EUROPE NEWS: Contrarian Colony

Colony is doing the unconventional again – considering an investment in a troubled developer in a part of Europe that has just posted its first fall in real estate markets in 10 years. PERE June 2009

Colony Capital does not generally take macro-economic views when investing. That is clearly the case with the most recent deal it is contemplating.

The Los Angeles firm, led by Tom Barrack, is in exclusive talks with Central European property developer and fund manager Orco Property Group. Orco is troubled by its debt load and in March sought the protection of the French courts in a bid to stave off creditors.

One source said: “It would be wrong to assume that Colony is looking at the company because they see a potential rebound on the Eastern European market.”

Zlota 44, Warsaw

Colony is considering an initial equity injection of €25 million into Orco, which would give the Los Angeles firm a roughly 30 percent stake. Colony though has an option to increase this to 60 percent in return for a further €140 million investment – provided Colony and other investors exercise further call options.

Orco's founder and chief executive, Jean-François Ott, is working with Colony to jointly make the equity injection, which would go some way in alleviating the developer's problems.

Colony did not wish to comment at this stage, but the firm is in the process of conducting due diligence on Orco's development book.

It may seem a strange time to be investing, especially since Ott told shareholders in April that the Central European real estate markets had posted their first fall in 10 years and that the firm had suffered its first portfolio value reduction in 18 months.

However, Colony Capital rarely follows conventional wisdom.

In Europe, the firm has an eclectic portfolio including French football club Paris St Germain, wine company Chateau Lascombes and an operator of Paris data centre Data 4. The firm also has a stake in hotel group Accor and the supermarket chain, Carrefour, as well as But, the third largest retail chain in France.

The firm tends to co-invest in assets jointly out of its opportunistic fund – its latest being Colony VIII – in conjunction with its European platform, Colyzeo, which was created jointly in 2003 with French listed private equity and investment firm, Eurazeo. Deals in Europe are usually led by Sebastien Bazin, Colony's head of Europe. For the Orco deal, the special investment vehicle formed on behalf of the co-investors is called CoLOG.

One close observer of the firm points out that Colony takes a “micro” view of an investment and in this case it is specifically interested in Orco because of the Procédure de Sauvegarde protection it sought from French courts. Orco's Central and Eastern European portfolio, valued at around €2.7 billion, is also deemed “interesting”. Projects include Zlota 44 in Warsaw. Orco is listed on the NYSE Euronext, as well as on the Prague, Warsaw and Budapest stock exchanges.

The firm is also the sponsor of the Endurance Real Estate fund, a closed-ended vehicle with office, retail and residential sub funds. As part of first priorities, Orco is retrenching from its Russian logistics business and from hotel investment.

For Colony, the priority is due diligence, but the clock is ticking. Colony's exclusive position expires on 22 June.