Alesco is a one of the few companies in the Specialty REIT space that has
been able to maintain earnings and dividend guidance in spite of very difficult
times. The reason for such performance is quite simply that Alesco's management
team is top-notch. In mid-2007, they recognized the real estate markets were
going to continue to weaken and two major bankruptcies, American Home Mortgage
and New Century Financial, solidified that belief. Alesco thus began preparing
for the impending doom long before their competition.
In order to maintain liquidity in the troubling times predicted, Alesco took
a major short position in real estate via Credit Default Swaps (CDS). If you
aren't familiar with CDS', they're very similar to an insurance policy against
credit events such as defaults on a debt obligation. So in cases of default,
Alesco is protected from loss through the CDS contracts they have. This has
allowed Alesco to establish a liquidity buffer and to maintain its dividends,
which is currently yielding a whopping 30%, while many competitors are either
significantly cutting or eliminating their dividends completely.
But can the dividend last?
Many have argued that Alesco cannot possibly continue to pay a 30% dividend,
or 7.5% per quarter. To them, it seemed too good to be true. Well, on March
10th, 2008, management came out and re-affirmed both their ability and
commitment to continue paying out $0.25-$0.30 per share per quarter for
the rest of 2008, which works out to a 30%-34% annual yield. Let me repeat that:
Alesco has confirmed it will pay out 30%-34% annual yield on its dividend for
2008. It's no wonder the stock price has gained nearly 50%, growing from $2.30
per share on March 7th, to $3.39 per share as of the March 12th close.
Blood in the streets
Alesco's decline in stock price has come about because of two significant
events. 1). Difficult credit markets have had a negative impact on every company
in the space including Alesco, and 2). Their financials have proven difficult to
understand primarily due to large losses in their real estate ABS business line
significantly above their economic liability because they have been marking down
their ABS assets without marking the offsetting liabilities. Regarding #1,
stressed credit markets will continue for some time and the company appears to
have the liquidity to weather the storm. Issue #2 will be resolved when the
company reports 1Q2008 results in May when SFAS 159 allows them to value their
Kleros ABS liabilities in line with the related assets and eliminate the huge
book value deficit currently on their books. Indeed, Alesco will go from a book
value of -$21, that's right, NEGATIVE $21 per share, to POSITIVE $5.40 per
share, representing a new price-to-book ratio of 0.63.
