I stumbled on an interesting trend that blends my two interrelated worlds of covering real estate and finance. Three companies in the Los Angeles area, including one in the Valley, recently registered with the U.S. Securities Exchange Commission to do an initial public offering (IPO). They all share one thing in common: They’re newly formed entities in the business of investing in commercial and/or residential real estate debt, much of which falls into the distressed asset category. Colony Financial Inc, a newly formed subsidiary of Century City-based Colony Capital filed for an IPO on June 30. It plans to acquire, originate and manage a portfolio of real estate related debt including performing, sub performing and non performing loans. Colony Capital was founded in 1991 by Thomas J. Barrack Jr., an investor who had a hand in preventing Michael Jackson’s Neverland Ranch from going into foreclosure. The company hopes to raise $500 million from the IPO and initially focus on commercial assets. It said it will take advantage of the FDIC disposing of failed bank assets, and the fact that originations of mortgage and mezzanine loans are scarce right now, according to its SEC filing. Colony Financial also intends to qualify to be taxed as a real estate investment trust. Merrill Lynch & Co. is acting as underwriter. Western Asset Mortgage Capital, which will be managed by Pasadena-based Western Asset Management Company, registered for an IPO on June 12. The newly-organized Delaware corporation also hopes to raise $500 million. The company plans to invest in, finance and manage primarily residential mortgage-backed securities not issued or guaranteed by a U.S. government agency or federally chartered corporation, or non-agency residential mortgage backed security, according to the SEC filing. It will also invest in commercial mortgage-backed securities and other asset-backed securities, and intends to qualify to be taxed as a real estate investment trust. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsch Bank Securities Inc., and Citigroup Global Markets Inc. are listed as underwriters. “We believe that the current distressed conditions in the financial markets present attractive investment opportunities for us and that we are particularly well positioned to capitalize on such opportunities,” said the company in its SEC filing. And PennyMac Mortgage Investment Trust, a newly formed Calabasas-based specialty finance company headed by former Countrywide Financial Corp executives, filed for an IPO on May 22. The company hopes to raise $750 million and invest primarily in residential mortgage loans, a substantial portion of which may be distressed and acquired at discounts to their unpaid principal balances, said the SEC filing. It will then maximize the value of the mortgage loans through proprietary loan modification programs, special servicing and other initiatives focused on keeping borrowers in their homes. Merrill Lynch, Credit Suisse and Deutsche Bank are listed as underwriters for the IPO. And PennyMac plans to shoot for real estate investment trust status for income tax purposes. So what gives? “It doesn’t surprise me that people see a business opportunity in these distressed assets,” said Travis Larson, spokesman for the Securities Industry and Financial Markets Association in Washington D.C. Recent financial turmoil has put stress on a host of financial firm’s balance sheets, and many of those firms are trying to get rid of their “troubled” assets. But with the credit crunch of the last 18 months, there have not been many buyers. It has also been difficult to place a value on these assets, said Larson. So if an investor can step in and purchase assets on the cheap, he/she has a good shot at making money from servicing loans or selling them when markets improve. Dan Fasulo, managing director of New York-based Real Capital Analytics, a real estate research firm, said we’re facing historic levels of illiquidity in the commercial property industry that’s placing tremendous pressure on owners who want to re-capitalize. “Debt is needed,” said Fasulo. “Owners with loan expirations are under a lot of pressure to make sure they have the right amount of capital.” Also, when the markets started showing signs of a turn around many companies rushed to the IPO window, he said. Some real estate investment trusts have been looking to improve their liquidity. And there may be other companies out there that are simply opportunistic. Staff Reporter Eric Billingsley can be reached at (818) 316-3124 or at [email protected] .