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# RAIT Financial Trust Message Board

• ki1gore_trout ki1gore_trout Oct 7, 2013 8:38 AM Flag

## Dilution is the killer

Like the other poster mentioned, dilution has been the killer.

Exactly three years ago I ran a series of calculations that forecast the range price range that RAS would be trading in today. On October 5 2010, I predicted that RAS would be trading at a maximum (split adjusted) price of \$11.10, a probable price of \$8.10, and a low price of \$4.80 three years out. I calculated those numbers on the basis that RAS would have diluted to 150 million shares --- equivalent to 50 million pre-RS:

5-Oct-10

7. Running the same calculation on 150MM shares yields a share value of \$3.70, \$2.70, and \$1.60 (after split those prices are \$11.10, \$8.10, \$4.80)
===========

It wasn’t five minutes before Ol’ Doctor Pepper came flying out of his rathole to tell me how bogus he thought my calculations were:

============Fouler's calcuations======

7. Running the same calculation on 150MM shares yields a minimum share value of \$5.10 to \$7.80 (\$15.30 to \$23.40)

These are more realistic estimates than you have provided. They are based on actual numbers numbers taken directly from RAS last three quarterly reports. They suggest that the minimum value we can expect for RAS going forward is \$5.10 (\$15.30). They suggest that \$11.70 (\$35.10) is well within the realm of possibility, even with a relatively low PE by REIT standards. That suggest a gain in the range of 3x to 7x over today's price.
===========

Note that the ONE thing I underestimated was the amount of dilution. I thought there would be 50MM shares (150mm prespit) in 3 years. They’ve actually issued 70MM (210 million pre-RS).

If I had figured the dilution accurately my projections for three years out would have been PERFECT. So, DILUTION is the killer. Every time the stock pokes its head up they kill it with a dilution bomb.

Ol’ Doc Pepper thought this was going to be a \$35 stock by now, LOL!

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• got that ratio backward, son: that was a *REVERSE* split
150 million shares now represent 450 million shares pre-split.

• You constructed a bogus calculation, K1, and then used incorrect numbers in it. What you call my calculation is actually YOUR bogus calculation with correct numbers plugged in. Let me state this more simply: the calculation I posted is actually your estimate if you use correct numbers (you know, the ones that RAS reports to the SEC). We've been through this before. You posted the same lies a couple of months ago. Then, of course, the issue was projected price. Now you want to use it to talk about how dilution is a "killer".

One problem. Dilution hasn't been a killer. Let's look at the numbers (you know, the one's reports to the SEC).

1 - Over the last four years the number of shares has increased from 22 Million post-split shares to about 70 Million (a big dilution, and you did well in your estimate of how many shares it would take for RAS to get free of the old convertible note).
2 -Over that same period quarterly operating income is up from -\$33 Million per quarter to about \$15 Million per quarter (a pretty big increase). You did badly there. Back then you thought that RAS business model was dead.
3 - We don't have AFFO numbers for 2Q2009 (although they were surely negative), but we do have them for 1Q2010, when they came in at 9 cents per post-split adjusted share. Today AFFO is 32 cents, a 3.5x per share increase in the dividend. 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.
4 - And while there was no dividend in 1Q2010, there was a quarterly dividend in 2Q 2011. The dividend is up 2.5x, from 6 cents to 15 cents, over that period. The share could was only up 1.8x over that period, from 38M to 70M, so once again, all shareholders benefited from the proceeds of the secondary offering.

RAS has announced \$1.02 in dividends since the end of 2010. Not bad for a stock that was \$2.90 two years ago.

• I should note, in addition, that 150M shares was your estimate for the number of shares RAS would get to in digging itself out from the Convertible Notes. You actually were pretty close on that one. Kudos.

As usually, however, you feel the need to #\$%\$ defeat from the jaws of victory. That dilution ended in 2010. Dilution since then has been used to rebuild the loan business, an effort that has been very successfully. I've already shown that all shareholders have benefited from that dilution. That pretty much invalidates the thesis that "dilution is the killer". Quite the contrary, Dilution is the path to earnings and dividends IF the money can be used to expand the business, and that's exactly what has been happening.

But your thesis is just wrong.

If dilution ends a threat of having noteholders steal the entire company from common shareholders (e.g. share price equals zero) it is a good thing.

If dilution allows a company to make investments that benefit all shareholders, including the new ones, it is a good thing.

I think you will find it difficult to find a dilution over the last four years that doesn't meet at least one of these conditions. The early ones saved the company. The later ones have built up earnings and what box recently called a "fancy dividend" (and at roughly a 9% yield, it is fancy).

RAS has announced \$1.02 per share in dividends (post split) since it resumed paying a dividend two and a half years ago. It has announced 93 cents a share in dividends since it started paying monthly dividends two years ago. It has announced/paid 40 cents a share of dividends since it announced the March secondary ("dilution") that put it back in the securitization business. It has announced 50 cents since the dilution that set up its bridge loan warehouse facilities.

When there is a business opportunity and dilution lets you take it, you should take it.

• Good one K1. Maybe you should dig up some of Baghdad Bob's statements about book value as well.

• Book value is convoluted. They carry the Taberna at cost, which overvalues it significantly. At the same time, they carry all of the Real property they own at acquisition cost, which probably significantly understates its value. Further, the Tranches of RAIT 1&2 that they bought back at big discounts are carried at what price?

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