I think all the pieces are in except the conference call transcript,, so its time to start updating this this thread. It has traditionally been overdawall's creation, but I'll do it if he doesn't.
Q: What role do the bonds RAS holds in RAIT 1 and 2 play in RAS book value?
RAS owes RAIT I and II a little over $875 Million in loans on the properties it has taken over since 2008. It's bond holdings in RAIT I and II, by contrast, are valued at a little under $500 million. The balance of the two reduces RAS overall book value.
For what its worth, that's not a bad thing. As the manager of the securitizations, RAS is effectively its own bank. RAS will,moreover reduce that debt over time via loan paydowns and more quickly based on occasional sales of property (at least some of it to IRT). Over time, then, RAS debt to RAIT I and II will come into balance and even decline below the value of its debt.
When that happens (and it will take a while, as there is roughly $380 million of debt to pay down) something interesting becomes possible. As the controlling interest in the securitization RAS can potentially wind down RAIT I and II by repackaging all of the non-RAS holdings in the RAITs into new re-REMICS securitizations that would pay off existing RAIT bondholders and allow RAS holdings in the RAITs to pay off its remaining debts to RAIT I and II. From that:
1 - RAS would own the remaining properties free and clear, which opens all sorts of opportunities for creating RE asset-based leverage or taking profits.
2 - There would be new RAIT securitizations that could once again reinvest the proceeds of loan payoffs into new loans.
This would be a major win-win for RAS.
Q: Is dilution (selling more shares) always bad?
A: There are multiple ways to dilute a stock, and some of them are bad for existing common shareholders. Issuing all of a companies yearly profits to management and the board as new shares, for instance, is bad for shareholders. CSCO has been known to do that. There are other bad dilutions, but none that appear to apply to RAS.
The two best reasons to do a dilution are (1) to expand investment capital and grow the business and (2) to eliminate debt, especially debt that threatens common shareholders. RAS has done both of these things over the last four years, and the results have generally been good for shareholders, at least over the long term:
1 - RAS' quarterly operating income is up from -$33 Million per quarter to about $15 Million per quarter. Over the same period the number of shares has increased from 22 Million post-split shares to about 70 Million. Both are big increases, but a move from losses to gains is a bigger gain than the increase in the number of shares, and the largely portion of the dilution freed up from its old convertible note, which threatened common shareholders with a total loss of capital).
2 - AFFO (the number RAS uses to estimate its dividends) is up from 9 cents (post-split) in 1Q2010 to 32 cents, a 3.5x increase. Over the same period the share count is up 2.8x, from 25M shares to 70M shares. Bottom line, all shareholders benefited from the dilution over that period as RAS turned new investment into earnings.
3 - RAS resumed its quarterly dividend in 2Q2011. The dividend is up 2.5x since, from 6 cents to 15 cents. The share count was only up 1.8x over that period, from 38M to 70M, so once again, all shareholders benefited from the proceeds of the secondary offerings.
RAS nicely illustrates why secondary offerings can be a good thing.
Q: What are the merits and demerits of lending like RAS does? - Ethison
A: RAS is, for all intents and purposes, a real estate pawn shop. That overstates things in some ways, but its core bridge and mezzanine loans business is built on the need of commercial real estate owners to borrow money they can’t get from more conventional lenders at market rates. RAS charges an above market interest rate, leverages the loan (and hedges its risk) by placing it in a non-recourse securitization, carefully monitors the loan, and so long as the borrower pays, is able to provide its investors with a very high yield. . If, for whatever reason, the borower can't pay RAS takes over the property as a substantial discount, which allows it to operate the property more profitably than the borrower could. It's actually a very simple model.
The merit of this model is that it delivers high yields based on substantial spreads. That sets up a big dividend. The demerit is that it really is a business for real estate sharks. The price of getting loans wrong can be pretty high, especially if you have a deep fall in the markets like we had in 2007/2008. The good news is that Scott’s team seems to be pretty good at evaluating loans and properties; good enough that the commercial securitizations that had been built on the model got them through the great recession when just about everything else RAS had done went bust. The better news is that, partly as a consquence of surviving the recession, bridge and mezzanine loans are only a part of the business. RAS now has a thriving conduit business that complements and feeds its bridge loan business and a large RE portfolio that is delivering excellent margins.
Securitization is not critical to this model. RAS grew its business for eight years by creating loan partnerships with insurance companies and regional banks, a model it successfully returned to last year, but securitizations do mitigate risk for both bond holders and RAS.
