Are the Commercial REITs Now Stabilizing?

It would appear from the recent quarterly reports of four commercial REITs that the credit market, at least in the ways that it affects the commerical REITs, is beginning to stabilize.  Here is a list of the four REITs that, when you consider what has happend over the last year, have reported incredible reports over the last week:

Rait Financial Trust (NYSE: RAS)

Resource Capital Corp (NYSE: RSO)  

CapitalSource (NYSE: CSE)

Alesco Financial (NYSE: AFN)

The quarterly reports put out by these four companies are all worth a read as they show four companies that are well positioned to begin expanding their businesses after a brief but sharp contraction caused by the turmoil in the credit markets last August.  In looking at the reports of these four companies, we see that all are now relatively free of short-term financings, poor performing CMBS & RMBS securities and nonperforming whole loans. 

They are all undoubtedly preparing to expand into new areas of the commercial loan market in the future as their cash situations allow.  While shareholders wait for the companies to begin expanding again, the dividends of these four respective companies can be collected as they are quite safe at their current levels.  The adjusted earnings of the four should all cover the common stock dividends for the foreseeable future.

For the most part, these companies have removed a large majority of the questions that have been surrounding them, especially after taking the appropriate write-downs over the last year.  The assets that remain are all of high credit quality and show no signs of increasing delinquency rates.  

For example, Rait Financial Trust now has no net short term liabilities on its balance sheet and its residential mortgage portfolio, which totals $3.96 billion, has only experienced $3.1 million in losses since its inception three years ago. 

In the case of Resource Capital, its quarterly report showed its business of commercial real estate and commercial finance lending has continued to thrive as can be seen in their increase production.  It does not hurt that Resource Capital is now benefiting from a fairly wide yield curve, thanks to the Federal Reserve's actions. 

CapitalSource is another example of a company that has addressed its problems through proactive measures designed to protect its funding base.  Its purchase of Fremont’s bank in Californian (minus its loans) has ensured that the company has quite possibly the deepest and widest funding base of any of the publicly traded commercial REITs. 

Finally, Alesco Financial has managed to limit loan losses and preserve cash as it prepares to either acquire new assets to maintain its REIT status or convert to a more capital efficient entity.

To close, the results of these companies should not be ignored as they show credit market dependent companies surviving and in most cases growing, if only slightly.  As the Federal Reserve’s policy of low interest rates begin to open up the credit market these companies will be well positioned to benefit.      

For Further Review:

Rait Financial Press Release

Recource Capital Corp. Press Release

CapitalSource Press Release

Alesco Financial Press Release

Disclosure: Long CSE & AFN

Comments

[NO DooDahs:]

I noted that commercial REITs were stabilizing from a technical momentum standpoint last weekend.

billrempel.com/2008/05.../

"REITs are the biggest gainers in terms of momentum, although as a class they still show negative momentum overall in my timeframe. The biggest gainers in REITs are the retail and industrial/office classes, which (yet again!) shows the confidence that “big money” has in the worst being behind us."

2008 May 08 09:45 AM

[Ames Tiedeman:]

RAS is a dividend king. But can they pay the yield?

2008 May 08 10:02 AM

[NO DooDahs:]

You'll probably find the answer to your RAS question here ...
moneycentral.msn.com/i...

2008 May 08 05:41 PM

[OJO Zafado:]

