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RAIT Financial Trust - Revisited
August 14, 2010
RAS became one of the worst performer last week. Panic selling's brought this stock down -31.03% in four trading sessions.
In our article published in April 25, 2010 after the company announced its first profitable quarter since 2008 ( Why RAIT Financial Trust Looks Like a Comfy Investment ), we consider it one of the possible future dividend generating stocks.
The company's fundamental continues improving thereafter. This can be seen in its recent quarterly reports:
* Please note that all figures are in millions of dollars expect EPS, which is in dollars.
From the above table we can see:
1. The company has been profitable three quarters in a row. If the trend continues, we may see well over $1.00 net income this year.
2. FFO (Fund For Operation) is still negative but the loses become smaller every quarter.
3. The company had its first quarter with taxable income : +$0.08 against -$0.05 in Q1, 2010. The company said that it has $19 million in remaining in losses that can be balanced against gains. If this trend continues, dividend may resume next year.
4. We saw its first quarterly positive cash flow in years: $10.40 million; This increased its unrestricted cash by roughly $10M from 1Q to $28.9M.
5. Better debt to equity and provision for losses numbers. Recourse debt was reduced from $397M to $341M, a $56M reduction. $13.5M of CDO notes were repurchased at what appears to be a considerable discount (less than 50 cents on the dollar; perhaps substantially less that 50 cents on the dollar). This should have a noticeable positive effect on interest margin in 3Q and beyond (certainly over $150K per quarter).
6. We may see further growth in its income. Now its owned properties increased from 34 to 47 within one year and the owned multi-family units increased from 6,367 to 7,893.
6. The company's income stream is now more stable as most of its owned properties are multi-family residential rental properties. Occupancy rate has been higher as more people adapt renting instead of buying.
Then, what triggered the big drop last week? All were from their Prospectus Supplement published on August 6, 2010: a possible 17 million share dilution. Here is what they said in the document:
"We have entered into a sales agreement with JonesTrading Institutional Services LLC, or JonesTrading, relating to our common shares of beneficial interest, par value $0.01 per share, or common shares, offered by this prospectus supplement and the accompanying prospectus. In accordance with the terms of the sales agreement, we may offer and sell up to 17,500,000 common shares, in the aggregate,
from time to time through JonesTrading, as our agent for the offer."
"Sales of common shares, if any, under this prospectus supplement and the accompanying prospectus may be made in transactions registered under the Securities Act of 1933, as amended, or the Securities Act, (1) in transactions that are deemed to be “at the market offerings?as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange or (2) in privately negotiated transactions. The net proceeds we receive from the sale of our common shares to which this prospectus supplement relates will be the gross proceeds received from such sales less the commissions or discounts and any other expenses we may incur in issuing the common shares. See “Use of Proceeds?and “Plan of Distribution?for further information.
JonesTrading will be entitled to compensation of up to 3% of all gross proceeds from the sales of any common shares sold pursuant to the sales agreement. In connection with the sale of the common shares on our behalf, JonesTrading may be deemed to be an “underwriter?within the meaning of the Securities Act and the compensation of JonesTrading may be deemed to be underwriting commissions or discounts."
But I believe that this is an over reaction and more from short attack not public panic selling.
1. This is not a new offering. It is only part of its previous $750,000,000 offerings registered with SEC in August 6, 2008.
2. It is very doubtful that RAS has sold even a single share under the agreement with Jones Trading. It only indicates that it intends to do it from time to time in the future when the price is right. This weeks price movement has been about fear of dilution; not about actual dilution.
3. The company has enough cash and means for its financial needs.
It is a bad thing for current shareholders when the share price was cut by 31.04% in one week. But it is a good thing for bargain hunters or for the shareholders to average down.
We may see it to test its year low of $1.00 again in the near future and that will provide another golden opportunity to buy its shares cheap.