PMI - PMI Group

**lzhang** Fri Aug 24, 2007 11:44 am

Hi bdcmm,

I have read its 10-K, 10-Q, and listened to its conference call as of 08/02/2007, and I could not have any optimistic view as you have. In the conference call, the management was using book value, or about $16/share, as its liquidation value, which was quite questionable. The questions from the last several analysts were quite sharp and I did not find any good answers from management.

So it should not be hard to estimate its liquidation value by ourselves. As of 06/30/2007 (Q2), it has $12.536B total liabilities. Its total assets are $14.134B, but we need to subtract $130M goodwill, $92M intangible, $54M deferred financing costs, now we have $1.322B NAV. The story does not stop here. As we have known, it has $300M equity or BB CDOs exposure in mortgage companies or homebuilders, of which $95M has been totally written off for AHM. It is more likely than not the rest will be written off later on because of the very risky nature of those CDO tranches. So now we have $1.022B NAV, which is about $16/share. But the story does not end here.

We need to look carefully at its asset structure. It has about $6.070B investments in available-for-sale securities and security-related receivables. The asset value was `fair value' as of 06/30/2007. As an analyst had pointed out in its conference call, they couldn't be serious. They thought all those investments were just fine as of 06/30/2007 and gave them fairly high `fair value', but suddenly, after the AHM problem, they needed to reevaluate all those investments. Of those investments, the fair value was $6.036B, which was very close to its book value. Those numbers can not be used in liquidation valuation. You can mark your shoes 50% off for fire sale, but you still have to pay full amount for your debts. If we give 90% fair value for its TruPS and subordinated debentures/receivables, 90% fair value for its unsecured REIT note receivables, full valuation for CMBS and other securities/receivables, we will have 4,274*.9+478+810*.9+387*.9+252=$5.654B. So for this part, we need to subtract $416M

Other than that, it has about $6.483B investments in mortgages and loans, at amortized cost. Now we need to estimate their fair value. Again, we want to give 90% fair valuation for residential mortgages/receivables, and full valuation for commercial mortgages, mezzanine loans and other loans, which are very optimistic. We have 4,326*.9+2,166-10(loss allowance by its own estimation)=$6.049B. So for this part, we need to subtract $433M.

Together, we need to subtract $849M from the $1.022B NAV we have. Now we need to be careful not to double count. The $300M equity or BB CDOs exposure might be part of the $849M we need to subtract. So now we add those $300M back, and we have 1,022-849+300=$473M liquidation value, which is less than its current market cap, $538M.

So currently its common stock is at best fair valued, if not over-priced.

bdcmm wrote: Listen to the conference call and read 10-k, you'll get the answers. The total exposure is about $290M, less than 3% of it portfolio. Again this is assuming zero-recovery of its Trust Preferred Securities (TruPS) with AHM and other HB builders. Not a big deal to RAS.

RAS also has a good portion of commercial real estate mortgage, which has been growing very well. Sorry I could not provide very detailed analysis here, but I recommend you to listen to the conference call and look at its financial reports to get the whole picture.

FD and Disclaimer

The author has no position in RAS. The position can be changed without further notice.

This is not an investment recommendation to buy or sell any of the securities mentioned therein. All materials presented here are for information purposes only.

References

http://phx.corporate-ir.net/playerlink.zhtml?c=95835&s=wm&e=1606022

http://www.snl.com/irweblinkx/file.aspx?IID=113624&FID=4604625

http://www.sec.gov/Archives/edgar/data/1045425/000119312507175789/d10q.htm

http://www.sec.gov/Archives/edgar/data/1045425/000119312507044370/d10k.htm

Conference call transcript
http://www.sec.gov/Archives/edgar/data/1045425/000129993307004759/exhibit1.htm

**bdcmm** Fri Aug 24, 2007 2:59 pm

Thanks lzhang for your analysis, which I think is reasonable estimate for its liquidation value. However, the valuation is purely based on the assumption that this company is being liquadated, which is very unlikely if you look at the overall financial health of this company and US economy. Also if you assess any company based on liquidation value, people may be better off holding all cash instead of a portfolio of stocks. The right question is, how likely this company will be liquadated? If it is less than 5%, we'd better look at other aspects as well, such as cash flow, management, economic characteristics of this company, etc.