I have had some success trading CBF. The author presumes lower interest rates. The commodities bubble make this a seemingly very short term scenario. This week it was WB reporting more losses out of left field on Saving's Bank life insurance! The shoes continue to drop in the financials. There was the former "Free Money World", Fed Chairman making sanguine remarks on Thurs. More shoes may yet drop in the foreign banks. Why did the Fed increase the TRCAs with the ECB and SNB by 100% this week? We are now in a period of public insecurity and distrust. The geniuses are now trying to discern if the period is now one where inflation expections are out of control yesterday, or if there is still a short window of time left before that time actually arrives. At the beginning of last month Ford extended 0%/60 financing to nearly it's entire line of vehicles. At some point they will stop giving away cars and trucks as well as participating in the depreciation. This will be the period of increasing "idle capacity". that is recession. Consumers have maxed out their HELOCs and many banks are ending the programs. If you have paid for gas in cash lately you will be stuck in line behind someone trying to get a few dollars authorized on their Debit card. Undaunted by the bank refusing the debit due to the wife beating them to the grocery store an hour earlier, they try over and over again, holding up the line. Most of these are the ones who already had their credit cards maxed out and shut off. What has Eddie Lampert done? It was supposed to be a Real Estate conglomerate Sears/K-Mart? What is the story on this "CENTRO" of Australia? Are they going to make it? It will be a long period of recovery this time as the consummer is becoming shell shocked by the real inflation not of any real consequence to the geniuses. Ben the Dollar Slayer stated upon assuming the Fed chairmanship,"The Fed's goal will be to maintain the current expectations for inflation" . Early last month the signal was from Ford. This month it is again from the financial markets as the PST & TBT kicked off on May 1st. The ETF is not a way to invest anymore. the ETF is a plce people who have or still have money put their money so that it will maintain it's value. This is what used to be called in third world countries the currency black market. If you had c-notes or fifties you could get 15% more shekels from a Russian trying to accumulate hard currency to send home than you could from an Israeli Bank. Commercial real estate may just beginning to deteriorate! It is a vicious cycle once underway. Idle capacity generating higher unemployment, causing consumption to fall, causing big box stores like the Home Depot slaughter, to close causing more unemployment causing more idle capacity etc. What comes first the idle capacity or the fear, anxiety & uncertainty brought on by huge disruptions in what was the American way of life? We can be sure that no martter who is elected in Nov as the leader of the "Free Money World", they will apply the same formula that has gotten us to this point. Big tax cuts combined with massive spending increases. Maybe one side would fund way more health care, Student loans, food Stamps, and unemployment insurace extensions, while the other will dump a few trillion more down into the cesspool of IRAQ. It is already begun as the champions of the Bear Stearns bondholders explain the idiocy of subsidising homeloans that the lender agrees to partially write down, and helping the Student loan situation. Enrollments are expected to drop at the nations colleges by 10-15% this Fall. Hey a few trillion here and a few trillion there and pretty soon you are talking about electronic money instead of a linen fiat currency. That should help out by saving on printing costs as the national mints now turn out pennies that cost 1.25 cents to make and nickels that cost 7 cents. There is still value in the US Dollar though if only in the pre'82 copper bullion coin Lincoln cent worth 1.5 cents. It is of course illegal to melt them down so that will stop that from happening for sure! In another year or so they will of course disappear. I would be very cautious going into commercial REITs before we emerge from the Summer market. A period that traditionally has defined the lows in market cycles.

2008 May 09 04:10 AM

[jjason:]

This article is lacking in adequate information. Also, the management of RAS is responsible for a large decrease in shareholder value...especially for the shareholders who purchased RAS common stock for over $30.00 per share.

Needless to say, RAS is not the only financial firm that has lost shareholder value.

Finally, RAS is more of a lender than a real estate owner. There are better investments than RAS.

2008 May 09 05:21 AM

[E Nuff Sed:]

CSE continues to look interesting. Though the financial leverage is high - over 5X - it is not ridiculous. Quarterly earnings are still 20% below dividend payout.

AFN is probably close to going down the tubes ... doubtful if they will survive.

2008 May 11 10:02 PM

[Fish Gone Bad:]

I put in a few hours looking at these REITs. A little voice kept saying "Lincoln Bonds". Lincoln Bonds over and over again.

If something appears to be too good to be true, then it probably is. A ridiculous yield should be a great big warning sign to anyone who will listen.

Buy SLG, OFC, BPO, SPG, or EPR. Their yields are 2.75% to 6.3%

As I write this, I see that AFN is now having a melt down.

2008 May 12 03:34 PM

[copesetic:]

as long as they pay and I can exit +$ ,I'm a happy man.ABR is still down,but cfc,ras,afn have all paid and since the trades come from ira's
no capital gains.I've loaded up the boat on ticc and afn again and will be holding my breath the next 2 weeks :)

2008 Jun 04 12:45 PM