Disclosures

Colony Financial, Inc.

I, Richard Eckert , certify that this report reflects my personal beliefs about this company and that no portion of my compensation was, is or will be directly or indirectly related to the specific recommendations or views discussed in this report.

Disclosure

• B. Riley & Co., LLC does and seeks to do business with companies covered in its research reports.
• A portion of this analyst’s compensation is based on the sales, trading and investment banking activities of B. Riley & Co., LLC.

Initiated Coverage on 01/06/2012 with "Buy" Rating and Price Target of $18.50

Explanation of B. Riley & Co. LLC's Rating System

• Buy: We generally expect "Buy" rated stocks to materially outperform both the S&P 500 and Russell 2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the potential risk is particularly attractive.
• Neutral: We generally believe "Neutral" rated stocks will perform roughly in line with the S&P 500 and Russell 2000 over the intermediate and long term.
• Sell: We generally expect "Sell" rated stocks to materially underperform both the S&P 500 and Russell 2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the potential risk is particularly unattractive.

Risks and Considerations

Additional Risks and Considerations

Risks and Considerations

Long-term interest rates rise unexpectedly, placing downward pressure on commercial real estate values.  This would have the effect reducing the amounts that can be recovered on some of the company’s investments and/or extend the period of time it takes to recover those sums.

Another leg down in the commercial real estate markets for any other reason.  Although renewed or persistent weakness would create new opportunities for CLNY, once more such weakness could lower expected recovery values and lengthen the time necessary to realize those values on existing assets.

Portfolio concentration.  CLNY has two dozen large discrete investments and several smaller ones (less than $5 million invested in each).  While some of these represent portfolios containing hundreds of loans, others consist of just one large credit facility (e.g., the WLH Secured Loan, the Luxury Destination Club Recourse Loan, the Extended Stay Loan).  If the financial condition of the underlying borrower weakens materially and the loans become nonperforming, they can introduce unevenness into reported earnings, reducing revenue at the same time they increase credit administration expenses.  Significantly, large, nonperforming loans can also crimp cash flows and capital generation.  At some point, if one or more of these become nonperforming, they may even force the company to cut its dividend.

Too much capital chasing too few good ideas.  A number of other commercial mortgage REITs, BDOs/BDCs, private equity firms, “vulture” capital funds, distressed debt funds, and even operating companies have either formed or expanded in the last few years, raising tens, if not hundreds of billions of dollar in capital for the same purpose as Colony Financial.  Balance sheet repairs and new regulation at commercial banks has created shortages, but it seems that capital is becoming less scarce with each month that has elapsed since the onset of the financial crisis in September 2008.

Miscalculation on the recoverable value of one or more large loans or other debt instruments.

Changes in tax treatment of dividends.

The presumption of liquidity.

Counterparty risk (currency hedges).

Policy error—for example, the elimination of two important exclusions to the Investment Company Act of 1940 upon which mortgage REITs rely heavily.

A geopolitical event precipitating or exacerbating a policy error or recession, especially as the U.S. enters a major election cycle.

See the Company's SEC filings, particularly its 10-K filing, for a discussion of further potential risks.