Here, for whatever it's worth, is my take on the 1Q2013 results:
1 - Operating income was up sharply (27% from last quarter and 103% from 1Q2012. That's a great quarter and a great year. Actually, its better than that. 1Q operating income were almost fully half the best quarter RAS ever had for operating income (2Q2008) and a 129% increase over its lowest operational earnings since that peak (3Q2010). RAS is clearly showing strong growth.
2 - The growth in operating income was largely driven by better than expected improvements in investment interest income and fee income. RAS is writing more loans and is reaping the benefits. Investment interest income was up 4.3% from 4Q while investment interest expense was down 4.7%. Fee income was up 27.7%. Together these line items contributed aobut $4.2M to RAS operating earnings. Investment interest margins improved from 74% to 76%.
3 - Rental income was up .3%, a small gain, but real estate operating expense was down 3.3%. Together they contributed about $.6M to operating income. RE margins improved from 45% to 47% and there is still plenty of room to grow occupancy and RE margins.
4 - AFFO, while down 2 cents from 4Q, is still strong enough to support the 12 cent dividend. Indeed, when you count the one time 1Q expenses, AFFO may be strong enough to support a small increase in the dividend.
5 - The big news from the conference call is the decision to convert the IRT offering to a publically traded REIT. The non-traded REIT option was, at best, only marginally successful, but this probably IS a good time to bring a property REIT to the open market. It's curent 6.25% yield should help to make it a successful offering.
6 - There was, as expected, a GAAP loss. Not a surprise. More on that in the next post.
While the overall results weren't as good as I'd hoped they would be, the operational results that can only be viewed as excellent; even huge.
I was commenting on the 1Q results; not the 2Q results that came out today ... and I was right. AFFO was more than strong enough to support a 12 cent dividend. Indeed, we got a 13 cent dividend.
These results are probably good enough to lift the dividend to 14 cents in 3Q.
But I imagine you knew all that already.
Sold my 3000 trading shares out which I bought early this week, today on the share price spike. The fixed income market, which RAS is associated with, is weak due to the rise in short-term rates. My core shares remain.
As to this quarter:
1. Good that they gave up the private REIT plan for IRT. Unfortunately they did sink time and money in going down that road.
2. Management has always overpromised on how quickly they can deploy money in making loans. They are salesmen. They get goals and real expectations confused.
3. It would be interesting to see a good evaluation of the Tabernas. It is unknown how long it will be before they might realistically be expected to throw off some cash to RAS.
4. Clearly results are below expectations or whisper number.
I'd say that for a mortgage REIT that RAS is reasonably priced now.
The whisper number (which is a GAAP number) was clearly a joke. I said so in advance when I said there would be another GAAP loss.
But I disagree on "results below expectations." Operating earnings were up way more than I expected: 27%. That said, one time charges will get you sometimes.
The expected GAAP loss was, as expected, largely associated with improvements in the value of the Tabernas (increased liability marks). This number will, unfortunately, probably be more closely noticed by the broader market than the improved operating income/ That said, the GAAP number is worse than meaningless; it's misleading.
The Taberna liabilitiy marks are non-cash, which means that there was no real loss; non-recourse, which means that even if there was a real loss it would be to Taberna bond holders rather than RAS shareholders, and its a liability mark up, which means its actually a gain for Taberna bondholdrs (including, at some point RAS shareholders).
And there is a real plus for RAS shareholders insofar as (1) some portion of the Taberna mark to market loss will find its way to RAS' NOL carry-forward, extending the time frame over which the dividend is paid as capital gains, and (2) every liability markup advances the day on which RAS starts to collect interest and principal payments on its investment in the Tabernas..
It remains that the GAAP loss remains the official SEC earnings estimate (despite is conflation of assets and earnings) and the number potential investors are most likely to focus on. RAS should improve this quarter, but it isn't going to jump over $9 until the prospect for a dividend increase becomes more real to prospective investors.
Davis, you say a lot here.
"dividend is paid as capital gain" ----the dividend is never paid as a capital gain, it is being characterized as a return of capital, causing the shareholder's cost basis to go down. If one were to sell (at a higher price than the cost basis) a capital gain would be recorded for tax purposes (also assuming that one held those shares for over a year).
"every liability markup advances the day on which RAS starts to collect interest and principal payments on its investments in the Tabernas." Really? I thought the Tabernas bonds were marked down because the market found them suspect (marked to market). So the bonds are actually being market up in value because the cash flow from the assets has improved? The bonds may be improving because cash flow from the assets (loans) within the securitization are paying better (curing defaults, coming back on line after a five year deferral, prepaying) but I haven't seen RAS management make that statement, or provide any details of that sort. If you have, can you point it out to me? Thanks.