EKS,
I do not profess to be an expert on RAS' assets. My familiarity with the industry was a by-product of taking lumps to the head in buying AHM. As Homer says: "Dohhhhh!" Analyzing what went wrong in AHM, though, is helping me to sort through the carnage going on.
RAS is complicated, which is part and parcel with any Cohen family company (REXI, AFN, TBBK). In many ways, these specialty REIT's require trusting management as to knowing what they are doing. However, before you really delve into that, you have to get comfortable with the capital structure.
This panic is about short-term financing. 60% of AHM's financing was on short-term financing: repo's, warehouse lines and commercial paper. LUM's short-term financing was around 45% of debt. A number of REIT's bought AAA-rated RMBS using repo agreements, but most of it was private label, not agency (Freddie, Fannie, Ginnie). In normal markets, this is a great spread trade. Problem is that the unexpected happened and the spreads widened on private label RMBS. This caused the mark-to-market write-downs on the underlying assets, so the repo lenders upped the margin requirement, a.k.a. the haircut. The warehouse lenders started raising the margin requirements for any mortgage loans held that were non-agency conforming, like Alt-A, as well as lower-rated MBS, particularly those backed by subprime and Alt-A loans. The write-down in assets may have also triggered minimum net worth covenants in the credit facilities. This is a long-winded way of saying that the first thing that you should check on any potential REIT investment in this market is how much short-term financing they have.
Another concern with leverage relates to CDO's, particularly those backed by MBS, which are sometimes called CDO-squared. When they securitize lower-rated MBS and hold the equity tranches, there is massive leverage masked in something called an equity.
With the capital markets closed and lenders in retreat, it is important to determine how much borrowing capacity a REIT has. Capital preservation is key here to surviving, and the survivors will have some capital flexibility.
If you can get comfortable with the liability side of the balance sheet, then take a look at the assets.
I am not going to recommend any REIT's here. My view is slightly different from yours, in that there are vulture investors out there who are going to profit from buying those toxic MBS that are being force-sold due to margin calls. Plus, I am not sure whether we have bottomed yet. I would recommend listening to the NCT earnings call from last week, and maybe listening to the RWT call coming up on Wednesday. |
