Arbor Realty Chases CBRE Realty Finance

Lost in the Thanksgiving shuffle was Arbor Realty's (ABR) 13-D filing disclosing its 9.4% stake in CBRE Realty Finance (CBF), and more importantly, Arbor's desire to acquire CBRE. As detailed in the 13-D, Arbor made a $8.00/share stock-for-stock offer (though it did offer to pay up 25% in cash) in late August, which was rebuffed by CBRE.

However, Arbor didn't give up, and on November 13, after CBRE reported its third-quarter earnings, Arbor made another offer to acquire CBRE. This offer was also rebuffed.

It's now two weeks later and Arbor is keeping the pressure on, amending the 13-D to request a waiver of the 9.8% ownership threshold and to include a direct request to meet with interested parties of CBRE's board.

It's certainly an intriguing proposition for the two companies, although the $8/share offer is significantly below CBRE's third-quarter book value of $9.65/share. I believe Arbor will need to raise its offer to at least $9.50/share to get enough fire behind CBRE's independent board members for the offer to be seriously considered. Still, Form 4 filings since November 12 appear to indicate that at least some of CBRE's insiders believe the company is in play.

From a strategic standpoint, the deal does have some synergies. Both companies have shown the ability to work well with JV partners, but CBRE's current opportunities for capital reinvestment appear limited. Arbor, on the other hand, could redeploy CBRE's capital to reduce reliance on repurchase financing and retain more equity interests, which has been a real strength for Arbor.

The cost of the deal could range from $250 - $300 million, meaning Arbor would have to issue an additional 15-20 million common shares to effect a stock-for-stock swap. Nonetheless, the opportunity to acquire a cheap commercial mREIT appears to have heightened Arbor's ardor.

More Bad News at BRT

Two weeks ago, I wondered if trouble was brewing at BRT Realty Trust (BRT). In an after-hourse press release on Monday, BRT confirmed that the news was indeed pretty bad.

In its September 10, 2007 release, the company estimated that it would have $55,858,000 of non-earning loans at September 30, 2007. The company now expects that $63,627,000 of its first-lien mortgages will be categorized as non-earning at September 30, 2007. That means that 25.5% of its gross loan portfolio is in some way not performing.

BRT admitted that "[i]n connection with its year end audit, the company...expects to take an [additional] allowance for loan losses of $8,300,000..." The amount is shockingly high as compared to the prior year, when there was no provision for loan losses. Another marked change to the balance sheet is the presence of REO. BRT expects to have REO of $9.3 million at September 30, with another seven foreclosures totalling $63.6 million in process.

While the loan loss provisions will not impact taxable income, the foreclosures will translate into realized losses during BRT's fiscal 2008. Those losses will limit taxable income going forward, so while BRT may pay a $0.62/share dividend for the fourth quarter of 2007, its dividend will come into question for fiscal 2008 and beyond.

Luminent's Lenders Playing Hardball

Luminent Mortgage Capital (LUM) disclosed late this afternoon that the trustee for its 8.125% convertible senior notes notified LUM that "a reporting default has occurred under the indenture" because Luminent didn't file its third quarter 10-Q on time.

Luminent said that "[t]he trustee informed us that the reporting default will ripen into an event of default under the indenture unless we cure the reporting default by filing with the SEC our Form 10-Q report for the period ended September 30, 2007 within 60 days after the date of the trustee's notice, or by January 20, 2008."

Such an action is very unusual, as failures to file timely SEC reports are very technical covenant violations and is customarily waived by lenders. Seems like Luminent's bondholders are searching for loopholes.

