Colony Capital Prevails in FDIC Acquisitions

WALL STREET JOURNAL

by ELIOT BROWN

– January 25, 2011 –

Latest Win of $820 Million of Failed Banks’ Assets, Is Expected to Be Announced Wednesday; ‘It’s Not Sexy Stuff’

Colony Capital LLC, the real-estate-focused firm that made headlines and raised eyebrows last year by joining a group that bought Miramax Films, is now emerging as one of the dominant players in the acquisition of distressed assets from the Federal Deposit Insurance Corp.

The FDIC is set to announce as early as Wednesday that a group led by Colony was awarded two portfolios with $820 million of commercial and residential mortgages seized from failed banks, according to people familiar with the matter. The price couldn’t be determined.

Los Angeles-based Colony, led by Chairman Tom Barrack, already has won four other portfolios of FDIC mortgages valued at more than $3 billion, making it the largest winner of multiple deals. The firm bid and lost on the single-biggest FDIC deal, the $4.5 billion in real-estate assets of the Chicago-based Corus Bank won by a Starwood Capital-led group. No

other bidder has won more than two portfolios.

The FDIC deals provide a useful window into the severity of the carnage in the commercial real-estate industry that was caused by the global economic downturn. During the darkest days, many predicted that commercial property would follow the residential market off a cliff, creating an enormous amount of distressed opportunities for investors.

That didn’t happen on a huge scale similar to the early 1990s, partly because many banks have been able to extend underwater loans rather than foreclose. But there still has been a lot of pain, with 157 bank failures last year, up from 140 in 2009, many with big commercial-property portfolios.

The FDIC sold $11.8 billion of commercial-property assets last year through structures similar to the Colony deals, and analysts expect a similar volume this year. By and large, the agency has retained a stake in the loan portfolios so it can participate in the upside if the market improves.

The concentration on the FDIC marks a homecoming for Mr. Barrack, who vaulted to prominence in the early 1990s, when he invested heavily in discounted mortgages from the government-owned Resolution Trust Corp., which previously sold off failed banks’ assets.

But like many funds, Colony was hurt by the downturn. Its problems included soured investments in Station Casinos and the Xanadu retail development in northern New Jersey.Colony created a stir last year, when it joined the group that purchased Miramax from Walt Disney Co. for $663 million. Up until that time, the firm had primarily done real-estate deals and had never played in Hollywood before.  Mr. Barrack added to the sense that he might be losing his passion for real estate when he was quoted in the press last year saying that the asset class was “boring.”

But the FDIC deals show that Colony isn’t straying too far from its roots. Since mid-2010, it has partnered on all its FDIC deals with Cogsville Group, led by Donald Cogsville, a former professional soccer playerturned-investor who tried in 2009 to buy Starrett City, the nation’s largest subsidized-housing complex.

The success of the FDIC deals depends on Colony’s ability to work with scores of individual borrowers, either foreclosing or selling loans. In its early deals, it paid roughly 45 to 60 cents for every dollar of debt, and it needs to be able to recoup more than that.

By winning early portfolios, it became better positioned for future contests, Colony executives and others involved in the FDIC auctions say, benefiting from economies of scale. The group now has a trove of information on how these distressed assets perform that helps with underwriting new deals, and a set of 40 to 50 in-house asset managers, said Paul Fuhrman, a principal at Colony who leads the FDIC bids.

Further, the fields have narrowed since the early bids, when more than 20 bidders competed for some deals. Many of the larger players in the broader real-estate market right now aren’t vying for the FDIC deals.”There’s a lot of guys who are vanity players who aren’t going to look at this. It’s not sexy stuff,” Mr. Fuhrman says.

While Mr. Fuhrman said his general outlook is conservative, other bidders and observers speculate that Colony’s edge comes in part from its assumptions on the broader economy. “I believe we’re winning because we have an optimistic and realistic view of the future of the economy,” said Mr. Cogsville, pointing to recent job growth.

Colony’s repeated victories haven’t sat well with at least one losing bidder on numerous FDIC deals. Edward Loyd, CEO of Loyd Capital Management, said the fact that Colony keeps winning means that others will stop bidding, thus depressing prices from a lack of competition. “Economies of scale are killing the competitiveness of this process,” Mr. Loyd said, as the number of bidders fell by the end of 2010. “It’s a flawed system.”

As policy, the FDIC awards each portfolio to the highest bidder “that best maximizes the return,” a spokeswoman said.

Posted in The Cogsville Group News