Q: What are the most important things you should know about RAS?
A: You have to dig inside RAS numbers to see what is really happening. The pointers at the top of this thread should help with that, but here are some important things to look for as you do your due dilligence:
1 - "Net income" (GAAP earnings) is negative). For some people the evaluation ends there. You won't lose money acting on that information unless you are selling at a loss, but you may regret missing an an opportunity.
2 - RAS just raised its dividend 15% to a 15 cent quarter dividend. That makes the eighth dividend increase for RAS in 10 quarters. These increases contradict net income, so they are a hint that you should looke deeper. There are reasons for those continuing dividend increases that you won't understand those reasons if you stop your evaluation at "net income".
3 - RAS’ "net income" is consolidated from the results of 7 companies, 6 of which RAS manages on behalf bondholdlers (RAIT I, RAIT II, RAIT 2013-FL1, Taberna VIII, and Tabrerna IX) and stockholders (Independence Realty Trust or IRT). Five of those companies are profitable. Two (the Tabernas) are are paying interest to most, but not all, bondholders and paying limited fee Income to RAS. The Tabernas have been experiencing large changes in asset and liability fair values. Those changes in asset and liability values are completely responsible for RAS’ negative GAAP earnings. The companys are “non-recourse” to RAS such that they don’t drain cash from the company, It is the profits from the other five companies that keep RAS profitable and allow it to keep increasing the dividend.
4 - "Book value" looks far better than it really is for the same reasons.
5 - RAS provides two numbers, Adjusted Funds From Operations (AFFO) and Adjusted Book Value (ABV) that give a better sense of the companies actual profitability and minimumm book value.
There’s more, but that’s a good start.
Q: Is RAS likely to do a common share repurchase (a buyback)?
A: Probably not, but …
1 - RAS is in a better position to do a share buy back than it has been in over six years. It has an extremely strong cash position (the best it has had in over 5 years), low interest securitizations and warehouse lines and, compared with its three preferred offerings, a higher dividend yield on its common. That’s a great recipe for a common share repurchase, especially insofar as RAS has open offerings on its four preferred stock series. Buying back higher yield common using cash or the proceeds from selling lower yield preferreds could be, as biggerclicker recently suggested, a smart move, especially if it was made with cash or proceeds from RAS A, B, or C preferreds (which are not convertible).
2 - RAS is trading 59 cents below its convertible notes offering, which currently features a lower yield than the notes would receive if converted to common stock. It is likely that some of these notes will statt to be converted to common (perhaps even this month, before the 3Q dividend is paid). RAS has a unique opportunity to purchase those shares for less than their conversion price and to encourage more note holders to convert. RAS may not see an opportunity like this again.
3 - RAS has an existing $30 Million buy back plan in place. The plan was announced in 2007 and reiterated on conference calls several times. RAS oesn't have to use the entire $30 Million (and biggerclicker has specifically suggested “a tiny insignificant but symbolic buyback”). It would probably be enough to push the price up to $7.60 and put out a press release to the effect that RAS had repurchased a million shares (or whatever the number is) under its previously announced buy back program, which still has $22 Million or prospective purchases outstanding. Heck, it might be enough to just double check with the SEC to see if there is any objection to executing the existing plan. Rumors happen.
Q: How likely is it that RAS will dilute its common again?
A: REITs are built, in general, by raising money in the capital markets and using that cash to make real estate loans, but real estate bonds. Most REITs eventually find opportunities that justify an occasional secondary offering, and the odds that RAS will eventually dilute its common stock with another secondary is probably close to 100%.
That doesn’t mean it will happen any time soon. RAS last few secondary offerings have all raised money that have allowed it to expand its loan origination business. The last two raised a little over $100 Million. At the time of each secondary, RAS had less than 30 of unrestricted cash to work with. The secondaries financed new loans and collateralized new credit lines, allowing it to sell loans in the conduit market and make its own bridge and mezzanine loans.
RAS doesn’t need to raise cash right now. Indeed, Ethison recently expressed the view that RAS had enough cash for the next twelve months. They probably do. Here’s what they have:
1 - $60 Million in Unrestricted cash: (as of the end of 2Q)
2 - $99 Million in Restricted cash: (as of the end of 2Q)
3 - $100 Million in new cash from its sale of the rated tranches of its RAIT 99-FL1 securitization:
4 - Existing loan securitizations and real estate that are generating about $24 Million of free cash from operations a quarter, enough to, after dividends are paid, add about $10 Million a quarter to their unrestricted cash horde (that’s works out to a new $40 Million secondary every year.
