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CompanyRAIT Financial Trust
Submitted By:noahfarb
Member Rating:33.53
Submitted On:11/15/2010
Stock Price At Recommendation:$1.63
RAIT Financial Trust Profile
Star Rating*****
HeadquartersPhiladelphia, Pennsylvania
IndustryProperty Management
Market Cap$178 million
Competitors & Peers

Chimera Investment (NYSE: CIM)

Annaly Capital Management (NYSE: NLY)

American Capital Agency (Nasdaq: AGNC)

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:

RAIT Financial Trust's (NYSE: RAS) business consists of the following:

1. 1.3B loan book- consists of match-funded, non-recourse CDOs. The interest margin from the loan book contributed approximately 40% of revenue for Q3 10.

2. 824MM real estate portfolio- 67% multi-family, 25% office, 5% retail, 3% other. Avg. occupancy of portfolio is 78.5%. Rental income contributes about 50% of revenues.

3. Other debt securities- funded with non-recourse debt. Primarily contributes fee income.

4. Property management and broker/dealer services- fee income.

The company got itself in trouble with investments in residential mortgage backed securities. It has since rid itself of any exposure to residential mortgage backed securities. The company is paying down its recourse debt and focusing on its core business of commercial real estate lending, and owning and managing commercial real estate.

The stock has been volatile, and was hammered following the Oct. 22 earnings call. Part of the concern is the 143MM senior convertible notes that are due (the holder has an option to convert or call the balance) April, 2012. This will either need to be paid off or refinanced. The total recourse debt is approx. 330MM.

Since the company is going through a transformation, it is not the easiest to analyze. I have applied a very simplified technique that I think is valid. It's basically a liquidation value. Please share your thoughts.

Since the loan book and their investments in TruPS and other debt securities are encumbered by only non-recourse debt, let's just assume those fail, and that nothing comes from them. (I actually believe these assets have some value in excess of the debt.) This will wipe out the restricted cash on the balance sheet, and almost all of non-recourse debt.

What is left?

824MM real estate portfolio
25MM cash
35MM NOL (tax asset)

64MM Non-Recourse debt on real estate
330MM Recourse debt (143MM due April 2012)

Subtract 394MM from 884MM, and you have 490MM left for the holders of RAIT's common equity. The market cap today is about 180MM.

Now that is a margin of safety if I've ever seen one. Additionally, recent leasing activity has been very strong (we will see the economic benefits in Q4 10 and Q1 11), management bought back a bunch of stock earlier in the year, and they seem to be making all the right decisions toward reviving their business. I'm looking for a big 2011 for shares of RAIT Financial Trust.

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