FBR Capital Markets Presentations

The following companies have announced upcoming presentations at the 2007 FBR Capital Markets Investor Conference. I'll post links to the presentation slideshows as they become available:

Crystal River Capital (CRZ)
Alesco Financial (AFN)
NorthStar Realty Finance (NRF)
RAIT Financial Trust (RAS)
Resource Capital Corp. (RSO)
KKR Financial Holdings LLC (KFN)
CapitalSource (CSE)
Anthracite Capital (AHR)
JER Investors Trust (JRT)

MFA Mortgage Investments (MFA)

Quibbling with Quadra

Wachovia's downgrade this morning of commercial originator Quadra Realty Trust (QRR) reminded me that I had yet to discuss the Company's third quarter results. Quadra posted GAAP net income of $0.26/share for the third quarter, with no impairments to its existing loan portfolio. The dividend was set at just $0.13/share.

It can't be a good sign when the first question on the conference call is about "consider[ing] a strategy to wind down the portfolio, some other strategic change like maybe being folded back in Hypo." Although Quadra execs dismissed those possibilities, preferring instead to discuss the possibility of pursuing alternative financing opportunities, the Company also acknowledged that it was not going to press its warehouse lender (Wachovia, natch) for a possible $250 million extension.

A review of Quadra's portfolio leaves me with the impression that the Company is a high-risk, low-reward investment proposition. Quadra has significant exposure to condo and construction loans in the overheated South Florida and Las Vegas markets. Also, the Company has an aggregate of $109.5 million in loans to one group of commonly controlled borrowers. These two factors introduce unsystematic geographical and credit risk to Quadra.

I am also suspect of Quadra's assertion that the five construction loans it transferred from "held-for-investment" to "held-for-sale", which required valuation at lower of cost or market. Quadra claimed that available market information supported the existing valuation, so no markdown was recorded. That seems unlikely.

In short, Quadra has a risky portfolio, skimpy dividend yield, and no clear vision on how to structure its funding without access to the CDO market. That's just too many quibbles for investing in Quadra.

Commercial mREITs Charts are Telling

This article in the Wall Street Journal (behind firewall, see summary at Calculated Risk) represents some media confirmation of what we all suspected - falling property values in commercial real estate. While the current expectation of the market is not for the same kind of severe collapse in CRE that we have witnessed in the residential market, the opportunities for the commercial lenders and investors are fairly limited at this point.

Additionally, anecdotal evidence reveals that many recent commercial deals were done using optimistic forecasts for lease payments increases and occupancy improvement - trends that have not borne out 12-18 months after the deal was done.

The commercial mREITs, while generally smacked around by the credit crunch, have also undergone intense selling in recent weeks despite strong earnings reports. iStar Financial (SFI), for example, has dropped about $10 (27%) since the middle of August despite raising its dividend and only mildly easing forward guidance. NorthStar Realty Finance (NRF), Capital Trust (CT), and Anthracite Capital (AHR) also show a similiar pattern despite reporting decent third-quarter earnings.

The declines in these names and the related chart action show an eerie similarity to the year-ago charts of NovaStar Financial (NFI), New Century Financial (NEW), and Accredited Home Lenders (LEND) - all of whom continued to post decent results for the third quarter of 2006 yet saw serious declines in their stock prices during the fourth quarter of 2006.

Tread carefully in the commercial mREITs. While valuations are compelling at these levels, a collapse in the CRE market seems to be foretold in their charts.

Luminent Lays It on the Line

Luminent Mortgage Capital (LUM), which got crunched in August after a series of margin calls and asset seizures, put out a pretty straightforward presentation about the timeline of events affecting it from August through today. Not much commentary to add except that the chain of events is a pretty grim read for any mREIT investor. Luminent's presentation shows just how important liquidity is during this extremely distressed environment.

Impac Intent on Survival

Residential originator and investor Impac Mortgage Holdings (IMH) provided a market update via press release early this morning, principally to inform the market of its inability to file its 10-Q. (But you already knew that.)

As has been the case for other mREITs this quarter, under GAAP, Impac is going to have to record a negative equity investment charge related to losses in certain trusts. The losses embedded int those trusts, which are consolidated for GAAP purposes, exceed Impac's economic net investment and thus will not be realized cash losses. However, the negative equity charge will likely cause Impac to to have a consolidated stockholders' deficit and consequently a negative GAAP book value. It will be interesting to see how Impac's lenders treat this material development.