First, the analysts' earning estimates for RAS is 0.76 for the next quarter, according to Scottrade. (Not sure whether the analysts are the same as in the conference call.) Management's estimate for the next quarter, assuming worst case senarios is around 0.50, which is VERY conservative. My guess would be in the range of 0.65 ~ 0.75. Normalized P/E ratio is less than 3.5, which is a true bargain compared with other stocks. Also RAS will distribute 90% earning to shareholders, the return is tangible quarter by quarter. It is rare to find another financially sound company with such cash flow return (I'd say this is a forward looking statement.)

Second, US economy is still in decent shape, and interest rate is historically low. Most people/businesses are paying mortgage and loans, US Fed Reserv is dedicated to save banking/mortgage industry, as it did in the 1990s. It will keep the interest rate in the next couple of years fairly stable. The fiancial sector depression today is temporary, but Mr. Market is overreacting by penalizing good REIT businesses as well.

Third, I'm not an expert, but insiders are experts (if you check their background). Huge insider buying indicates their confidence in this company before and AFTER the crash. Although there are quite many other REIT companies have insider buying recently which further indicates the undervalued nature of financially healthy REIT companies, I found RAS is the most undervalued among them.

Last, even in the event of liquidation, you are not losing all your investment, so risk/reward is still attractive in this investment. However, why so concerned about liquidation if it is a remote distance? RAS has sufficient cash reserve and cash flow! If many of my friends or many businesses stop paying mortgage, I'll then start worrying about its liquidation.

I don't object to financial analysis, but it is sometimes too mathematical. If a company looks attractive overall (i.e., equity, cash flow, management, etc.), it is a good investment. Warren Buffett said that he would better be approximately right than precisely wrong (Blast also quoted it recently.)

My fair value estimate for RAS is around $30 (with a time frame of 2 ~ 3 years.) Sorry but I'll no longer post for RAS and will let time tell whether I am approximately right in my RAS investment.

**lzhang** Fri Aug 24, 2007 3:56 pm

Hi bdcmm,

When the business model of a company is questionable, the liquidation value is the best you can get. IMHO, this is not a goose which can lay golden eggs, but a goose on sale for meat. Its meat poundage (net of labor etc.) is what you want right now.

bdcmm wrote: your analysis, which I think is reasonable estimate for its liquidation value. However, the valuation is purely based on the assumption that this company is being liquidated, which is very unlikely if you look at the overall financial health of this company and US economy. Also if you assess any company based on liquidation value, people may be better off holding all cash instead of a portfolio of stocks. The right question is, how likely this company will be liquidated? If it is less than 5%, we'd better look at other aspects as well, such as cash flow, management, economic characteristics of this company, etc.

In a business where you can book whatever profits you want just by accounting tricks, you know what you are expecting once things turn from bad to worse.

bdcmm wrote:
First, the analysts' earning estimates for RAS is 0.76 for the next quarter, according to Scottrade. (Not sure whether the analysts are the same as in the conference all.) Management's estimate for the next quarter, assuming worst case senarios is around 0.50, which is VERY conservative. My guess would be in the range of 0.65 ~ 0.75. Normalized P/E ratio is less than 3.5, which is a true bargain compared with other stocks. Also RAS will distribute 90% earning to shareholders, the return is tangible quarter by quarter. It is rare to find another financially sound company with such cash flow return (I'd say this is a forward looking statement.)

First, low interest rate right now is the problem. With interest rate going higher and higher in the foreseeable future, RAS' business is getting tougher and tougher. It has hedged part of its portfolios, but not all of them, so it is going to see its portfolio value going down gradually.

Second, Fed is going to save the financial system, not a particular industry or business. Even Fed is going to save some particular company, it does not mean the equity of the company is not subject to huge dilution, etc.

Mr. Market is overreacting to many other companies, industries which have no direct link to those loans, etc., but I am not sure what kind of reaction there should be for those companies who are engaged in those dumb things.

As Mr. Buffett has said, those who have done foolish things will sometimes pay a very significant price for it. Unfortunately, PMI or RAS was doing those dumb loans.

bdcmm wrote:
Second, US economy is still in decent shape, and interest rate is historically low. Most people/businesses are paying mortgage and loans, US Fed Reserv is dedicated to save banking/mortgage industry, as it did in the 1990s. This is a temporary depression, but Mr. Market is overreacting.