5 - A $150 Million "commercial mortgage facility”. “As of June 30, 2013” RAS “had $14.8 million of outstanding borrowings under the commercial mortgage facility. As of June 30, 2013, $135.2 million in aggregate principal amount remained available under the commercial mortgage facility."
6 - $30 Million of Restricted Cash in its new managed public REIT, IRT.
RAS doesn't need to do a secondary, but lets check more closely.
Net: It's the only kind of URL that Yahoo will allow anymore:. It's up to you to supply the appropriate punctuation. Put a period between the goo and the gl. Put a / between the gl and the elybJm. Ignore the vertical bar. Include no spaces.
Q: Why are some people on this board optimistic about RAS price and dividend going up when the company is showing a GAAP loss.
A: One good answer is simply to take look at the last two and a half years of dividends. RAS has announced ten quarterly dividends over that interval. Eight of them have included dividend increases. The latest, announced yesterday, was a two cent increase to 15 cents a share.
The basis of those increases has been improvements in RAS’ earnings. That may seem contradictory given the GAAP loss RAS reported last quarter, but as has been explained in another Q&A, RAS GAAP earnings are actually the consolidated earnings of seven distinct companies, two of which have problems that are creating a non-cash losses. RAS itself is making money, at least in part because the other four companies are.
The measure of profitability that matters mosst to a REIT is normally taxable earnings, as taxable earnings are the basis of the RIETs dividends. It’s hard to measure taxable earnings until the end of the year, however, and public companies have to report their results quarterly. AS a result, REITs generally come up with a number that provides an estimate of taxable earnings. For RAS, that number is AFFO ((Adjusted Funds from Operations), a non-GAAP measure of RAS’ profitability that RAS publishes along with the SEC’s madated measure, “Net Income” as computed using FISA’s Generally Accepted Accouting Practices (GAAP earnings) and the REIT industries preferred standard metric, Funds from Operations (or FFO.
Measured via its AFFO, RAS is actually making a lot of money (enough to pay at least a twenty cent dividend if it didn’t have an NOL loss carry forward of over $30 Million that it can use to reduce its taxable income). Indeed, AFFO has been improving rapidly enough to push its dividend from 3 cents to 15 cents in just two and a half years. More increases are likely in 4Q and 2014.
Q: Why are some people on this board pessimistic about RAS price and dividend going forward
A: The answer to that probably varies somewhat depending on who is talking, and it is often the case that no reason is offered it all, but these are some of the most common explanations seen here:
1 - RAS price is going down.
2 - “RAS is losing money, and has to cook the books to gin up "adjusted" numbers to justify their continued existence.” - johnnyondaschpot
(1) (RAS price is going down) is a momentum argument. It essentially argues that anything that is going down is likely to continue to go down (and conversely that anythingn goingn up is like to continue going up. The market rarely works that way. Most stocks go up and down. When they go down they most requently become bargains because they will eventually go up again. When they go up, its not a bad idea to take profits because they will eventually go down again. Obviously, you have to make your own decisions.
(2) is simply wrong. RAS isn’t losing money. It is making quite a lot of money. It appears to be losing money because RAS manages six other companies and has to consolidate them on its books. Two of those companies are “losing money” (making non-cash adjustments to their books that look like losses even though most bondholders are being paid and many bondholders are being paid at ann accelerated rate. This gets complicated. See that already posted q and a about securitizations and their profitability to get a better understanding.
Yahoo limits space, so I'll continue in another post.
A Frequently Discussed Question
Q: How profitable are the Securitizations that RAS manages
A: Pretty profitable. The quickest way to get a sense of just how profitable they are is to look at the top two lines in RAS earnings statement: Investment Interest Income and Investment Interest Expense. While RAS does have other sources of investment interest income (loan partnerships with insurance companies and regional banks and loans that are held in its warehouse lines, almost all of this income and expense is associated with the five securitizations that RAS controls and manages. In second quarter RAS collected $31.2 Million of interest from the loans it manages, but paid only $7.3 Million in Investment Interest Expense. That’s a 77% Margin. To put it differently, RAS is keeping over three of every four dollars of interest it collects from borrowers, and nearly all of those collars are collected within the securitizations.
That’s a remarkably high number when you consider that RAS isn’t keeping any of the interest from its Taberna VIII and IX securitizations, which have been failing their overcollateralization tests for over four years now. It is likely to be several more years before RAS sees gets to keep interest from its Taberna securitizations, so it makes sense to focus on RAS three RAIT securitizations, starting with its new RAIT 2013 FL1, which RAS successfully placed last month.
