AMERICAS NEWS: Banking on the government

Colony Capital is eyeing the FDIC as a valuable source of real estate deals in 2010. PERE magazine, February 2010 issue

It’s back to basics for most real estate investors. For Colony Capital, its back to dealing with US banking regulators.

In a mirror image of Colony’s deal making days during the RTC, in January the firm successfully bid to take over an entire portfolio of more than 1,200 loans from the Federal Deposit Insurance Corporation. The loans, with a face value of $1.02 billion, were acquired with an equity investment of $90.5 million and government financing of $233 million in corporate guaranteed notes.

This particular portfolio was worth $1 billion so there are around 30 more of these sorts of deals to go.

The deal though is likely a one-off for Colony. With an estimated $30 billion of real estate loans needing to be sold, the FDIC will prove a critical deal source for the private equity real estate firm.

Indeed, Colony is believed to have spent two months working with the FDIC on its January bid, fighting off competition from more than 40 potential groups and more than 20 bids (only a few of which were for the entire portfolio). It is energy Colony can’t be expected to restrict to just one deal.

According to market sources familiar with the matter, Colony eyes the current debt opportunity as more “compelling” than equity plays, with expectations the firm will be a major player in future FDIC portfolio bids. “The FDIC is probably sitting on around $30 billion worth of loans that it hasn’t yet sold,” the professional added. “This particular portfolio was worth $1 billion so there are around 30 more of these sorts of deals to go.” Colony declined to comment beyond a statement from its mortgage REIT, Colony Financia, announcing the deal.

The January deal itself saw Colony take a 40 percent stake in a Colony-FDIC vehicle that bought the assets out of 22 failed bank receiverships. Some 75 percent of the assets are located in Georgia, California, Nevada and Florida, the FDIC said, while 70 percent of the loans were delinquent. The assets include a mix of property sectors, including land deals and residential assets. The FDIC will remain a passive investor, while Colony manages, services and ultimately sells the assets.

Colony is expected to outsource some primary and special servicing of performing and non-performing loans within the portfolio, although much of it will be done by the firm. Colony is expected to employ a variety of strategies in relation to the portfolio, including loan-to-own in some cases, as well as holding the loans to maturity.

Colony split the deal across three vehicles, PERE has learned, including the $900 million Colony Distressed Credit Fund, the $4 billion Colony Investors VIII and Colony Financial.

The FDIC took over 140 failed banks in 2009, and by 8 January had taken over its first troubled institution of 2010, the Horizon Bank, of Bellingham, Washington state, which had approximately $1.3 billion in assets and $1.1 billion in deposits.