Nonetheless, Impac believes that "its current cash flows along with its reduction in operating expenses...should provide sufficient liquidity to execute its current business plan." Time will tell for Impac, whose stock continues to trade well below $1/share.

Delta's Dilutive Deal

Delta Financial (DFC), which warned last week of its dire liquidity situation and need for dilutive financing, announced this morning that it had entered into a letter of intent with an affiliate of Angelo, Gordon & Co., one of the Company's principal stockholders, for an aggregate financing of $100.0 million, including amounts outstanding under the residual financing facility established in August 2007.

Angelo Gordon will provide the funding in exchange for 10% senior secured notes and 40 million newly issued shares, almost twice Delta's current outstanding shares.

The deal is subject to a number of closing conditions, including the Company not being in default under any of its material agreements and the successful execution of a securitization or sale of $500 million in loans.

It's a terribly dilutive deal for Delta shareholders, but given that the alternative may be a swift plummet into bankruptcy, Delta investors have no choice but to accept this course of action.

Hanover's Hangover

Hanover Mortgage Capital (HCM), a struggling subordinate RMBS investor, announced a further delay in reporting third quarter results. Hanover blamed turmoil in the credit markets, of course, saying it needed "more time to arrive at the fair value of certain of its assets for financial statement purposes and certain REIT compliance purposes."

The statement is a bit more ominous sounding if you recall Hanover's warning from the second quarter 10-Q:

Further, as of August 15, 2007, the Company’s position in Agency MBS...held primarily to meet compliance with the Investment Company Act of 1940, has been sold. ...[S]hould lenders refuse or become unable to loan to the Company sufficient amounts to purchase Agency MBS or prime mortgage loans to meet compliance requirements, the consequences may result in the Company’s being deemed an investment company.

Hanover also faces scrutiny regarding its transaction with Ramius:

We have agreed, pursuant to the terms of the Ramius MRA, to treat the entry into the MRA with Ramius as a sale for tax purposes. While we have a reasonable basis for believing that the transaction will indeed be treated as a sale for tax purposes, there can be no guarantee of such tax treatment. Failure to treat the Ramius MRA transaction as a sale for tax purposes could result in not only adverse tax consequences for us, but could, ultimately affect our ability to maintain our REIT status.

In short, Hanover's overhang from the August credit crunch leaves its future in some serious doubt.

NovaStar's Days are Numbered

NovaStar Financial (NFI) finally revealed what many had suspected all along - that a bankruptcy filing is imminent. In fact, NovaStar mentions the word "bankruptcy" over twenty times in its recently filed 10-Q. The Company also chose to suspend the dividend on its Series C and Series D-1 preferred shares. The GAAP loss for the quarter was a stunning $64.05/share, and NovaStar admitted that it had a negative net worth:

Due to the fact that we have a negative net worth, we do not currently have ongoing significant business operations that are profitable and our common stock and Series C preferred stock are likely to be delisted from the New York Stock Exchange, it is unlikely that we will be able to obtain additional equity or debt financing on favorable terms, or at all, for the foreseeable future. To the extent we require additional liquidity and cannot obtain it, we will be forced to file for bankruptcy.

NovaStar still owes Wachovia nearly $100 million, and as noted below, the Company is running out of time to satisfy its debts:

As of September 30, 2007, the Company was out of compliance with the net worth covenant in its repurchase agreements with Wachovia but has obtained a waiver to be in compliance. The waiver expires on November 30, 2007. The Company expects to be out of compliance with the net worth covenant subsequent to November 30, 2007 and there can be no assurance that the Company will be able to obtain additional waivers or amendments. If the Company cannot obtain additional waivers or amendments, there can be no assurance Wachovia would not issue an event of default and cause the outstanding borrowings to become due and payable immediately which also could cause the Company to file bankruptcy.

