Value Investors Club / Anthracite Capital (AHRPRD)

Description

Introduction

In a fast moving market, you sometimes don't have all the answers, let alone all the questions, and that's definitely the case here; I owned AHR coming out of the '98 credit crisis, but haven't followed the company in years and didn't start looking at it until this weekend, so this is a bit of a FIRE! AIM! READY! idea.

AHR is a mortgage REIT investing in sub-prime CMBS. For those of you who are still reading after that, they also make mezzanine commercial real estate(CRE) loans, and invest in CRE equity through some partnerships with Blackrock, their external manager.

The D shares were issued in February. The coupon is 2.0625; at $13.67, that's a 15% yield. Liquidation preference is $25. They're perpetual, cumulative and callable in 2012, pari passu with the C issue, and get to elect two directors if in arrears for more than 6 quarters.

GAAP book is ~$750MM. The current market value of the two preferred issues is $87MM, so in theory you have to chew through a lot of equity to lose money here.

Why This Is Not AHM (sorry, David101!)

1: Minimal Liquidity Risk.

Yahoo! will tell that D/E 5.5:1. Given what's happened with spreads lately, you'd think they'd be a zero. But GAAP D/E is misleading because they resecuritize their CMBS on balance sheet, keeping the bottom 20-25%. So a lot of the "debt" is stuff that they've sold, it's gone, there is no actual claim on the company.

As of Dec. 31, recourse debt-to-equity was 1.7. As of March 31, they had $683MM in repo, collaterized by $743MM in assets, and $156MM outstanding on their credit facilities, collateralized by $252MM in assets. I'd imagine that the repo is used mostly to finance $690MM in _agency_ securities, which they seem to be required to own for regulatory/REIT reasons and should (I haven't checked) be holding up well, and the LOC to finance the loans and other junk.

Since the balance sheet date, they've raised $50MM in equity, and $87.5MM in long term unsecured debt -- most recently, $37.5MM on June 15th at 8.13%. I just don't see how or why liquidity will be a problem. If it turns out that they do have a liquidity issues, I think there's a good chance that Blackstone steps in. Blackstone should be willing to _give_ them ~$35MM; $10MM to keep "Blackstone, sub-prime, blow-up" out of the headlines, and 1x the ~$25MM in management fees they're getting. But Blackstone doesn't need to give them any money. Say they buy 20MM shares at $5. The risk factor is to CRE defaults. Blackstone's a freaking hedge fund. Transaction fees on making $100MM of CRE risk go away would be, I don't know, $2MM?

Remember, these guys made it through 1998, and it's not like they haven't been able to see the storm clouds coming.

2: First-Loss Exposure to CRE Defaults has value until it doesn't.

Let's grossly over-simplify the AHM situation. Say they had a boat load of AAA paper financed at LIBOR paying LIBOR+20, but then it turns out that "AAA" is actually "AA". That's just game-over. Nobody's going to finance that at LIBOR.

I don't know what a bid on AHR's paper would be, if there'd be one at all, but screw the market, these sub-prime securitizations are going to throw of some cash for some period of time -- they're worth _something_. If they throw off $87MM over the next couple of years (AHR reported $80MM net income in '06), then in theory you walk away whole.

Miscellaneous

1: I don't claim to fully understand the accounting, but suspect that it's extremely conservative. AHR owns junior CMBS with vintages going back to '98. Defaults have been essentially nil over the last few years. Net income and the common dividend should be going through the roof, but from '03 to now they've only raised it from $0.28 to $0.30. From Blackrock's point of view this is completely reasonable, because for them AHR is a way to generate fees from managing the company _and_ the CDOs.

2: I've looked at their CDOs. No defaults It's going to take a lot before any triggers get hit. I _haven't_ looked at Blackrock's fees; it's possible that these deals are structured so AHR only does OK while Blackrock makes out like a bandit.

3: This is extremely complicated. Re-securitizations, taxes, REIT status ... given book to market value of the preferred, this should be close to a no-brainer, but in reality there are a lot of ways for preferred holders to get screwed. It's possible that things could go sour and Blackstone could jigger things so the common does better than the preferred.

4: Obviously CRE default exposure is eminently hedgable. One might want to look at some of the equity REITs. As I suggested above, it's possible that a straight capital structure arb could underperform.

5: Price targets -- assets are around BB, so assuming no blow-ups the common should be trading at 11-13%, and the preferred at 9%-11%. If things settle down, further appreciation might be possible.

6: I don't know how things are going to work out going forward, but one could argue that AHR should be raising capital right now to take advantage of all the great opportunities that are going to be popping up.There's a real limited universe of qualified buyers for this stuff -- GMAC (I think?) LNR, Allied Capital used to have a unit but sold it -- of course lately there have been plenty of "unqualified" buyers, but I imagine they'll be exiting the market. The common could well be a buy too, but if things work out the preferred offers high equity returns, too.

7: They're reporting earnings on Wednesday.

8: You can access their June 20th presentation at the Jeffries conference here:

http://www.wsw.com/webcast/jeff17/

Summary:

I don't think they're going to blow up over the next month. If CRE defaults stay at a reasonable level, this could trade back close to par over the next 5 years.

Catalyst

Earnings on Wednesday

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			2007	2008
Price:	13.67	EPS
Shares Out. (in M):	0	P/E
Market Cap (in $M):	47	P/FCF
Net Debt (in $M):	0	EBIT	0	0
TEV (in $M):	0	TEV/EBIT