Investing in value-deep value-distressed assets is not for the faint-hearted. RAIT Investment Trust (OTCQB:RASF) recently provided an update on their strategic initiatives to stabilize their balance sheet and restore the value of preferred and common shares. While these investments may carry moderate to high risk, it's critical to note that they're not suitable for retirement income accounts.
Cessation of Lending Operations
RAIT has made the decision to halt their lending operations, indicating their intent to liquidate assets instead. This shift fundamentally changes the evaluation of the company, focusing on potential recovery from the remaining assets. As a result, the analysis of debt, preferred, and common equity securities becomes more dependent on the available net assets. The company's acknowledgment of doubts about their viability as an ongoing concern further emphasizes the importance of assessing the value of these securities through a liquidation analysis.
Early Purchase of the 4% Convertible Note Issue
RAIT has been proactive in reducing its outstanding 4% convertible senior notes. Through purchases made during 2018, the company has repurchased $42.3 million of these notes, leaving $68.2 million still outstanding. Additionally, $2.0 million of senior secured notes were redeemed, leaving $9.5 million outstanding. These transactions improve the balance sheet and strengthen RAIT's financial position.
Continued Liquidation of Owned Real Estate and Commercial Real Estate Loans
RAIT has been actively selling its owned real estate (REO) portfolio and certain commercial real estate (CRE) loans. As of June 27, 2018, the total net proceeds from these divestitures amounted to approximately $93.8 million. The cash generated from these transactions will be used to repay obligations and reduce liabilities. However, further clarification on the breakdown between real estate sales and loan divestitures will be provided in the Q2 report.
The "FL Sale" and Related Transactions
RAIT recently completed a series of related transactions, including the so-called "FL Sale" and the redemption and exchange of preferred shares. In the FL Sale, an RAIT subsidiary sold its interests in joint ventures that held $61.2 million in securities. The net proceeds of approximately $54.6 million, along with $2.2 million in additional cash, were used to redeem $56.8 million of preferred units and Series D preferred shares. The remaining balance of $16.7 million was exchanged for newly issued Series A, B, and C preferred shares.
These transactions have led to a reduction in assets and liabilities, as reflected in the pro forma balance sheet. While the net assets have decreased by $63 million, the reduction in preferred shares' face value has balanced the impact on common equity. The elimination of the D shares also removes potential barriers and allows RAIT to move forward with its liquidation process.
Implications for RAIT Securities
Exchange-traded debt securities, such as RFTA and RFTT, appear to have a higher probability of being redeemed at maturity. Their shorter maturities and available resources make them relatively secure investments. The preferred shares (RASFP, RASFO, and RASFN) offer greater potential upside, but also come with higher risk. Currently selling at around 32-33 cents per dollar of face value, these shares could see a significant increase if recovery exceeds book values.
For common equity (RASF) holders, the situation is more challenging. Without backing from book assets and with preferred shares having priority in any recovery, the common shares face significant obstacles. However, speculative investors may see an opportunity with the potential for substantial upside.
It's essential to recognize the risks associated with microcap stocks, and we advise consulting with a registered investment advisor before making any investment decisions.
Disclaimer: The information provided is for informational purposes only and should not be considered as specific investment advice. Always consult with a qualified professional before making any investment decisions.