Comparing RAIT Financial's Preferreds And Notes - Which Is The Superior Investment?

| About: RAIT Financial (RAS)
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Summary

In the comment section of a recent article concerning RAS, I was asked to compare its Notes and Preferreds concerning which were the better investments.

As beauty in the eye of the beholder, the most attractive investment will ultimately be up the individual investor.

And this will be determined by each investor's view about the long-term viability of the company.

Recently I submitted an article designed to determine whether or not RAIT (NYSE:RAS) preferreds were a safe and worthwhile investment at this time. In the attendant comments section, several of my followers asked about RAS bonds and whether or not they were a better buy than their preferred counterparts. Consequently, I have designed this article to answer that question.

For those interested, I invite you to review the above-mentioned article that should enable you to better understand the company and the history of its preferred pricing.

RAS Preferreds 1-18-17

Symbol Yearly Dividend Price Dividend/Price Yield Best
RAS-A 1.9375 20.70 1.9375/20.70 9.36% Best
RAS-B 2.09375 22.21 2.09375/22.21 9.43%
RAS-C 2.21875 23.55 2.21875/23.55 9.42%

Because they are all presently callable, My choice that A is the best buy simply because it offers the best capital gain when ultimately called, although will not be called at least until after the B & C are called.

Now let's see how the above preferreds stack up against the two available RAS bonds.

RAS Bonds 1-19-17

Symbol Callable Matures Yearly Dividend Price Dividend/Price Yield YTM
RFT 4/15/17 4/15/24 1.90625 23.99 1.90625/23.99 7.95% 8.412%
RFTA 8/30/17 8/30/19 1.78125 24.85 1.78125/24.85 7.17% 7.355%

The Bond YTM for RFT:

The Bond YTM for RFTA:

It appears that RFT is the best buy of the bonds with a current yield of 7.95% and a YTM of 8.41%. However, RAS-B offers the highest yield of 9.43% plus a capital gain upside, if and when called, of $2.79. As beauty is in the eye of the beholder, it's up to each investor to determine which of the two is the most attractive investment.

To help you select the most attractive, allow me to explore this further. To begin, it will be up to each investor to determine how each feels about the long-term viability of RAIT Financial. If, as I do, you decide you are comfortable with this company's long-term vitality and profitability, I suggest the preferred as the best buy. However, if you are not so certain, I suggest the bond for two reasons.

  1. Although under difficult circumstances the preferred's cumulative dividend can be suspended (although still owed the holder), the bond's interest payment cannot remain unpaid without causing a default and an eventual bankruptcy.
  2. And in the event of bankruptcy, the bond holder's chance of recovering a portion of his investment far outweighs that of the preferred shareholder, who will most probably recover nothing.

Disclosure: I am/we are long RAS-B.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.