Anthracite Capital (AHR) – Part 3 - Outlook

Anthracite Capital’s ratio of exposure to commercial and residential mortgage backed securities was 2:1 in 2003. Since then they have brought down the residential exposure to zero, and diversified within the commercial mortgage asset class. Below is a summary of Anthracite’s percentage investments by asset class over the last five years taken from their annual report:

Year	2007	2006	2005	2004	2003
Commercial Real Estate Securities	49.3	53	49.7	44.6	62.8
Commercial Mortgage Loan Pools	26.9	27	32	36	-
Commercial Real Estate Loans	23.5	11.8	10.6	9.1	4.4
Commercial Real Estate Equity	0.2	2.3	1.3	-	-
Residential Mortgage Backed Security (RMBS)	0.1	5.9	6.4	10.2	32.8

Anthracite investments are well diversified by property type both globally and within the US as detailed in the below tables taken from their annual report:

Property Type	Percentage
Office	32.8
Retail	28.8
Multifamily	22.7
Industrial	7.5
Lodging	6.7
Healthcare	0.7
Other	0.8

Geographic Location	Percentage
California	16.8
New York	12.2
Texas	9.6
Florida	8.6
Other	52.8

Anthracite is trading well below Net Asset Value (NAV) and book Value of $10.87 as indicated in their latest quarterly report. This discount partly reflects the negative sentiment harbored by the market towards companies that have credit exposure and partly the anticipation of margin calls as 21% of the company’s assets are exposed to mark-to-market adjustments and margin calls. Alternative financing in lieu of short-term borrowings can reduce such exposure but in a tight credit environment, such restructurings calls for substantial associated costs. YTD margin calls to May 14, 2008 already stand at $91.7M and that compares to just over $82M for the whole of 2007. This explains the rapid decline in the market value of Anthracite’s assets as a result of the credit crunch. Anthracite responded to margin calls adequately by raising liquidity – issued common and preferred stock resulting in net proceeds close to $100M and renewed certain credit facilities. Although the terms of these deals make it expensive, the company could use some of that cash to fund the purchase of distressed assets, which should provide handsome returns when the credit situation eases.

Outstanding yield, BlackRock’s management expertise, and the discount to NAV make an investment in Anthracite a compelling proposition. However, the risks are very real and because of the 3:1 leverage, one can visualize scenarios where the company’s assets can end up being valued less than its outstanding borrowings thereby making the equity worthless. This risk should be weighed against the positives before making an investment decision on Anthracite. In a diversified portfolio, Anthracite is a fit as a small position in the small-cap portion.

Related Posts:

1. Anthracite Capital (AHR) - Part 1 - Introduction.
2. Anthracite Capital (AHR) - Part 2 - Business Issues.
3. Anthracite Capital (AHR) - Part 3 - Outlook.