RAS is a commercial real estate company the owns a mixture of commercial properties and RE loans that were financed in the pre-crisis environment using CDO structures that provide the company with relatively attractive financing terms. The owned commercial properties underlying this financing were originally financed by loans from RAS. Loans and properties outside of the structured finance vehicles are owned at the corporate level and are generally targeted for securitization or for ownership at Independence Realty, a wholly-owned property REIT, which the company is aiming to finance with third party equity over time. With $1.10/per share of AFFO reported for 2012, we think RAS is already cheap at 6.7x. However, we think street analysts and investors are meaningfully underestimating AFFO for 2013 which should include a significant boost in revenues from securitizations.
2012 and 2013 Results
Reviewing RAS's recently reported results provides a good overview of the company's business and affords an opportunity to see the sort of upside (the reason we like RAS) the company might report in 2013. The company has not yet filed its 10-K. However, when it does, the additional information might include company estimates for 2013 and, even if it does not, should prompt some positive commentary from the few analysts who cover the stock. Note that the company presented its financial results in a different format for 4Q 2012 so historical comparisons require some adjustments. The presentation isn't as clear as it might be either. The results can be found at http://www.snl.com/irweblinkx/corporateprofile.aspx?iid=113624&xslt=113624#PRdialog.
Net Investment Interest Income
This represents interest income on RAS's loans and securities less interest expenses related to such investments. Included in these figures are the results of a series of (Taberna) CDO structures that were set up to own securites (TruPS and Subordinated Debentures) of REITs and real estate operating companies. These entities don't have any value to RAS, but the results of these entities are consolidated in RAS's financials which makes them more complicated. Net Investment Interest Income also includes the results for real estate loans held in RAIT I and RAIT II which are RAS's more successful securitizations. RAS should receive a full recovery for these investments. Net Investment Interest Income was $84.1 million in 2012. With additional capital to deploy from a public equity raise in December 2012 and the capital received from a private equity investment from Almanac Realty in October 2012 plus the impact of a CS Bridge Loan Facility and CMBS warehousing activity we expect that this figure should grow meaningfully in 2013. We think $100 million is not unreasonable although it really depends how agressive the company chooses to be. Street estimates (prepared using the company's old format) are consistent with this type of figure or something higher.
RAS had $103.9 million of rental income in 2012. This was from properties for which RAS obtained ownership through loan positions in it's CDO structures RAIT I and RAIT. These properties are a mixture of multifamily, office and retail properties with the majority of the value being concerntrated in multifamily. Occupancy for the portfolio has been increasing steadily and was 85.1% in 4Q 2012. Rent rates have been increasing slowly. We expect these trends to continue and think that the CRE property portfolio overall should produce rental income of $110 to $115 million in 2013 (we use $112.5 million as a mid point). 4Q 2012 annualized is just over $108 million. Note that interest expense for mortages on these properties is included in a separate expense line item that is distinct from Net Investment Interest Income above.
Fee and Other Income
This line item includes fees from securitization structure, managing porperties, and most importantly, gain on sale income from sales of CMBS eligible loans to securitizations. In 4Q 2012, Fee and Other Income was $5.7 million of which $3.8 million was from the sale of $56.8 million of loans to securitizations. As of the 4Q conference call, the CMBS loan pipeline was approximately $640 million. Let's suppose that $500 million of that gets securitized, then RAS will earn $33.5 million with the same gain on sale margin as in 4Q. Most of this income will drop to the bottom line. In addition to this, in 4Q 2012, RAS entered into a $150 million wareshouse facility for bridge loans. RAS's bridge loan pipeline is approximately $160 million and the company is expecting a securitization towards the end of 2Q. If the gain on sale margin is the same as for CMBS that's another $10 million of fee income (on a $150 million securitization). If they can do the same again in 2H then that's $20 million for the year on this product. Combined with the CMBS gain on sale, RAS could have over $50 million of Fee and Other Income (we're using $50 million). As such RAS is becoming a play on the revival of the real estate securitization market.
These include corporate interest expense, interest expense related to debt on owned properties, real estate operating expenses, compensation, G&A, loan loss provisions, and D&A. All told in 2012, these expenses were $170.2 million. We think they could go to $180 million in 2013.
So...put all this together and you get operating income of $82.5 million in 2013 as compared to $30.5 million in 2012. If you assume that non operating items, the largest of which was the mark to market on the Taberna liabilities in 2012, are zero in 2013 and preferred dividends are $20 million you net income of $62.5 million. Adjust for depreciation and amortization, capex, staraight line rent and non cash compensation (in total $35 million) at levels similar to those in 2012 you get to AFFO of $97.5 million. Shares outstanding of 60 million gives AFFO/share of $1.63. That puts RAS at 4.5x. We think that makes the company cheap. We also think that analysts, which have estimates for 2013 AFFO as low as $1.17 per share are underestimating RAS's potential.
I do not hold a position of employment, directorship, or consultancy with the issuer. I and/or others I advise hold a material investment in the issuer's securities.
Several possible catalysts exist:
1. Analysts revising estimates and "rerating the stock" once the 10-K gets filed.
2. The company reporting guidance for 2013.
3. The company reporting meaningful revenues from securitizations. Any growth in AFFO that prompts an increase in RAS's dividend will be particularly important for retail ownership.