respect to investments financed with borrowings provided by the FDIC or under government sponsored debt programs, such as the TALF, leverage on which we currently expect would not exceed, on a debt-to-equity basis, a 6-to-1 ratio. We consider these initial leverage ratios to be prudent for our target asset classes. Our decision to use leverage currently or in the future to finance our assets will be based on our Manager’s assessment of a variety of factors, including, among others, the anticipated liquidity and price volatility of the assets in our investment portfolio, the potential for losses and extension risk in our portfolio, the ability to raise additional equity to reduce leverage and create liquidity for future investments, the availability of credit at favorable prices or at all, the credit quality of our assets and our outlook for borrowing costs relative to the interest income earned on our assets. Our decision to use leverage in the future to finance our assets will be at the discretion of our Manager and will not be subject to the approval of our stockholders, and we are not restricted by our governing documents or otherwise in the amount of leverage that we may use. To the extent that we use leverage in the future, we may mitigate interest rate risk through utilization of hedging instruments, primarily interest rate swap and cap agreements, to serve as a hedge against future interest rate increases on our borrowings.

Contractual Obligations and Commitments

On January 7, 2010, in connection with our investment in DB Investor, we committed to contribute up to an additional $1.7 million, to the extent it is required, in order to support a guaranty issued by the joint venture. In addition, on May 17, 2010, in connection with our investment in BC Investor, we committed to contribute up to an additional $1.4 million within 180 days to fund an additional loan by BC Investor. There have been no other material changes to our contractual obligations and capital commitments as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

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Dividends

We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to pay regular quarterly dividends to our stockholders in an amount equal to our net taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service if any. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We currently do not intend to use the proceeds of our IPO or the private placement to make distributions to our stockholders, except if necessary to meet our REIT distribution requirements or eliminate our U.S federal taxable income.

On December 21, 2009, our board of directors declared a quarterly dividend of $0.07 per share of our common stock, which was paid on January 20, 2010 to stockholders of record on December 31, 2009.

On March 24, 2010, our board of directors declared a quarterly dividend of $0.16 per share of our common stock, payable to stockholders of record on April 5, 2010, with an ex-dividend date of March 31, 2010. The dividend payment was made on April 15, 2010.

On June 16, 2010, our board of directors declared a quarterly dividend of $0.21 per share of our common stock, which was paid on July 15, 2010 to stockholders of record on June 30, 2010.

Off-Balance Sheet Arrangements

On January 7, 2010, we, together with investment funds managed by affiliates of our Manager, committed to contribute up to an additional $5 million, to the extent it is required, in order to support a guaranty issued by DB Investor. Our share of this additional commitment is up to $1.7 million.

On December 2, 2009, we committed to invest a total of $13.3 million in a joint venture with investment funds managed by affiliates of our Manager that acquired a performing loan issued by a Spanish real estate company. To date, we have invested $12.5 million for the purchase, transaction costs, and customary and ordinary operating costs of the joint venture, leaving a $0.8 million commitment for future fundings.

On May 17, 2010, we, together with an investment fund managed by an affiliate of our Manager, committed to contribute up to an additional $4.1 million within 180 days to fund an additional loan by BC Investor. Our share of this additional commitment is approximately $1.4 million.

Non-GAAP Supplemental Financial Measure: Core Earnings

Core Earnings is a non-GAAP measure and is defined as GAAP net income (loss) excluding non-cash equity compensation expense, the costs incurred in connection with our formation and our IPO, including the initial and additional underwriting discounts and commissions, the incentive fee, real estate depreciation and amortization (to the extent that we foreclose on any properties underlying our target assets) and any unrealized gains or losses from mark to market valuation changes (other than permanent impairment) that are included in net income. The amount will be adjusted to exclude (i) one-time events pursuant to changes in GAAP and (ii) non-cash items which in the judgment of management should not be included in Core Earnings, which adjustments in clauses (i) and (ii) shall only be excluded after discussions between our Manager and our independent directors and after approval by a majority of our independent directors. The parties to the management agreement have amended the management agreement to clarify the foregoing definition of Core Earnings to reconcile the definition with its intended meaning and in a manner consistent with that used by the Company to determine Core Earnings since the commencement of operations, which amendment is attached hereto as Exhibit 10.2. The amendment clarifies that excludable unrealized gains or losses are those resulting from mark to market valuation changes (other than permanent impairments) and that the only non-cash items which will be excluded from Core Earnings are those that management determines should be excluded after discussion with and approval by a majority of our independent directors. The exclusions in the definition of Stockholders’ Equity in the management agreement have been similarly amended for the same reasons.

