RAIT Finc'l Trust May Cut Yield
RAIT Financial Trust (RAS) reported good 2Q results with adjusted EPS coming in at $0.54 per share, up about 6% from last quarter. RAS continues to pay off repurchase lines and the company’s commercial and residential loans still have low overall delinquencies. The yield is now over 30% and the company continues to cover the dividend ($0.46 per share) with operating cash. Due to the high yield and what we feel is a slightly improving outlook for credit markets, we are continuing our Hold recommendation.
Due to recent share price declines, RAIT represents good value in a battered sector. The company’s economic book value was $13.90 at quarter end, up from $10.52 at year end 2007. The company is trading at about .4x economic book. Economic book is a better gauge of a company’s value, as it excludes unrealized losses that are in excess of what the company has invested in securitizations. Based on our 2008 Adjusted EPS projections RAIT is trading at 3.3x estimates, well below historical norms and in line with sector averages.
However, with a slumping economy, commercial real estate owners and lenders will be stressed throughout the year. Furthermore, impairments and delinquencies are increasing in the company’s commercial and residential loan portfolio. With fewer originations and increasing defaults in the CRE portfolio, a dividend cut is likely in the coming quarters.