CBRE Realty Finance, Inc. (CBF)

jpenabad (54.30) Submitted: 7/25/07 6:35 PM : Start Price: $8.61 CBF Score: -65.20

CBF is a specialty finance company that has been indiscriminately killed in the marketplace. The company, trading below 0.8x book value, has several catalysts coming that will propel the stock over the next 6 months to 1.1x book. With a dividend in the middle, you are looking at 50% returns in 6 months.

The company is a lender to COMMERCIAL real estate borrowers and makes investments in COMMERCIAL real estate loans. I make the "commercial" point because it is being treated as if it was subprime. Right now, commercial real estate is far and away healthier than residential (although i don't expect this to last). The stock, after coming public earlier this year, was punished as two of the company's condo-conversion loans went bad. This scared away all investors, especially so early in the company's public history. Furthermore, origination volume has been weak during a time when the industry is enjoying tremendous origination volume. Lastly, the CEO was fired in April for lack of performance, leaving the company in the able hands of Ray Wirta in the interim. So why buy this stock?

First, the condo loan problems are one-off, not systemic in the portfolio. (In fact, they only have one other condo loan, in NYC). Credit has not been an issue for the company since, and I would expect management to be more careful going forward. Also, the loans they took over, while maybe not worth 100% face value, will definitely be worth at least 75% of face once CBF is done mitigating the loans. As for origination volume, that has been the steady problem. However, removing the CEO is the first step in the right direction. Also, CBF's relationship with CB Richard Ellis (its manager) should help push volumes its way. I would expect the second half to be much stronger. Lastly, the CEO hiring can only be a positive catalyst at this point.

I'm not making a bull case for commercial RE for the next 24 months, but I think the next 6-9 months will be good for this company. At its current valuation, it's time to go shopping. Build positions here and start taking profits as the stock goes above $13.

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