Alesco Financial: Gem in the Garbage Pile 22 comments
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Alesco Financial (AFN) reports earnings on May 6. As a REIT it has gotten no respect from Mister Market for quite awhile despite very good performance. Basically it is a case of a story that sounds too good to be true, but in my opinion is in fact true.
Management has guided for a dividend this year of 25 to 30 cents a quarter. There is no reason to think they will not make it.
A 25 cent dividend for Q1 has already been paid. At yesterday's price of 2.76 a share, 25 cents a quarter would be 36 percent for the year. Most investors look at a dividend like this and see a company in trouble.
Alesco has no potential liquidity problems. No debt is due until 2012. All investments are financed with non-recourse debt where the worst thing that can happen is that Alesco loses its investment. No margin calls can be issued to Alesco. The company has about 100 million dollars of unrestricted cash on hand which is about 1.67 dollars per share (as of 31 December). Liquidity is king right now and Alesco has it.
The frightening thing about Alesco is the huge losses it has reported in recent quarters. These have been due to an accounting technicality. Alesco lost its 30 million dollar investment in each of four Kleros CDO's. Although the loss was 120 million dollars GAAP accounting rules required Alesco to report a loss of over 1.2 billion dollars. This has resulted in a huge negative book value. SFAS 159, which took effect on 1 January, will correct this. The Q1 report will show a huge profit as the loss will drop from 1.2 billion to 120 million and Alesco book value will become a positive value around five dollars a share.
Alesco's major source of income is TruPS securities issued to over 300 banks and insurance companies, about 90 percent to banks and 10 percent to insurance companies. If you think large numbers of banks are going to fail in the next couple of years avoid Alesco. If you think the number of failures is going to be relatively small Alesco has a great risk-reward ratio. Even if the dividend is cut in half over the next couple of years the yield at the current stock price would be 18 percent. And the dividend may not be cut.
For what it's worth insiders have bought stock on the open market at higher than current prices but no insider has sold a share since the company went public.
Disclosure: Long
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This article has 22 comments:
Since all four Kleros CDO's are still generating income for the AAA tranches they may decide not to liquidate even if in default. A forced liquidation in the present depressed market may leave them with a loss instead of an income stream. I assume management will discuss the REIT / non-REIT situation in the 7 May CC as they have in the past.
However the income flow from Kleros, even though diverted to the senior tranches, is needed to keep Alesco REIT qualified. Alesco management has stated that liquidation of two or more of the Kleros would force Alesco to take action to maintain REIT status or else consider changing to a PTP or just dropping REIT and becoming a normal plain vanilla corporation.
A 36 percent dividend (down to 32 percent with the stock now at 3.05) is not available risk-free. The question that is a judgement call is whether the risk/reward ratio is favorable. My answer is yes. Time will reveal if I am right or wrong.
So I sold all of my TMA and BXXX and bought more AFN.
Now I'm relaxed!
I think we all are surprized by the bargin prices and that we are in
rare oppertunity in time.
There may be a special dividend later this year if Alesco closes out the credit default swaps which currently have a huge profit. How the company is going to handle this situation and the tax/dividend consequences is uncertain. I expect this subject will be covered in the 7 May conference call. In any event, how to deal with the tax consequences of out-sized profits is the kind of problem I like companies I have invested in to have.
delivers on the high side...e.g. 18% ++ dividend and eventual growth.
Anyone agree??
IMB deferring will cause 5 of 8 TruPS CDO's to stop paying income to Alesco. Alesco will lose about 40 to 50 percent of it's cash flow, an obvious downer. In about a year income from the first of the five CDO's will resume and by about two to two and a half years all five will have resumed paying Alesco. If IMB survives all deferred payments will be made up. The fate of the dividend depends on whether Alesco stays a REIT or not. The next dividend announcement date is about 10 June. We should know something by then about future dividends.
Alesco will not go bankrupt. It has about $2.50 per share in cash, about $2.00 of it unrestricted. No principal on any of it's debt is due until 2012. No one can issue a margin call to Alesco. It will still have cash flow of about 10 to 15 cents a quarter.
This IMB situation came as a surprise. Just two or three weeks ago the IMB CEO assured the street that the preferred would be paid. IMB has about 800 million in cash and total preferred dividends are only about 7 million a quarter. To make a bad situation worse IMB is the largest exposure in Alesco's TruPS portfolios, about 2.4 percent of the total.
As I write this Alesco is 2.54, down another 39 cents. I intend to hold on but I invest on a many year time-frame. Over the next few days and weeks I have no idea what is going to happen. If I was looking at Alesco for a new investment I would buy some now. The risk-reward situation is very good. But the risk is high so I would make only a small investment and only if I was prepared to hold it for several years. The situation will be clearer after the dividend announcement in early June and the annual meeting on 18 June.
Is there a good probability that such a scenario could occur ?
Assuming there are a modest number of deferrals in the future Alesco is OK. If a large number of banks flat out default Alesco is in big trouble. So far there have been 5 or 6 (hard to tell) deferrals and no defaults. Ten percent of the TruPS are from insurance companies and none of them have deferred.
Thursday morning's low for Alesco was 2.16. At that point it was selling for less than cash on hand and near unrestricted cash on hand. 125 million unrestricted cash for 59 million shares. You do not see situations like that often.
Thanks
Alesco's stock price will be to a great extent news driven for a period of time. If IMB finds a source of capital Alesco may pop 50 percent or more in a day. A couple more bank deferrals and it may be at a dollar a share. The committee looking at strategic directions may find a buyer for the company at double the current stock price. Alesco may become a liquidating trust. There are many possible developments that could make the stock price pop either way.
About the only development I can not see is bankruptcy. With 125 million in cash and no debt due for four years I just don't worry about that. But there are a lot of things, good and bad, that could happen in the next few months.
As far as IRA or regular account goes I would put Alesco in a regular account. Your IRA is for retirement. My preference would be to keep boom or bust stocks like Alesco out of an IRA.