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  • siegelventures siegelventures Jun 24, 2008 10:06 PM Flag

    Let's understand the dilution

    Here is some simple math. 3-31-08 Assets 17.701B, Borrowings,14.397B. Equity, 2.654B Share Outstanding 221M Fully Diluted Value Book Value = 12.00 share Debt to Equity=5.84:1

    As of Close of Freemont Deal: Assets 13.965B, Borrowings, 11.032B, Equity 2.933B, Shares Outstanding (oversubscribed) 270.5M Fully Diluted Value Book Value = 10.84 share. Debt to Equity 3.76:1 Additional Lending/investment capacity = 3.365B + 700m in cash = 15.25 share.

    CSEs recent activities with the Freemont deal will result in a 23% rollover of assets from low yielding questionable residential mtg assets, to higher quality commercial yields available today that should easily increase total revenue by 12% + fee income all of which flows to the bottom line.

    PLUS they own a bank which pays for itself at a lowest cost of funds in the best market in the WORLD and when the market turns instantly becomes a valuable asset/franchise with a startup $5B in deposits. PLUS PLUS they monetize the health care group. PLUS PLUS PLUS they do it all while their competition can't borrow very much! ALL this activity equals increased market share.

    Delaney could have waited the downturn out, but he saw the opportunity and grabbed it. Wall Street and CSE's long term investors pre-bought the new issue and Delaney backed it with 350K shares out of his own pocket. Unfortunately for some, the new book value taken on its face is a bit confusing allowing the shorts (probably assisted by insider info) to have their field day Monday with the help of a erroneous mid-day Reuters press release.

    The very good news is CSE grows in the downturn and investors love the action! With the increased revenue from the turnover of assets, figuring a conversion from a REIT in '09 and a 10 PE, we've got a $23-25 stock.

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    • Mikee may be right on a short term basis that things look TA pretty bad.

      But remember not too companies many out there with:

      1) Closing In July "immediatley accretive" FIL acquisition;

      2) FIL deposits will produce much lowest cost of funds going forward on new loans;

      3) CSE will have more than $2 in earnings going forward, assuming no more write-downs from best underwriter / originators in middle market finance industry.

      4) CSE's undervalued to market healthcare reit will be spun off "in short order" creating nice book value/cash increase.

      So for those reasons on a 3 to 6 month basis risk reward is excellent. Thus I think sp will not revisit all time low of CIT panic March low @ $7.6. But it is quite possible we could see the mid 9's like in March.


    • "THEY' the royal they. Or the conspiracy they. What the hell are you talking about. We disagree.....And.... soon we will see who is right in the short run and the long run. I suspect we are not in total disagreement on the long run. But I sure the hell know we are for now. This puppy can be bought lower. My only point. When the rose colored view folks get downtrodden, it is time to buy. Is that you?

    • Book value? Book value?

      So you are saying that selling shares at book value is a good thing? I certainly hope their NAV is higher than book value and it is nav that is the measure.. not book value.

      CW, if you think book value is the measure by which you sell additional shares you clearly know very little about how reits are supposed to work.

      You also have to look at IRRs. Let's say CSE were to maintain its dividend of $2.40/share.

      30M shares @ $2.40 is $72M.

      If all these opportunities are in the marketplace you are better off doing $330M of debt (proceeds from 30M shares @ $11/share that was raised) at say 8.14% which is what ALD just issued 5 year unsecured paper for....

      $330M @ 8.14% is $26.8M

      Which is the better alternative to take advantage of market opportunities? Which method, more debt, or more equity, generates greater returns for shareholders. Those of you who would actually say issue equity best explain what IRR is needed to generate an addtional $45.2M of cash flow to cover the difference between issuing more equity versus taking on more debt.

      I think you now can see why I am convinced CSE will de-reit. It is because of this analysis that I believe mgmt has decided that raising equity at $11/share makes sense to take advantage of opportunities for a de-reited company that will pay a much lower dividend.

      So redo the above and say CSE puts a 5% dividend out there in a de-reited corporation in 2009.

      $330M capital raised (30M shares @ $11/share) @ 5% dividend is $16.5M. Now you have saved $10.3M/year over issuing more debt.

      This is the proper analysis to do in terms of determining both issuance of debt versus equity and whether to stay a reit or de-reit.

      If I am wrong I'll eat my own poop on it but you now can see my reasoning for the de-reit thesis and I will be here to buy in when the high income investors exit and the value investors come in because CSE as a non-reit WITH A BANK could be something special.

      • 3 Replies to ferdiefor
      • ferdiefor,

        "If all these opportunities are in the marketplace you are better off doing $330M of debt (proceeds from 30M shares @ $11/share that was raised) at say 8.14% which is what ALD just issued 5 year unsecured paper for....

        $330M @ 8.14% is $26.8M "

        wouldn't that 26.8m be anualized
        so 26.8 x 5 yrs = 134 mil
        granted i did not take off for paydown of principle but i also did not compound accured interest
        long cse again as of 6/23

      • I agree with most of what you said, but there is something missing from the analysis. Most of the earnings are being generated by a taxable REIT subsidiary which is taxed and does not have to pay dividends (within some reason) to CSE, the REIT. Only when these earnings are distributed to CSE will they be included in income of which 90% needs to be distributed. Thus, they can reduce dividends without de-REITing. In other words, they can still receive a better tax outcome for other earnings not within the taxabel REIT structure. Of course, there are other considerations in remaining a REIT besides the income distribution.

      • I am a significant holder of REIT shares. CSE has restructured. It did so not out of the need to "de-reit" as you say, but because the cost and availability of capital was best found in an FDIC institution vs. a money center bank. AND, more importantly it was found in the middle of a credit crunch! The Street understands this achievement and will reward shareholders in due course.

        CSE now has 4.115B to reinvest, which should conservatively produce an additional 200M in interest rev and 45M in fees. That's .91/share without becoming a pure bank. Delaney's decision to convert to a pure bank is under NO stress now that he has done his deal. The dividend will be cut some, but he must distribute 90% of cash flow. He has already announced his asset ($36m) write down for the 2nd quarter. There may be future write downs, which the Street is hedging, but as of today the CSE REIT is doing just fine.

        July conference call and results should be positively entertaining. If guidance for the 3rd qtr has dividend anywhere north of 15% the stock goes up 20%. You've got great mgt with the Street's confidence.

        The facts are incontrovertible. The NEWS is 100% out of this stock. So are the shorts. So is the intrigue. Buy the dips. To be sure, the market will.

    • siegel,
      Where've you been? Are you a recent convert, inspired by the underwriters' bullet points, or a long suffering shareholder like the rest of us?