I won't rely my investment on those insider `experts', as if insiders won't do dumb things.

bdcmm wrote:
Third, I'm not an expert, but insiders are experts (if you check their background). Huge insider buying indicates their confidence in this company before and AFTER the crash. Although there are quite many other REIT companies have insider buying recently which further indicates the undervalued nature of financially healthy REIT companies, I found RAS is the most undervalued among them.

Last, even in the event of liquidation, you are not losing all your investment, so risk/reward is still attractive in this investment. However, why so concerned about liquidation if it is a remote distance? RAS has sufficient cash reserve and cash flow! If many of my friends or many businesses stop paying mortgage, I'll start worrying about its liquidation but not now.

I don't object to financial analysis, but it is sometimes too mathematical. If a company looks attractive overall, it is a good investment. Warren Buffett said that he would better be approximately right than precisely wrong (Blast also quoted it recently.)

I do not want to offend you so as to discourage you from discussion. I hope all our investments are based on reasonable reasoning, not on speculation. Your reasoning might be right if RAS can survive.

bdcmm wrote:
My fair value estimate for RAS is around $30 (with a time frame of 2 ~ 3 years.) I'll no longer post for RAS and will let time tell whether I am approximately right in my RAS investment.

**lzhang** Fri Sep 07, 2007 2:13 pm

Hi bcdmm,

We are on the same boat now. After several days of study and I think it might be worth to buy it at current level. If it can drop much lower, it should be even better. I am waiting for it...

Disclosure and Disclaimer

The author has a long position in RAS. The position can be changed without further notice.

This is not an investment recommendation to buy or sell any of the securities mentioned therein. All materials presented here are for information purposes only.

**blast_investor** Thu Oct 18, 2007 10:01 pm

This stock PMI lost 22% in last 3 days from $30 to now $23.3.

It is expected to lose $1.05 per share for the quarter.

The PMI Group, Inc. Announces Housing, Mortgage and Credit Market Conditions to Adversely Affect Third Quarter 2007 Financial Results

**xuedong_zhang** Fri Oct 19, 2007 8:23 pm

blast_investor wrote: This stock PMI lost 22% in last 3 days from $30 to now $23.3.

It is expected to lose $1.05 per share for the quarter.

The PMI Group, Inc. Announces Housing, Mortgage and Credit Market Conditions to Adversely Affect Third Quarter 2007 Financial Results

So is it good time to load some of these companies?
All the mortgage insurance company was half of their prices

**blast_investor** Mon Oct 22, 2007 2:20 am

xuedong_zhang wrote:
So is it good time to load some of these companies?
All the mortgage insurance company was half of their prices

I would stick my earlier caution opinion in this thread on these mortgage insurance company.

I see the risk of bankcruptcy on these mortgage insurance company is real. Most of banks are not that risky because the the risk is insured by mortgage companies such as PMI. The risk is too high for my take. I would avoid them all in this sector.

**bdcmm** Mon Nov 05, 2007 6:01 pm

Just a quick update on Rait Financial Trust (RAS) after listening to its CC today:

Despite the recent credit crunch and death of CDO market which was worse than I thought, RAS wrote down over $4 per share of asset imparement (now tangible book value is $11.63), and generated cash flow of $0.54 per share with $0.46 common stock dividend annouced in September.

The management did a good job weathering through the turmoil, and indicated better business opportunities going forward (due to less lenders and larger interest rate spreads.) They also indicated the current dividend level should be maintained (with growing potential) going forward. I thought the CC was very positive, and at the current stock price of $8.10, the dividend yield is at 22.7% (0.46*4/8.1). RAS is very attractive at this price level.

My original target price of $30 within 2 ~ 3 years may be too aggressive, but I think $18 is a reachable goal within a couple of years with its current earning yield. If you look for less risk, its preferred stock with current dividend yield of 15% is a safe buy as I don't think this company will go under.

**lzhang** Mon Nov 05, 2007 6:25 pm

Hi bcdmm,

As I said before, we are on the same boat now. It is attractive at this level (around $7.5, which is below my estimation of its liquidation value). Anyway, they are more realistic about its book value now. Not too bad at all.

Disclosure and Disclaimer

The author has a long position in RAS. The position can be changed without further notice.

This is not an investment recommendation to buy or sell any of the securities mentioned therein. All materials presented here are for information purposes only.

bdcmm wrote: Just a quick update on Rait Financial Trust (RAS) after listening to its CC today:

Despite the recent credit crunch and death of CDO market which was worse than I thought, RAS wrote down over $4 per share of asset imparement (now tangible book value is $11.63), and generated cash flow of $0.54 per share with $0.46 common stock dividend annouced in September.

