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JER Investors Trust Inc. Message Board

  • grleader grleader May 7, 2007 10:24 PM Flag

    earnings

    How bad is this earnings report?

    Is it good or bad for future earnings that they will up their debt/equity ratio?

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    • dividendaristocrat -- I appreciate your posts. We also seem to have/had positions in a couple of the same companies like EZPW. Since your risk-reward approach may be similar to mine, I was wonndering what other stocks currently look attractive to you. I'm just looking for new ideas if you have the chance to reply. Thanks.

    • " A lot of good points have been brought forward re earnings, however they did miss. "

      Miss what? They had a fine quarter.

      It sounds like you are letting the inability of some wall St analyst to predict JRT's earnings drive your investment choices.

      I think that is retarded.

      Wall St analysts have a very hard time with MREITs because.

      1) The GAAP/Taxable mismatch makes net income unpredictable and a useless measurement of dividend capacity.
      2) The pace of Investments is lumpy. If JRT doesn't see any good deals they won't buy. If borrowers chose to prepay CRE loans, you can't prevent it.
      3) The presence of a CDO's with a ramp/replenishment facility causes the balance sheet to be plastic
      4) Swaps/hegdes and mark-to-market accounting cause book value to be plastic.

      The net result is you cannot preduct JRT's (or any other commercial MREIT's) GAAP results on a quarter by quarter basis. You need to listen to the CC's, and understand what the big picture is.

      There is a reason that JRT has over 3000 loans on the books (in CMBS) and only 4 are in special servicing. There is a reason JRT has experienced only $0.3M of permanent impairments on over $1.4 Billion in assets. Credit Culture at JRT is strong.

      ------
      This is what you focus on:

      http://phx.corporate-ir.net/phoenix.zhtml?c=188639&p=irol-dividends

      Do you see a trend?
      -------

      A significant amount of my net worth is tied up in JRT, since from back when the stock was trading in mid 15's. That happened because JRT's investment pace ground to halt as they refused to participate in the speculative excess in CRE lending circa mid 2006.

      It is truly the case that Wall St and Mr Market are biased against sound business models in this sector. If you keep that in mind, you can make *alot* of money.

      AFN is a different, much riskier (and much more leveraged) business model than JRT. IMHO it's too soon to tell if it will work out.

    • A definite miss on my expectations. Borrowings are necessary in this business, but if they become over leveraged then this becomes a much riskier stock subject to possible/probable reduced margins especially on future borrowings. Please note that originally they were only planning to maximise borrowings at 3x equity (currently standing at 3.6x I think). Now they are talking 4x to 6x.

      If you look at the average yield on their various investments 8.1% to 8.6% (also 14.2% on a very small portion of their overall investments) then look at the cost of the new $60m private placement of preferred at 7.24%, then their margins must shrink unless they can increase the yield on future investments. This does not mean that their revenues/net income wont grow. With increased borrowings and smart investment they probably will grow but more slowly on a borrowed $ to investment basis.

      One further thing to note is that even if interest rates drop in the next few years, they will still have to pay 7.24% on the preferred stock up to 2012. Also, if they do nothing with the $60m received from this placement, then they will still have to pay the 7.24%. So hopefully, they can use this to pay off more expensive debt or use it quickly on the investment front to start generating income from it.

      • 2 Replies to zad36
      • " A definite miss on my expectations. Borrowings are necessary in this business, but if they become over leveraged then this becomes a much riskier stock subject to possible/probable reduced margins especially on future borrowings. "

        Given JRT's past credit performance this is entirely reasonable. JRT's debt at this point is CDO's without recourse to the company, warehouse lines and preferred stock.

        This was a planned decision and approved by the BoD's independant memebers, who are a pretty sharp bunch

        "If you look at the average yield on their various investments 8.1% to 8.6% (also 14.2% on a very small portion of their overall investments) then look at the cost of the new $60m private placement of preferred at 7.24%, then their margins must shrink unless they can increase the yield on future investments. "

        The company is leveraged on two levels. First there is leverage at the asset level, and then a second layer of leverage at the equity level. This is all well and good.

        "One further thing to note is that even if interest rates drop in the next few years, they will still have to pay 7.24% on the preferred stock up to 2012. "

        Issuing $60 of preferred stock @ 7.25 is preferrable to issuing $60M of common stock @ 9.5.

        Anyways JRT's trategy is to try and make everything fixed rate to lock in spreads vs trying to float up and down with the tides.

        "So hopefully, they can use this to pay off more expensive debt or use it quickly on the investment front to start generating income from it."

        At the start of the year, the target for investments was $800M in new assets. As of 1Q07, JRT has originated $400M of assets. So I'm not too worried.

      • that also concern me.

        1. The book value is nearly $1 less than last year and
        2. The payout (.44c) is higher than their net income (.38c) which means that they are eroding stock value to maintain payouts while at the same time increasing borrowings.