CBRE Realty Finance Can Still Run

CBRE Realty Finance (CBF), a commercial originator and investor, recently reported solid third quarter results outside of impairment charges. The results sent shares soaring 23% earlier in the week. The real question for CBRE going forward, however, is whether or not these impairment charges will be one-time or recurring.

During the quarter, CBF recorded a net loss net loss available to common stockholders for the third quarter of $50.0 million, or $1.64 per diluted common share. Adjusted funds from operations ("AFFO") totaled ($48.1) million, or ($1.58) per diluted common share. These losses were driven by the recognition of $54.7 million of impairments on the Company's two foreclosed assets.

Excluding the impairment charges, AFFO would have been $6.6 million, or $0.22 per diluted common share -enough to cover the $0.17/share Q3 dividend.

CBF said it expects to achieve its previously stated 2007 dividend guidance of $0.80 per share from core activities with an expected dividend of $0.21 per share to be declared in the fourth quarter, which equates to a current yield of about 20%.

Most tellingly, book value per diluted common share was $9.65 at September 30, 2007, after the impairment charges, meaning CBF is trading at just 55% of book value.

It remains to be seen if CBRE's portfolio will continue to perform going forward, which traders are obviously betting against at this point. CBRE said in its earnings release that "[a]s of the date of this press release, there are no non-performing loans within the Company's debt portfolio."

Another issue for CBRE is future earnings given limited origination activity and access to funding. As existing investments payoff and mature, CBRE has thus far been unable to redeploy the capital into higher-yielding investments due to internal capital needs. Now that the balance sheet has stabilized somewhat, it will be interesting to see how CBF chooses to put to use available capital. The Company's existing joint ventures appear to be a strong niche for CBRE, one that might well be worth expanding given the limited availability of CDO issuance for funding purposes.

Overall, given the 20% dividend yield and upside potential due to the gap in market price and book value, CBF appears to be strong speculative play.

Disclosure: none