Change Needed at RAIT Financial
For the full year, RAIT Financial Trust (RAS - Snapshot Report) reported a net loss of $6.26 per share. As expected, RAS recorded large impairments on its loans, mainly due to the trust preferred portfolio. Adjusted EPS, excluding impairments was $0.47 per share in 4Q06, slightly below our estimates.
We expect more impairments and losses on asset sales in the coming quarters due to loans which continue to drop in value. The company continues to see deterioration in its residential mortgage portfolio and took large impairments in 2007. We do not expect the environment to improve in 2008. The company's traditional sources of short-term financing, repurchase agreements and warehouse lines are no longer available.
RAS will need to change its business plan in response to the continued deterioration in the credit markets. Credit qualities have been declining in the company's residential business, and now its commercial mortgage portfolio is also being affected. Market conditions caused the company to cut its dividend by nearly 50% in 2007.
Another large dividend cut is probable in the coming quarters. The stock has settled a bit after dropping from over $30 per share early last year. The company currently trades at 1.08x GAAP BV and 0.60x economic BV, lower than sector averages. We estimate that the company could take impairments of up to $100 million more due to bad loans next quarter. We rate the shares a Sell due to market conditions and a good possibility of another large dividend cut. We are setting our price target at $5 per share or 4x 2008 EPS estimates.