I was finally able to listen to the NAREIT presentation and the question and answer period that followed. As expected, they used the presentation that was filed at the SEC last week. The NAREIT presentation is available at the NAREIT website. I'd provide a pointer, by Yahoo will just delete it, so you'll have to search it out yourself. That said, there was some "news", most of it in response to some very good (but inaudible) questions.
1 - The pipeline is up to $800M. As I"ve noted before, the pipeline is all the loans that RAIT has applications for and has not yet rejected. It won't do that much business (maybe 20% of it). Still, that's a big increase from the last reading.
2 - Loans are closing much faster in second quarter. I heard them say twice as fast, but I might have misheard that. Faster works for me. It suggests a strong 2Q.
3 - They were asked about rising interest rates and how it would affect the business. They reiterated the things said at the annual meeting and added that they are moving new loans to bank securitizations twice a quarter, which limits their risk. When pushed they simply said that they hoped and expected that increases, when they happened would be slow and steady such that their risk would be minimized.
4 - Scott offered a great explanation of their property acquisitions, which boil down, quite simply to, existing debtors were offered extensions when asked, but on terms that limited RAS' risk to loan risk and not equity risk (e.g. debtors typically had to put in more capital). If debtors chose not to do so, RAS, as a real estate company rather than a bank, was willing to take over the properties.
5 - They actually put a date on when the Tabernas might reasonably be expected to start to pay again so long as existing loans continue paying: 2019. That's BIG news, I think.
6 - RAS expects to fully deploy its cash by the end of 2Q.
Best line: "I'll be conservative and say that there is a 99.9% chance that the quarterly rate will be at least 15 cents by year end. "
He's looking for a 15 cent dividend this year and an 18 cent dividend next year. He is being appropriately conservative, I think.
$800 million pipeline. Loan applications received, not yet rejected.
The slide presentation mentions "$180 million of loans under application" on slide #7.
Please reconcile your definition and theirs. There seems to be a difference.
I noticed the "loans under application" number when I talked about the presentation filing last week. At the time I said that it appeared that RAS was trying to talk about something a little more meaningful than the pipeline is. I assume that it has something to do with loans that are being actively moved towards completion. At the annual meeting Scott used the term signed offer letters to describe the subset of applications that RAS was interested in that they were actively evaluating, but they didn't expect to close all of those loans either (most, I suspect). I imagine that "under application" is a similar kind of reference and might be interpreted as "loans we feel we are likely to close on".
But I don't really know. Ask Andre.
"they are moving new loans to bank securitizations twice a quarter, which limits their risk." Still they are holding loans for a period in a time when the value of loans is going down (since interest rates are rising). I believe you said that at the annual meeting they said they had these loans hedged. Or did they mean only the loans they intended to hold long term?
Others have commented that the management expects soon to be "fully deployed" comment to mean they may go back again for yet another secondary. Sadly, this may be true. I'd agree with others who suggest that it would be better to raise money, if they must raise more money, another way such as by issuing more preferred or selling IRT stock.
One thing you need to get clear on. RAS can potentially sell properties to IRT, and I expect it to do so, but RAS cannot issue IRT shares. IRT has an independent board. Only the IRT board can make decisions to sell shares or buy properties, whehter from RAS or anyone else. RAS, as the sponsor and manager, obviously has a say, but it cannot exercise fiat.
This is a point that Scoot made rather strongly at the annual meeting, and it is an important point. RAS shareholders stand to benefit from RAS management of IRT, but it is IRT's shareholders that will own that company.
So be careful about this. In my post I focused on the possibility of IRT buying some of the billion dollars of property assets that RAS holds. That cash IS equivalent to a large number of secondaries of RAS stock, so there is potentially considerable opportunity for RAS in a successful IRT IPO. Until that happens, however, RAS will have to rely on other approaches.
They are raising money in every way. But they are doing it carefully. They are raising through the prfd ABC issues only when they can sell at high numbers (like $24 per share).
IRT.......we will see.
..........I think they will hold off on issuing more common for a while. Certainly there is no urgent need.
In reviewing their interest rate risk one must look at, and break up their businesses the way they do. The whole loans that they are selling off into the bank securitizations are typically issued at a fixed rate with 5 to 10 year maturities. They are not hedging these as they are likely on the RAS balance sheet for 30 to 60 days. So, there is some interest rate risk on holding these until they are sold and indeed, there is a chance that RAS could and maybe did lose a bit while rates were heading North these past weeks. Bridge loans are issued with floating rate coupons and are financed floating rate, so there is no interest rate risk. Likewise, the existing securitizations are match funded and to the degree there is an imbalance of floating and fixed within them RAS as purchased hedges to eliminate that risk.
It's hard to know. I wouldn't be surprised to see a new offering as soon as the end of the month, but there are other possibilities which could happen in combination:
1 - RAS still has a lot of capacity under the Preferred D agreement. They might decide to use it.
2 - An IRT effectiveness notice and IPO, if successful (and I assume it would be) would set up the sale of at least some number of currently owned rental properties. Assuming IRT follows its recent pattern and gets new loans on the properties, RAS can potentially pick up the equivalent of perhaps a dozen March equivalent IPO's in redeployable cash from those transactions. The same would occur if they sold properties to third parties. It's up to the SEC at this point, but if IRT happens this month RAS might be able to avoid secodaries for a long while.
3 - The RAIT III securitization, if it happens in the expected time frame, would free up most of the capital that RAS has deployed in the course of making the loans for redeployment. That would reduce the need for a secondary. Again, the quicker the securitization goes to market, the less pressure there is to do another securitization.
Bottom line, a secondary is hardly a certainty in the short to medium term, so I won't hazard any guesses as to timing or size of offering.
What I would say is that if there is a 2 cent dividend increase as needoptions suggests there may be, that a secondary will probably complete before ex-div.
All depends on what happens between now and then. There are other potential sources of cash.
1. They are still selling some prfd A, B, C.
2. They can get another $35 million from Prfd D, if they want.
3. If IRT issues its $50 million in new shares, some of it could flow back to RAS in a variety of ways.
4. Some of the assets that RAS traded out of their securitizations about a year ago could pay back, creating cash they will need to redeploy.
nice summary - I think they actually said 2018 to 2019 for Taberna, didn't they? Either way, stock might begin to reflect some of this value by 2017 I would think. A long time to wait, but nice to have the extra optionality there.
That's what I thought I heard, but the 2018 seemed a little indistinct and the 2019 was clear. I went with the more conservative date. No harm in that.
And yes, I'm sure they were estimating conservatively as well.
You never know these days, what Yahoo is likely to delete. It has become a very weird company, at least in the financial conferencing space. So here's what I write yesterday that is no longer here.
In addition, they indicated that the new bridge loan securitization, and they referred to it as a RAIT securitization, so look for a RAIT III, was still on line to go to market late this month or in early July.
While I wish the room in Chicago had an audience mike so that it was easier to hear the audience questions, they clearly had a large and knowledgeable audience, at least some of whom were familiar with RAS going back to the late 1990's. There were several historical questions that basically boiled down to "how did you get to where you are now" and "what happened" that Scott addressed with compact statements of how RAS' lending business has changed since its inception.
There were good questions about RAS loan mix and why it was more focused on bridge loans and less focused on mezzanine loans than it was in the late 1980's. The short version of Scott's answer is that they are a bigger company now and can leverage that into offering a full spectrum of loan offerings to prospective customers. Mezzanines aren't as a good a business as they were 15 years ago, but they help close deals on whole loans.
Overall a strong presentation.