That to me was the most interesting and telling part of the call. In response to a question from an analyst who asked why should we believe the 13% divvy is safe, CEO Jonathan Cohen essentially chuckled and said (paraphrasing): "They said our divvy wasn't safe at 24% during the worst of the crisis, and we believe it is much safer now given that CRE is recovering, our new growth initiatives, and the repositioning of the portfolio to own more controlling positions (for instance, by selling the $39M subordinate loan and eating the $14M writefoff) and stuff the CDOs with more secure CMBS".
I listened closely on the call because like everyone else I had questions about the new impairments and I wanted to be prepared in case there was a big pullback if people freaked out on the GAAP number. Now that I've heard their explanation, I will be ready if there is any major weakness in the SP.
GL to all.
I looked up match funding so I could try to understand what you are talking about. It seems that many financial insitutions typically try to immunize their interest rate risk by matching the maturities of the assets and the liabilities and they also will use interest rate hedges in order to turn fixed into floating and floating into fixed. Thus, they just are trying to keep a steady spread.
This would seem to contradict what you are suggesting in your post. You seem to suggest that RSO have made interest rate bets, where the spreads can get wider and thus RSO will make more money. So, you are saying they have fixed rate liabilities and floating rate assets, right? I'm just trying to learn from someone that has done their research.
Thanks in advance.
I remember what you describe from my textbooks :)
The important part "matched funded variable loans" of what the person you are replying to was saying was 'variable loans'
Its true you want to match your liabilities and assets (money you borrow and money you receive so that they end at the same time, otherwise, if your loan runs out, and you have to get it again at a higher rate, then you get less income in the future.
In this case I think he is implying that the loans that rso is getting paid on are variable, in that they will be libor + xxx%, or prime + xxx%, so as interest rates go up, rso will be earning higher income on those loans proportional to how high the libor or prime rates increase.
That is what the CEO said in the last CC and there is a transcript available if you look. He said that if libor go's up 1% we will make 3 mil more and if it go's up to 5% we will make 15 mil more with out having to do any more work. As far as having more default's if rates go up, that could happen but I don't know how to forecast that one.
PSA would be a good example of a REIT that is a decent inflation hedge.
PSA owns lots of storage properties outright. Storage properties are known for being able to raise rates with inflation because they have month-to-month leases. (Contrast with office leases or mall leases which may have 10-year terms) PSA has almost no debt. It has a bunch of fixed-rate preferreds rather than debt.
If we experience a lot of inflation, PSA's cost of capital will remain the same but its rents will increase (both expressed in dollar terms rather than real terms).
I don't own any PSA. I don't view it as being cheap, but it fits your request for a REIT that owns property but has fixed rate capital.
Smooth, you are a valuable asset on every message board where your posts happen to appear.
Thanks again. Wish I were as resolute about posting as you and as informed to make such disclosures.
I just wanted to say thanks.
I like RSO but doubt dividend goes up. They are starting to think about the day when the CDOs run off and how to mantain the dividend as that happens. Need capital to invest outside of CDOs so will keep doing secondaries to get that capital.
The transcript does not catch eveything (and it's sometimes a little hard to follow). Nevertheless, here's the transcript for reference.
You can still replay the CC until April 09, 2011 by dialing 888-286-8010, passcode 72349676.
Me too, as far as buying more on a pull back in sp. I love the idea that this stock is an inflation hedge since it is my largest holding. And am looking foward to a div increase in the last half of the year. I see no reason for them to make less than .33 a quarter in 2011, which would be $1.32 a share. With all that cash on hand I don't expect another offering this year. Of course this does depend on the economy holding up.