I recently picked up a few more shares of CapitalSource, mostly because I had a long-term limit order in for just a hair below $10.

I am, in all honesty, not entirely sure about this one.  I do like CapitalSource, but the next year seems incredibly uncertain — I think that they should do fairly well in 2010, but I expect the remainder of this year and 2009 to be very uncertain.  Primarily, that’s because there is an extremely high likelihood that they’re going to slash the dividend, and the vast majority of their individual shareholders (not to mention sector and high yield mutual funds) are undoubtedly in this company largely because of that very high dividend.

If I pull out my crystal ball, it looks like CapitalSource will have to stop being a mortgage REIT beginning in January — they aren’t likely to be able to keep REIT status while owning a bank and suffering the problems that are plaguing even prime mortgages right now.  That’s probably an exaggeration:  They can keep REIT status, all they have to do is buy more mortgages and set the bank up as a taxable subsidiary … but it wouldn’t probably be their best move, and it wouldn’t leave a whole lot of capital for what they’re really good at, which is mid-tier secured lending to businesses.

The crystal ball also tells us that CSE would like to spin off its healthcare holdings into a separate REIT — this would have been more popular before all the health care REITs took 20% haircuts in June, but it still may well happen, since CSE believes their portfolio isn’t getting the same valuation as it would get as an independent REIT.

So I’m guessing that sometime in the next six months the dividend will probably drop, and that in 2009 they will probably restructure as a different kind of company.  They will probably have a permanently lower dividend, but their business should be more profitable and sustainable as they change their value proposition.

The value proposition has been that they can make loans that other people can’t afford to make because their REIT status gets rid of the tax burden, with some extra mustard added by the fact that they are aggressive about going after borrowers when they default on securitized loans (they recently picked up an office building in Indianapolis for this reason); in ...