Colony Capital, Inc (CLNY)

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Colony Financial (CLNY)

Q3 2012 Earnings Call

November 06, 2012 10:00 am ET


Lasse Glassen - Senior Vice President of Financial Relations Board Division

Richard B. Saltzman - Chief Executive Officer, President, Director and Member of Investment Committee

Darren J. Tangen - Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer, Treasurer and Member of Investment Committee

Kevin P. Traenkle - Chief Investment Officer


Zachary Tanenbaum - McNicoll, Lewis & Vlak LLC, Research Division

Joshua A. Barber - Stifel, Nicolaus & Co., Inc., Research Division

Jade J. Rahmani - Keefe, Bruyette, & Woods, Inc., Research Division

Kyle Rhoades



Greetings, and welcome to the Colony Financial, Inc. Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Lasse Glassen, with Addo Communications. Thank you. Mr. Glassen, you may begin.

Lasse Glassen

Good morning, everyone, and welcome to Colony Financial, Inc.'s Third Quarter 2012 Earnings Conference Call. With us today are the company's Chief Executive Officer, Richard Saltzman; and Chief Operating Officer and Chief Financial Officer, Darren Tangen. Kevin Traenkle, the company's Chief Investment Officer; and Neale Redington, the company's Chief Accounting Officer, are also on hand to answer any questions.

Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectation and are subject to risks, uncertainties and assumptions.

Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward-looking statements are described in the company's periodic reports filed with the SEC from time to time.

All information discussed on this call is as of today, November 6, 2012, and Colony Financial does not intend or undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call contains non-GAAP financial measures. The company's earnings release, which was released last night and is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non-GAAP financial measures are useful to investors.

And now I'd like to turn the call over to Richard Saltzman, Chief Executive Officer of Colony Financial. Richard?

Richard B. Saltzman

Thank you, Lasse, and welcome, everyone, to our third quarter earnings call. We had another productive quarter and won acquisitions by deploying an aggregate of $157 million across all 3 lines of business: loan acquisitions, new originations and single-family homes for rent. Two, asset management and dispositions, as demonstrated by the growth of our single-family rental platform, progress on the restructuring and imminent bankruptcy emergence of our 103-property Hotel Portfolio investment and additional sell down in our First Republic Bank position and continued accretive loan resolutions in our sub and nonperforming loan portfolios. And then three, capital formation by raising $255 million of common and preferred equity.

Our third quarter activity also reflects the continued evolution into more equity-oriented real estate investments, most notably our growing significant investment in CSFR, Colony's single-family home for rent platform. Last quarter, I gave our view on the macro thesis for the single-family rental strategy. Bottom line, we continue to be very excited about this once-in-a-lifetime opportunity to capitalize on the U.S. housing recovery through the establishment of the national operating and investment platform that matches up with this new institutional real estate asset class.

This quarter, we'd like to discuss some of the operational progress and early results from the business. Today, CSFR's total home count stands at approximately 4,200, up from 1,500 homes on our last earnings call, which is diversified across 6 states, including California, Arizona, Texas, Nevada, Colorado and Georgia. This includes a recently announced purchase of 970 homes from Fannie Mae under a structured partnership arrangement, not unlike the partnership arrangement we have with the FDIC on various small balance loan portfolio acquisitions. The partnership provides a favorable structure that incentivizes us to manage the portfolio cost effectively and to hold the investment for the long term. Excluding that recent structured Fannie deal, the average purchase price across the CSFR portfolio is approximately $135,000 per home, which, in our estimate, is a 30% to 40% discount to replacement cost. We are approximately 60% leased across the entire portfolio. And of the homes we have leased after acquisition, we have achieved rents consistent with underwriting.

We have now demonstrated our ability to significantly grow the portfolio at target prices and expected deals through an acquisition team that is buying homes across multiple channels. Large REO and rental portfolios from banks and government-sponsored enterprises like Fannie Mae, many bulk leased portfolios typically from local investors, and individual MLS and trustee sales. To be sure, this acquisition function demands considerable human resources in order to achieve this kind of scale.

In addition to acquisitions, the other major initiatives, which we are focused on include renovations, leasing and property management. To date, we have leased approximately 800 homes in the aggregate and our leasing velocity is increasing every month. October was our most productive leasing month to date with approximately 280 new leases signed, for example.

In terms of upfront capital expenditures, we are spending approximately $10,000 per vacant home on renovations. The spend level we expect will remain consistent over the near-term on new acquisitions. We are making great progress operationally on each of these disciplines with timelines showing improvement in each sequential month. We knew, going in, that this would be a time and management-intensive business, which is both the opportunity and the challenge. Similar to our small loan balance portfolio business, Colony has historically been successful identifying outsize returns and businesses possessing higher barriers to entry due to execution and operational complexities. In the case of the single-family rental platform, the blocking and tackling is made possible by 170 and growing full-time employees dedicated to this strategy. We believe we have the right human capital in place to succeed and are very pleased with the portfolio assembled to date and the exponential progress we have made on the operational front.

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