Our four Specialty REITS -- Alesco Financial (AFN), Crystal River Capital (CRZ), Deerfield Triarc Capital (DFR) and RAIT Financial Trust (RAS) -- got hit hard yesterday and this morning in reaction to news that three more hedge funds holding subprime mortgage paper are in trouble.

At the time I'm writing this the four stocks are down more than 50% on a composite basis. And even though they only make up 12% of our portfolio (and hold almost no subprime loans) we're definitely feeling the pain in this panic-stricken sector.

At this point, I believe massive margin selling, coupled with indiscriminate selling by leveraged funds, is overwhelming these four stocks and the whole financial sector because of the ever-widening spreads between Treasuries, mortgage paper and non-investment-grade bonds. Frankly, we need some insight as to the current state of this busted market.

And tonight we will get that reality check as RAIT Investment reports its Q2 numbers. Yesterday, RAS' management put out a press release to clear the air about its exposure to the newest blowup, American Home Mortgage (AHM).

The company said today that all issuers of its trust preferred securities, other than American Home Mortgage Investment Corp. (AHM), made the payments that were due on July 30. RAIT has net equity exposure to AHM of approximately $95 million, or $1.56 per share of book value, resulting from trust preferred financing provided to AHM in 2005. This exposure, relative to RAIT's book value of $23.94 is a small piece of its overall business.

If you look on Yahoo Finance under "Key Statistics," you'll see that RAIT, AFN, CRZ and DFR are all trading at 40%-50% discounts to their prevailing book values. This reminds me of the Canadian Royalty Trust meltdown back in early November that eventually worked itself out in six months with most of these stocks recovering and surpassing their pre-meltdown prices -- and maintaining their hefty dividends.

As I mentioned in Friday's update, when I spoke with Alesco, Crystal River and Deerfield Triarc's internal people, prior to going into the current pre-earnings quiet period, they all expressed confidence that they will pay out their dividends for the current quarter. That leaves only the question of what happens going forward?

Even if we get a reprieve, it's still likely to take months to repair this damage. I think the "powers that be" (read: the Fed) won't let that happen -- of course there is no guarantee.

Finally, I've never made the right decision by punching out of a sector in panic-mode. Especially one that I believe is too big to fail, like the credit markets. It appears that some serious unwinding of leverage is more the problem than the ability of these portfolios to pay their stated dividends.

RAIT expects to release its second-quarter 2007 results after market hours today, Aug. 1, and investors can listen to its quarterly results conference call, which has been moved forward and will be broadcast live over the Internet on Thursday, Aug. 2, at 9 a.m. Eastern. Investors may participate in RAIT's earnings call by dialing 1-888-713-4205, access code 74176523.

I'll certainly be paying close attention and give you a full update on this situation no later than Friday in the Update.

Bryan Perry

Editor The 25% Cash Machine