07/02/2010

Colony Snares Another Big FDIC Portfolio

Beating out a host of rivals, Colony Capital is in line to buy a 40% stake in a $1.85 billion portfolio of commercial mortgages from the FDIC.

The Los Angeles fund shop has been selected as the winning bidder and was in final negotiations on the price this week. It is expected to pay about 58 cents on the dollar, or $430 million, according to people familiar with the offering. The transaction values the portfolio at about $1.1 billion. Colony and the FDIC declined to comment.

The FDIC, which is retaining a 60% interest in the assets, will supply low-cost debt financing for half of Colony's purchase, reducing the firm's cash outlay to about $215 million.

Other firms that looked at the portfolio included Lennar Corp. of Miami, Lone Star Funds of Dallas and Starwood Capital of Greenwich, Conn. Barclays is advising the FDIC on the auction.

The portfolio contains more than 1,500 commercial mortgages originated by nearly two dozen failed lenders. Loans from First Bank of Calabasas, Calif., and Las Vegas-based Community Bank of Nevada made up about half of the collateral pool, according to initial marketing materials provided to investors. About half the mortgages are performing, with a weighted average coupon of 7.5%, according to those materials. The portfolio's makeup changed slightly in recent weeks, as roughly $120 million of mortgages were removed because of maturities, restructurings or for other reasons. Bids were taken about a month ago.

The deal would be the second FDIC portfolio that Colony has taken down this year, following the January purchase of a 40% stake in a $1 billion portfolio of mixed-quality commercial mortgages. The operator paid 44 cents on the dollar in that deal, or $180 million. Debt financing provided by the FDIC reduced Colony's cash outlay to $90 million.

Colony, which is headed by veteran investor Thomas Barrack, made the January acquisition via its mortgage REIT and two investment funds: the $4 billion Colony Investors 8 and the $900 million Colony Distressed Credit Fund 1.

The stake was offered under the FDIC's structured-sales program - one of the agency's options for liquidating assets inherited from failed banks. Under the program, the FDIC sells stakes of 20-40% in portfolios to operating partners, which work out the assets. The agency retains an interest in order to share in any upside.

The FDIC has now conducted 13 structured sales since May 2008, selling stakes at prices ranging from 9-75 cents on the dollar. It also took bids last week on a $1.9 billion portfolio of assets from AmTrust Bank of Cleveland. And it has a steady pipeline of upcoming offerings, including:

*$1 billion-plus of mostly nonperforming commercial and residential mortgages. Advisor: A joint venture between UniCorp Services of Dallas and Cushman & Wakefield of Washington. Bid date: late summer.

*$750 million of mixed-quality commercial mortgages and acquisition, development and construction loans. Advisor: Milestone Advisors of Washington. Bid date: late summer.

*$181 million of mostly nonperforming commercial acquisition, development and construction mortgages inherited from more than a dozen banks. Advisor: Barclays. Bid date: Delayed to July 27.

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