        We believe that Core Earnings is a useful supplemental measure of our operating performance. The exclusion from Core Earnings of the items specified above allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Core Earnings is also the basis upon which the incentive fee to our Manager is calculated and is a key factor in determining the performance hurdle for the reimbursement of our Manager’s partial payment of the initial underwriting discounts and commissions (see “Business—Our Manager and the Management Agreement—Reimbursement of Manager’s Partial Payment of IPO Underwriting Discounts and Commissions” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009). Also, as some of our competitors use a similar supplemental measure, it facilitates comparisons of operating performance to other mortgage REITs. However, other mortgage REITs may use different methodologies to calculate Core Earnings, and accordingly, our Core Earnings may not be comparable to all other mortgage REITs.

 

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Core Earnings does not represent cash flow from operations as defined by GAAP, should not be considered as an alternative to net income as defined by GAAP and is not indicative of cash available to fund all cash flow needs.

A reconciliation of our GAAP net income attributable to common stockholders to Core Earnings for the three and six months ended June 30, 2010 is presented below (in thousands):

 

     Three Months Ended
June 30, 2010
   Six Months Ended
June 30, 2010

GAAP net income attributable to common stockholders

   $ 3,584    $ 5,680

Adjustment to GAAP net income to reconcile to Core Earnings:

     

Noncash equity compensation expense

     14      29
             

Core Earnings

   $ 3,598    $ 5,709
             

 

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk includes the exposure to loss resulting from changes in interest rates, credit curve spreads, foreign currency exchange rates, commodity prices, equity prices and credit risk in our underlying investments. The primary market risks to which the Company is exposed, either directly or indirectly through its investments in unconsolidated joint ventures, are credit risk, interest rate risk, credit curve spread risk and foreign currency risk.

Credit Risk

The Company’s joint venture investments and loan receivable are subject to a high degree of credit risk. Credit risk is the exposure to loss from loan defaults. Default rates are subject to a wide variety of factors, including, but not limited to, borrower financial condition, property performance, property management, supply/demand factors, construction trends, consumer behavior, regional economics, interest rates, the strength of the U.S. economy, and other factors beyond the control of the Company. All loans are subject to a certain probability of default. The Company manages credit risk through the underwriting process, acquiring our investments at the appropriate discount to face value, if any, and establishing loss assumptions. The Company also carefully monitors the performance of the loans held by the joint ventures, as well as external factors that may affect their value.

Interest Rate and Credit Curve Spread Risk

Interest rate risk relates to the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations and other factors beyond the control of the Company. Credit curve spread risk is highly sensitive to the dynamics of the markets for commercial real estate loans and securities held by the Company. Excessive supply of these assets combined with reduced demand will cause the market to require a higher yield. This demand for higher yield will cause the market to use a higher spread over the U.S. Treasury securities yield curve, or other benchmark interest rates, to value these assets. The majority of the performing loans held by our unconsolidated joint ventures are fixed rate loans. As U.S. Treasury securities are priced to a higher yield and/or the spread to U.S. Treasuries used to price the assets increases, the price at which the joint ventures could sell some of the assets may decline. Conversely, as U.S. Treasury securities are priced to a lower yield and/or the spread to U.S. Treasuries used to price the assets decreases, the value of the loan portfolios may increase.

As of June 30, 2010, the Company and the joint ventures did not have any interest rate hedges. However, in the future, the Company or its unconsolidated joint ventures may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts, in order to limit the effects of fluctuations in interest rates on its operations. The use of these types of derivatives to hedge interest-earning assets and/or interest-bearing liabilities carries certain risks, including the risk that losses on a hedge position will reduce the funds available for distribution and that such losses may exceed the amount invested in such instruments. A hedge may not perform its intended purpose of offsetting losses of rising interest rates. Moreover, with respect to certain of the instruments used as hedges, the Company is exposed to the risk that the counterparties with which the Company trades may cease making markets and quoting prices in such instruments, which may render the Company unable to enter into an offsetting transaction with respect to an open position. If the Company anticipates that the income from any such hedging transaction will not be qualifying income for REIT income purposes, the Company may conduct all or part of its hedging activities through a to-be-formed corporate subsidiary that is fully subject to federal corporate income taxation. The profitability of the Company may be adversely affected during any period as a result of changing interest rates.

