“25% Cash Machine: Clean up in Real Estate”

This one just came in from Tobin Smith’s ChangeWave, on behalf of Bryan Perry’s 25% Cash Machine subscription service, and — as all of them do — it sounds too good to be true. Let’s see.

Perry “promises” that you can earn a 10% dividend yield without taking any wild risks, “AND you can even earn another 15% in yearly capital gains on top of that. Without taking any wild risks.”

I guess it depends what you think “wild” means, but let’s see what he’s talking about.

He calls his investment newsletter, and the portfolio, the “25% cash machine” (that 10% divvy plus 15% cap gain), and he notes one specific one that he’s been successful with before:

“Deerfield Triarc Capital – a specialty finance company, making a ton of money in Residential Mortgage-Backed Securities, despite the “housing crisis” – yields 10.6% today and has
already given us a total return of 25% in just 9 months.”

But he teases about one that’s even better …

“my more recent addition to our holdings has the potential to do much better than that …
Yielding 12.6%, it focuses on the commercial real estate sector, which is doing incredibly well. And this company is one of the strongest players in that market. Insiders are buying the stock – there have been 7 different open-market purchases.”

So … insider purchases, big yield … what’s not to like? The Gumshoe is intrigued.

So let’s see … a few seconds on “spin” in the Wisdomization Machine, and we find out that this company is almost certainly …

RAIT Financial Trust (RAS)

It does indeed have a nice yield — 12.7% today, thanks to a tiny dip in the share price. They are structured as a REIT and provide debt financing for the real estate industry, primarily commercial but also other types. There have been seven open market insider purchases in the past couple months, which certainly sounds promising

There’s got to be some risk here, however — one might be that, although this is not probably surprising for a financing company, they are massively indebted. If I were to invest in this one I’d want to see how they maintain their spread — do both their loans and their bonds float, or do they have any built in protection if the yield curve moves big in one direction or the other? I haven’t looked, but I think it would be an important thing for an investor to understand.

On the plus side, they’ve definitely got some good growth, and maybe those insiders know something we don’t (though a quick review of the transactions in Yahoo Finance might cause one to note that those insider purchases pale in comparison to the numerous “non open market” acquisitions and options exercises from these same insiders … not that this means they aren’t buying for a good reason).

It’s true that this company is not particularly exposed to the sub prime or residential real estate malaise, as far as I can tell at a quick glance, but that doesn’t mean there’s no risk. The shares did take a big ‘ol tumbe back in the early part of this year, along with all the other real estate stocks, and as of recent reports it still carries a pretty hefty short interest at well over 10% of the float. My hunch is that the financial partnership that I looked at a while back, CHC, sounds significantly less risky, but that’s just an initial impression (it’s also got a significantly lower yield, of course).

So … an interesting little niche REIT that does real estate lending, with a big ‘ol yield. They’ve been busy this year — buying back shares, launching more Collaterized Debt Obligations, issuing convertible preferred stock — so there’s plenty for you to sink your teeth into if you feel like researchifyin’. I’d hesitate to promise you that this is likely to get you 25% returns without causing you to toss and turn a little, but you never know. I haven’t ever seen this 25% Cash Machine service touted before, so we’ll see if it sticks around and catches our attention again. If other folks have anything to say about this company, or this type of investment, let ‘er rip.