Poetic Portfolios

Yesterday I began my analysis of CapitalSource with a look at CapitalSource Bank. CapitalSource has a current market capitalization of under $500 million, yet CapitalSource Bank has a book value of $910 million. At year-end there were no delinquencies or non-accruals in the bank’s portfolio, though it had a good portion of CapitalSource’s reserves based mostly on their macro view of the economy. The bank appears to be worth every bit of its book value.

Another source of value for CapitalSource is its Health Care REIT. The health care portfolio consists of 180 nursing homes located across the United States. Each of these facilities is leased triple-net leased on a long-term basis. Total investments in this portfolio totaled $990 million at year-end. Mortgage debt on the portfolio was $330 million. Total equity in this portfolio is approximately $650 million.

The Healthcare Net Lease Portfolio produced $15 million in net income in 2008. This doesn’t tell the whole story. Depreciation expenses in direct real estate investments totaled $35 million. This results in an implied funds from operations of $50 million. Net operating income for the portfolio looks to be about $96 million. At an 8.5% capitalization rate, the value of these properties is $1.1 billion. The market value of this portfolio may be over $100 million over gross book value.

Where Are We So Far

Stepping through the confusion that is CapitalSource, we have CapitalSource Bank that is worth at least book value of $916 million plus a Healthcare Net Lease Portfolio also worth at least $650 million. All this for a company with a market value of less than $500 million.

I’ve estimated income from CapitalSource Bank at about $80 million. Couple this with $50 million from the REIT and the company is priced at 4x cash flow with two more components to look at.

Both of these subsidiaries, however, are fairly well insulated. The Bank needs its own capital for regulatory purposes. Earnings will be retained within the Bank and not passed through to the parent. Cash flow could pass from the Health Care Portfolio, but CapitalSource continues to look for opportunities to spin-off this portfolio and realize its market value. At this point, holding the real estate is the prudent move for shareholders.

Next up is a look at the interest that CapitalSource has in various securitized pools.

Disclosure: I currently hold shares of CapitalSource

Related Entries CapitalSource Part Three: Securitization Residuals CapitalSource’s Third Quarter and Current Outlook CapitalSource Part Four: The Commercial Portfolio The Four Parts of CapitalSource: Part One A Look at Capital Source

This entry was posted on Tuesday, March 31st, 2009 at 4:39 am and is filed under CapitalSource. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.