Needham-based REIT Realty Finance Corp., formerly based in Hartford and previously operating as CBRE Realty Finance, eked out $42,000 in net income in the first six months of the year – after losing $126.6 million in 2010.
The company attributed its 2010 losses to soured investments in its two collateralized debt obligations (CDOs), its primary business. Losses in the CDOs exceed the company’s investment in the them.
The company invested in the most junior bonds and equity in the CDOs. The bonds contained interest coverage and asset over-collateralization covenants that must be met in order for Realty Finance to receive payments and a portion of collateral management fees. Both CDOs have failed the over-collateralization tests and a result, net cash flows – other than the senior collateral management, advancing agent and special servicing fees from CDO I – from both CDOs is being used pay down principal of the senior-most bondholders, with Realty Finance far down on the priority list for any cash distributions generated.
The company’s investment in CDO I at the time of its formation was $91.5 million. As of June 21, 2011, there was $376 million in outstanding third party debt within CDO I, that is senior to the Realty Finance’s investment. The company’s investment in CDO II at the time of its formation was $120.0 million. As of June 22, 2011, there was $760.9 million in outstanding third party debt within CDO II, which is again senior to the company’s investment.
Realty Finance said in a statement that recovery of any of its investments in the CDOs is not likely or expected.
As of June 30, the company said it had $2.8 million of unrestricted cash, or 9-cents per share. All incoming cash flows are generated by servicing and management fees on its two outstanding CDOs. Income has been sufficient to cover the company’s current operations, but there is no guarantee the company’s future cash flows and remaining cash will be sufficient to permit Realty Finance to continue its operations for an extended period of time, according to a statement.
Additionally, the company said that given the current state of its investments, there can be no assurance of any future distributions to stockholders.
