Anthracite: The Silent Bailout?

Commercial mortgage investor Anthracite Capital (AHR) is one mREIT that has remained out of the crosshairs during the current liquidity crunch. Nevertheless, the Company has been silently scrambling for financing as the crisis hit a peak in March. During the first quarter of 2008 alone, Anthracite received (and met) margin calls of $84 million -- more than it received during all of 2007.

The Company continually sought waivers and extensions from its lenders throughout the first quarter, and the same day that Thornburg Mortgage (TMA) announced its dilutive to stay alive, Anthracite also announced that it had priced a transaction for the sale of $93.5 million of its convertible preferred stock and common stock to a DLJ Real Estate Capital Partners fund (an affiliate of Credit Suisse) in a privately negotiated transaction.

The terms of the transaction provide for the sale of $23.4 million of common stock at $6.69 per share, the closing price of the Company's common stock on Friday, March 28, 2008, and $70.1 million of cumulative redeemable convertible preferred stock. Dividends payable on the convertible preferred stock would be 12% per annum and the purchaser would have a right to convert the preferred stock into common stock at a conversion price that represents a 12% premium to the closing price of the Company's common stock on March 28, 2008.

Additionally, the Company's advisor BlackRock (BLK) has been supporting Anthracite from the sidelines, providing it with a $60 million warehouse line and agreeing to lower its management fee and accept payment of the fee in Anthracite stock.

Anthracite's CEO, Christopher A. Milneris scheduled to speak at the Credit Suisse 2008 Global Real Estate Conference in New York on Wednesday afternoon. I'll be interested in hearing his prepared remarks -- which should include an update on Anthracite's liquidity and reasoning for doing the dilutive DLJ deal.

Anthracite's Waiver Suggest Serious Losses

Anthracite Capital (AHR) dove nearly 6% on Monday, as the company disclosed the receipt of a waiver from Bank of America (BAC) with respect to its GAAP book value. Anthracite last reported a GAAP book value of $9.40/share as of September 30, 2007.

It took a bit of digging, but I found the credit agreement appended to Anthracite's first quarter 2006 10-Q. It's not entirely clear, but it appears that the minimum tangible net worth is $400 million, or a GAAP book value of approximately $6.34/share. That would imply a huge fourth-quarter loss of at least $3/share during the fourth quarter 2007.

The math is back-of-the-envelope, but the conclusions are serious nonetheless. Anthracite has been trading at a discount to its book value, so the stock may be overvalued by as much as 12% at its current level.

Anthracite Deserves More Than Cramer's Cliffs Notes

Maybe it was the pressure of the lightning round, maybe it was just too easy to plug Annaly Capital (NLY) (again), but Cramer slipped up a couple weeks ago when he told a caller that Anthracite Capital (AHR) was "a residential REIT. ... just buy NLY... I'm sorry I can't be more positive."

Anthracite Capital is actually a CMBS and commercial whole loan investor. The company focuses on acquiring pools of performing loans in the form of commercial mortgage-backed securities, issuing secured debt backed by CMBS, and providing strategic capital for the commercial real estate industry in the form of mezzanine loan financing. The company has a minimal amount of RMBS on the balance sheet, but certainly not enough to label it a residential REIT.

Anthracite is externally managed by an affiliate of BlackRock, Inc. (BLK) and yields about 15%. The company has maintained a pretty stable dividend throughout its ten-year history. Anthracite pursues a fairly aggressive strategy, acquiring mostly B-notes and subordinate CMBS. As a result, its balance sheet is exposed to impairments and other valuation adjustments. However, from a liquidity standpoint, Anthracite is fairly solid, having only about 15% of its assets non-match funded.

At a 15% yield and at 0.85x book value, Anthracite is reasonably valued, given its less-efficent external management structure and riskier assets. Nonetheless, its business model -- to deliver high risk-adjusted returns through the acceptance of credit risk and selective commercial investment -- deserves much more than Cramer's cursory dismissal.