The reason why RAS is seeing 77% margins lies in the combination of leverage and spread, which will be discussed in the next post (due to Yahoo length restrictions).
A Frequently Asked Question:
Q: How does RAS compute its dividend
A: REITs are defined by the industry focus, real estate, and basis on which they pay dividends. A REIT normally pays at least 90% of its taxable income as dividends. So long as they do that their real estate earnings are non-taxable. As RAS notes in its annual report (thanks to primary_sources_only), "To qualify as a REIT, we are required to make annual dividends to our shareholders in an amount at least equal to 90% of our REIT taxable income, determined without regard to the deduction for dividends paid and excluding net capital gains."
RAS accumulated operating losses (from depreciation and other sources) starting in 2008 sufficient to offset much or all of its taxable income. Hence while RAS is showing strong operating income, it isn’t paying ts dividends based on this formula. While it isn’t a formal basis for the dividend, RAS has been paying out about 60% of its Adjusted Funds From Operations” (AFFO) since it resumed dividend payments in 2011. The actual dividend is determined by the board and could be above or below that percentage, but the number has worked pretty well as a basis for estimating dividends over the last several quarters. It can be expected that this percentage of AFFO will start to grow at some point in the future. Increases in earnings will increase the pace at which RAS burns off its accumulated losses (NOL carry forwards), and the carry forwards will themselves will start to expire in a few years as State NOL Carry Forwards start to expire. Federal carry forwards don’t expire until 2028.
don’t panic adds “The dividends are paid out of cash flow - not earnings. You should look at the AFFO numbers and ignore the earnings.”
A Frequently Asked Question
Q:Whey is RAS price going down.
A: Starting with a news item supplied by marcusgetz: "The absolute level of interest rates is a prime driver of mortgage REITs like American Capital Agency (AGNC), Annaly Capital (NLY), MFA Financial (MFA), Hatteras (HTS), or Capstead (CMO). Mortgage-backed securities closely track the level of long-term Treasuries—although they’re not quite as sensitive. Falling mortgage-backed security prices hit mortgage REIT book values across the board. Nearly every REIT experienced a sizeable drop in book value. The differences came between those that were highly leveraged and those with shorter duration. If foreign investors continue to dump mortgage-backed securities, the REITs will feel the pain."
It should be added that all of the REITs named currently feature high teen's yields (typically double RAS yield) because of market perception of these risks, but that other mortgage REITs are being taken down with them. RAS is just one of many MREITs that have been down substantially in recent days, and a number are down more than RAS. RAS is better protected from the issues marcusgetz points out than most REITs because it isn't a buyer of mortgage bonds, but both a creator and manager of commercial mortgage partnerships and securitizations and an owner of roughly a billion dollars of paying commercial Real Estate. That's one of the reasons why RAS yield, even now, is among the lowest amoung MREITs.
A Frequently asked question:
Q: How big will be the effect on RAS of higher interest rates? As compared to other MREITS? RAS is already trading like the earnings,cash flow and dividend rate will not be increased.
A: A lot of people wonder about that. I asked a similar question at the annual meeting a few months ago. It was also asked at RAS' June NAREIIT presentation.
RAS should not be directly affected by interest rate increases. The loans it keeps (especially its bridge loans and mezzanine loans) are variable rate, which means that interest payments increase as rates go up, and match funded, which means that investors in its loans (third party banks and bondholders in its securitizations) get increased payments as rates rise. To the extent that RAS holds fixed rate loans, they are hedged against rate increases. Bottom line, RAS maintains a spread between the loan payments it receives and the interest payments it pays out. That spread should not decline as interest rates rise. Earnings cash flow will not diminish. The dividend should not be affected.
So long as the spread is maintained, growth in earnings and the dividend largely a function of writing new loans and creating new securitizations. That could be an issue if interest rates go high enough to discourage new loan applications, but if the Fed is to be believed, we are a long way (at least a year away) from seeing rate increases from them. Rates have been rising somewhat on fear that the Fed will take action sooner, but the effect so far has been to increase the number of applications RAS is seeing. Bottom line, the threat of higher rates is good for RAS business.
And RAS is showing clear growth. A few weeks ago they indicated that they have applications sufficient to write 50% more loans in 3Q as they did in 2Q, and do them within a securitization that gives it a somewhat better spread (about 20 BPS) and substantially higher leverage in a non-recourse structure.