What Caused RAIT Financial Trust's Stock to Drop?

| About: RAIT Financial (RAS)
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RAIT Financial Trust (NYSE:RAS) became one of the worst performers last week. Panic selling has brought this stock down 31.03% in four trading sessions.

In our article published on April 25, 2010, after the company announced its first profitable quarter since 2008, we considered it one of the possible future dividend generating stocks.

The company's fundamentals continue to improve 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 for 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 losses 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 losses that can be balanced against gains. If this trend continues, dividends 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 than 50 cents on the dollar). This should have a noticeable and positive effect on interest margins in 3Q and beyond (certainly over $150K per quarter).
  6. We may see further growth in its income. Its owned properties increased from 34 to 47 within one year and the owned multi-family units increased from 6,367 to 7,893.
  7. 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? It all came from their Prospectus Supplement published on August 6, 2010 which announced 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 a short attack rather than 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 week's 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 that the share price was cut by 31.04% in one week. But it is a good thing for bargain hunters, or for existing shareholders to average down.

We may see the stock test its year low of $1.00 again in the near future and that will provide another golden opportunity to buy its shares cheap.

Disclosure: Author is long on RAS