Liabilities including borrowings of RAT are now of paramount importance and it is the stated intention of management to reduce gearing to between 55% and 65% of assets - relative to the current gearing ratio, an ambitious target.
RAT's gearing ratio is shown in the Directors' Report at 74.8% as at December 2007 and 74.2% at June 2007, but this ratio is based on borrowings rather than total liabilities which is far more relevant.
At 31 December 2007, total liabilities are $1.47 billion and total assets are $1.85 billion giving rise to a more relevant ratio of 79.3%. Some difference from the acknowledged borrowings ratio of 74.8%.
Now to the thing which may deliver the fatal blow to RAT, faster than anyone expects - the loan portfolio.
The total amount invested in real estate loans at December 2007 is stated at $US302.9 million ($323 million), which is supported by real estate having an appraised value of $US3.2 billion.
The underlying value of the real estate against which loans have been made is of little comfort.
It is meaningless. What really matters is the loans by all lenders against each particular property and how RAT ranks in line with the other lenders on these properties.
The bulk of the RAT loans are classified as mezzanine loans and these loans are really the top-up finance required by the borrower. They rank after the priority of earlier mortgagees.
In other words, RAT only gets its cheese, or pay out, after the other lenders against the real estate have been paid in full, including outstanding interest.
The CRE Loan Portfolio update discloses that nearly 50% of the RAT loans are struck over real estate where the loan to value ratio is between 85% and 93.5% of the value of the real estate. The other 50 has an average loan to value ratio of 78.9%.
Outstanding interest for mezzanine loans may have serious consequences.
If a loan turns bad then those lenders ahead of Rubicon also get unpaid interest ahead of Rubicon. This means that unpaid interest to priority lenders can wipe out any remaining value in the mezzanine loan.
Much depends on the circumstances and nature of the real estate providing the security, but the numbers certainly indicate the high-risk component of these loans.
This view is further reinforced by the wide spread between the average cash yield on the portfolio at 9.8% at December 2007 and the five year US Treasury rate at 6.43% at December 2007.
The big beneficiaries of the Rubicon saga have, of course, been the manager Rubicon Asset Management and its shareholders Fell, Cooper and David Coe.
The potential for further huge fees has probably been exhausted with low investor tolerance on fees and conflict of interest questions. Not a bad reward for Rubicon as RAT was only listed in January 2005, REU listed in January 2006 and RJT listed in October 2006.
REU Price at posting:
0.0¢ Sentiment: Hold Disclosure: Held
