Crystal River Capital: Deleveraging to Wait Out the Storm

| About: Crystal River (CYRV)

The first half of 2008 has certainly not been kind to financials in general and Specialty mREITS in particular. However, a number of these Specialty REITs have been changing their focus and business paradigm to match these tough times.

One of these Specialty REITs is Crystal River Capital (CRZ). The company has refocused itself around some basic tenets:

  1. Leverage the expertise of its affiliate Brookfield Asset Management to focus on commercial real estate;
  2. Match fund almost of all their income generating assets to eliminate the risk of margin calls and forced liquidation of assets in a firesale;
  3. Directly owning huge rental properties and triple-net assets similar to its Houston, TX, Arlinton, TX and Phoenix, AZ campuses, where captive tenants such as JP Morgan can provide predictable cash flows in long term leases.

With these goals in mind, the company announced a strategic shift in April 2008 that resulted in the following (see April 2008 8K (Q108 update)):

  1. Sold off its $1.2B Agency MBS portfolio to reduce repurchase, margin debt to approximately $28M;
  2. Raised approximately $45M of net cash;
  3. Freed up $52M on its funding line;
  4. Made available approximately $100M of unencumbered assets.

It would appear that with close to $200M of liquidity and only $28M of short term debt, CRZ has the wherewithal to wait out these difficult credit market conditions.

The company recently declared a 30 cent dividend, a 30% yield at current prices, and noted in its May 2008 earnings call that it remaining assets can generate roughly 30 cents per quarter in REIT taxable going forward.

The key question regarding CRZ is whether the market has thrown the baby out with the bathwater or if it will struggle to realign its strategy with the difficult credit markets.

Disclosure: Author holds a long position in CRZ

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