Davis F, Taberna (old post was getting hard to access)
Davis, you posted:
"That said, consolidation wipes out any intracorporate transfers. I would expect, given the structure of the Tabernas, interest income that is redirected to senior tranches winds up being consolidated out as it is ttansformed from interest to principal. I would expect further, given that RAS doesn't report principal repayments on the balance sheet, that the diversion is invisible in consolidation (e.g. it isn't reported as investment interest income). More to the point, if it didn't I would expect there to be a balancing entry somewhere that constitutes the diversion of interest to principal. Since I don't see the latter, I have to assume the former..
No offense intended, but not sure what you're going for here, and that's not the way GAAP works. If there is positive spread income, it hits the P&L. If that spread income, which is also cash flow, is re-directed to principal pay-down in Taberna, that is reflected on consolidated balance sheet, as a reduction in liabilities.
RAS then makes a decision whether to include that P&L income in their published AFFO. They really should take it out, in the same way they take Taberna out of adjusted book value, but for whatever reason they don't.
As far as reconciling guidance, if they only stayed flat with their 1H AFFO they would be above the $1.23 high end of cash flow guidance. But wouldn't make sense because earnings are back end loaded.
If you're skeptical, call the company IR and try to get clarification.
If you think I'm skeptical, maybe you should look in the mirror. I'm just plain realistic. And yes, I've spoken to Andre at Investors Relations and to the CEO at shareholders meeting. And I trust that since they mentioned no problems that there are no problems with Taberna. But I know you guys will keep trying to create a problem where none exists.
That said, elimination of intracompany transfers during consolidation is exactly the way GAAP works. To the extent that the RAITs pay interest or principal to RAS (especially on senior tranch bonds),, the principal and interest paid disappear in consolidation. They simply do not appear as an interest payment. To the extentn that RAS has loans on foreclosed properties that are in the RAITs or (in a couple of cases), the Tabernas, the interest that RAS pays disappears in consolidation. It simply does not appear as investment interest income.
What you describing is even more complex than that: a set of transfers on the earnings statement that have effects on the balance sheet. There are, of course, a number of things that happen on the earnings statement that affect the balance sheet. A cash loss on operating income would result as either a debit from assets or liabilities (depending on how the shortfall was made up. A cash gain on operating income would result in a credit to assets and/or liabilities, depending on how the income was used. The sale of ann asset results in a profit or loss on one line of the earnings statement and multiple changes to the balance sheet (a debit to tthe value of assets and a credit or debit to assets and/or liabilities. In every case I've mentioned, however, the debit or credit flowed from the earnings statement ot the balance sheet (the only direction they should ever flow in.
A payment of principal on a loan in the securitizations flows directly to the balance sheet (as restricted cash) without ever touching the earnings statement. A distribution of principal from restricted cash to bondholders in the securitizations flows directly from the balance sheet to the bondholders, again without ever touching the earings statement, which is pretty much the things should be. There are four lines in RAS earnings statement that are exceptions to this. I'll discuss them in my next post.