Currency Risk

The Company has foreign currency rate exposures related to its equity investments in joint ventures which hold certain commercial real estate loan investments in Europe. The Company’s sole currency exposure is to the Euro. Changes in currency rates can adversely impact the fair values and earnings of the Company’s non-U.S. holdings. As of June 30, 2010, the Company had approximately €11.1 million, or $15.0 million, in European investments. Accumulated foreign exchange losses on the European investments were approximately $1.6 million, before tax effect. A 1% change in the exchange rate would result in a $150,000 increase or decrease in translation gain or loss on the Company’s investments in unconsolidated joint ventures. The Company mitigates this impact by utilizing currency instruments to hedge the capital portion of its foreign currency risk. The type of hedging instrument that the Company employed on its European investments as of June 30, 2010 was a costless collar (buying a protective put while writing an out-of-the-money covered call with a strike price at which the premium received is equal to the premium of the protective put purchased) which involved no initial capital outlay. The puts were structured with strike prices approximately 10% lower than the Company’s cost basis in such investments, thereby limiting any Euro related foreign exchange related fluctuations to approximately 10% of the original capital invested in the deal.

 

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Table of Contents

At June 30, 2010, the Company had ten outstanding hedging instruments with an aggregate notional amount of €12.9 million and a net fair value of $1.5 million. The maturity dates of such instruments approximate the projected dates of related cash flows for specific investments. Termination or maturity of currency hedging instruments may result in an obligation for payment to or from the counterparty to the hedging agreement. During the six months ended June 30, 2010, a collar hedging the Company’s net investment in Laguna Investor was terminated, resulting in net cash receipts of $66,000. The Company is exposed to credit loss in the event of non-performance by counterparties for these contracts. The Company selects major international banks and financial institutions as counterparties to manage this risk and does not expect any counterparty to default on its obligations.

The following table summarizes the notional amounts and fair (carrying) values of the Company’s derivative financial instruments as of June 30, 2010 (in thousands, except exchange rates):

 

Derivative Financial Instrument

   Notional
Amount
   Cap
(USD/€)
   Floor
(USD/€)
   Expiration Date    Net
Fair  Value
 

Collar

   1,250    1.614    1.350    December 2010    $ 169   

Collar

     650    1.235    1.100    December 2010      (21

Collar

     640    1.618    1.350    June 2011      93   

Collar

     490    1.235    1.100    June 2011      (19

Collar

     650    1.620    1.350    December 2011      98   

Collar

     440    1.235    1.100    December 2011      (19

Collar

     520    1.300    1.100    June 2012      (10

Collar

     4,000    1.635    1.350    December 2012      631   

Collar

     3,800    1.627    1.340    December 2012      573   

Collar

     420    1.300    1.100    December 2012      (10
                        
   12,860             $ 1,485   
                        

 

ITEM 4T. Controls and Procedures.

The Company has established disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

As required by Rule 13a-15(b) under the Exchange Act, we have evaluated, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at June 30, 2010.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the period ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

As of June 30, 2010, we were not involved in any legal proceedings.

 

ITEM 1A. Risk Factors.

There have been no material changes to the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

On September 23, 2009, the SEC declared effective our IPO registration statement on Form S-11 (File No. 333-160323), pursuant to which we received net proceeds of $247.5 million before deferred underwriting discounts and commissions and other accrued offering costs.

On October 23, 2009, in connection with the exercise of the overallotment option by the underwriters, we received net proceeds of approximately $37.1 million, net of underwriting discounts and commissions of $375,000.

As of June 30, 2010, we had entered into agreements or consummated transactions representing net investments or commitments to invest approximately $256 million, or 93%, of the net proceeds from our IPO and the private placement in the manner described in this Report under the heading “Recent Developments—Investment Activities” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 under the heading “Business—Recent Developments.”

 

ITEM 3. Defaults Upon Senior Securities.

None.

 

ITEM 4. (Removed and Reserved)

 

ITEM 5. Other Information.

None.

 

ITEM 6. Exhibits.

 

Exhibit

No.

  

Description

10.1    Management Agreement, dated as of September 29, 2009, among Colony Financial Manager, LLC, Colony Financial, Inc., and Colony Financial TRS, LLC (incorporated by reference to Exhibit 10.3 of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009).
10.2    Amendment No. 1 to Management Agreement, dated as of August 11, 2010, among Colony Financial Manager, LLC, Colony Financial, Inc., and Colony Financial TRS, LLC.
31.1    Certification of Richard B. Saltzman, President and Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Darren J. Tangen, Chief Financial Officer and Treasurer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Richard B. Saltzman, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Darren J. Tangen, Chief Financial Officer and Treasurer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: August 13, 2010

 

COLONY FINANCIAL, INC.

By:

 

/S/    RICHARD B. SALTZMAN        

  Richard B. Saltzman
  Chief Executive Officer and President

By:

 

/S/    DARREN J. TANGEN        

  Darren J. Tangen
 

Chief Financial Officer and Treasurer

(Principal Financial Officer)

 

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