The management did a good job weathering through the turmoil, and indicated better business opportunities going forward (due to less lenders and larger interest rate spreads.) They also indicated the current dividend level should be maintained (with growing potential) going forward. I thought the CC was very positive, and at the current stock price of $8.10, the dividend yield is at 22.7% (0.46*4/8.1). RAS is very attractive at this price level.

My original target price of $30 within 2 ~ 3 years may be too aggressive, but I think $18 is a reachable goal within a couple of years with its current earning yield. If you look for less risk, its preferred stock with current dividend yield of 15% is a safe buy as I don't think this company will go under.

**xuedong_zhang** Mon Nov 05, 2007 9:01 pm

Quick question: what is the difference between prefferred and common share?
I just bought a little at $7.18 yesterday, not bad :P

bdcmm wrote: Just a quick update on Rait Financial Trust (RAS) after listening to its CC today:

Despite the recent credit crunch and death of CDO market which was worse than I thought, RAS wrote down over $4 per share of asset imparement (now tangible book value is $11.63), and generated cash flow of $0.54 per share with $0.46 common stock dividend annouced in September.

The management did a good job weathering through the turmoil, and indicated better business opportunities going forward (due to less lenders and larger interest rate spreads.) They also indicated the current dividend level should be maintained (with growing potential) going forward. I thought the CC was very positive, and at the current stock price of $8.10, the dividend yield is at 22.7% (0.46*4/8.1). RAS is very attractive at this price level.

My original target price of $30 within 2 ~ 3 years may be too aggressive, but I think $18 is a reachable goal within a couple of years with its current earning yield. If you look for less risk, its preferred stock with current dividend yield of 15% is a safe buy as I don't think this company will go under.

**bdcmm** Mon Nov 05, 2007 11:45 pm

xuedong_zhang,

Preferred stock dividend is fixed and is paid before common stock dividend can be paid. It also has priority over common stock during liquidation, and you can get your principal plus any unpaid dividends back if the liquidation value exceeds the preferred stock principal.

Right now the preferred stock of RAS is selling at around $0.50 per dollar with 15% dividend yield, which is a safe buy in my opinion. However, it is illiquid with higher spread so you want to place limit orders with an upper limit on your bid. On the other hand, if the company does really well in the future, preferred stock has limited up potential than common stock because common stock dividend can increase but preferred stock dividend will not.

Hope that helps. Oh btw, I agree with Blast that mortgage insurance company is a risky business (RAS is not in the mortgage insurance business).

**lzhang** Tue Nov 13, 2007 12:38 pm

CEO of RAS bot more shares
According to the SEC filing as of today (11/13/2007), the CEO of RAS, Daniel COHEN, bought more shares right after its 10-Q filing.

They have done a great job to manage through the crisis, and they use their own money to vote for their confidence.

http://www.sec.gov/Archives/edgar/data/1045425/000120919107063170/xslF345X02/doc4.xml

**clz2992** Fri Dec 07, 2007 1:51 pm

RAIT Financial Trust Announces Fourth Quarter 2007 Cash Div
It is $0.46 per common share. The dividend will be paid on January 14, 2008 to holders of record on December 17, 2007. The ex-dividend date is December 13, 2007. The div yield is well above 17%. It was above 23% just days ago, and this div was expected from last Q's ER.

http://biz.yahoo.com/bw/071207/20071207005328.html?.v=1

**xuedong_zhang** Sat Jan 19, 2008 3:45 pm

Re: CEO of RAS bot more shares
Question regarding debt of RAS, are these debt linked to sepcified portfolio, which means loss of one portfolio will not affect company ability to move on with other protfolio?

lzhang wrote: According to the SEC filing as of today (11/13/2007), the CEO of RAS, Daniel COHEN, bought more shares right after its 10-Q filing.

They have done a great job to manage through the crisis, and they use their own money to vote for their confidence.

http://www.sec.gov/Archives/edgar/data/1045425/000120919107063170/xslF345X02/doc4.xml

**goog** Thu Mar 06, 2008 2:54 pm

Today's RAS report showed the truth about this highly leveraged company. Another 3% impairment of its debt holding mean bankruptcy for the company.