As noted above, NovaStar's covenant waiver with Wachovia expires on November 30. Assuming NovaStar can survive the next two weeks without a deadly margin call, the fate of NFI will be completely up to Wachovia. Even if Wachovia is willing to play nice, NovaStar must also make the payments on its trust preferred securities or face immediate repayment of those obligations.

Is Impac Insolvent?

Silence is not golden for Impac Mortgage (IMH).

After the bell on Tuesday, Impac belatedly revealed that it received a September default notice from Bear Stearns related to unmet margin calls on an active repurchase agreement. Subsequently, Bear Stearns notified Impac that it had elected to terminate the facility and demanded immediate payment of the entire amount of approximately $286 million and seized the collateral.

Impac also disclosed that it had defaulted on two other repurchase agreements sometime after the end of the third quarter. Those facilities were subsequently terminated.

Finally, Impac was in default on a fourth repurchase agreement and a warehouse facility at September 30. The Company requested a waiver of default from each these lenders, but had not received the waivers as of November 13, 2007.

The one-time Alt-A giant admitted that the Company’s board of directors had elected to discontinue the mortgage operations, commercial operations and warehouse lending operations -- and incur a pre-tax restructuring charge of approximately $17 million.

Obviously, Impac was not going to file its 10-Q on time, but the SEC is the least of IMH's concerns. Impac closed at just $0.94/share, but with the very real threat of bankruptcy looming overhead, shares may head south quickly after the open tomorrow.

Luminent Lays Into I-Banks

Luminent Mortgage Capital (LUM), a residential mortgage investor, filed its second lawsuit against an investment bank for misrepresenting the true value of Luminent's asset-backed bonds. Reuters is reporting that Luminent is suing a unit of Barclays plc, alleging the bank used the crisis in the credit markets to unreasonably mark down the value of bonds it held as collateral.

Barclays served as a counterparty to Luminent for a repurchase agreement, a short-term method of financing loans and mortgage-backed securities. Repurchase agreements typically allow the counterparty to seize the related collateral if the borrower is unable or unwilling to maintain sufficient margin against the related borrowings. In August, Barclays demanded about $35 million in payments from the plaintiffs to cover a purported shortfall in the value of some bonds. Luminent said it refused to submit to the payment demands as the bonds were "much more valuable than Barclays was representing them to be." The mortgage REIT asserted that "Barclays was simply exploiting an aberrational market as a pretext to unreasonably mark down the purported value of the bonds, demand an unreasonable amount of additional collateral from plaintiffs, and then confiscate a portion of the value contained in certain of the bonds," according to the complaint.

Last month, Luminent separately sued HSBC Holdings Plc's broker-dealer unit, alleging it had wrongfully confiscated bonds Luminent subsidiaries had put up as collateral for loans.

Luminent confirmed today that it had hired Grant Thornton as its new auditor. Grant Thornton, you may remember, dumped both Accredited and Fremont last spring after those companies fell victim to subprime crunch #1. Luminent cited the change in auditor as its reason for delaying the filing of its Q3 10-Q. Curiously, Luminent indicated that it did not "anticipate any significant change in results of operations from the corresponding period for the last fiscal year." They may want to check their Form 12b-25 one more time before turning it in next time.

Fitch Cuts NovaStar's CDO to Junk

More bad news for NovaStar Financial (NFI). The Company's first CDO, which closed in February just as the subprime fallout was beginning, received notice today that the entire $375 million deal had been cut to junk (BB or below), including a $243.7 million tranche previously rated AAA.

The residual certificates, which were retained by NovaStar and represented much of NovaStar's remaining unencumbered assets, are certain to receive notice from the CDO trustee that the deal is now failing overcollateralization tests - meaning that cash flow will be cut off from the residual securities.

NovaStar, which was due to file its 10-Q on November 9th, has given no explanation for the late filing of its quarterly report. The SEC was closed due to Veterans' Day today, so NFI will have to file its Form 12b-25 tomorrow. It will be interesting to see what NovaStar cites as its reason to failure to file on a timely basis. Back in August, Deloitte & Touche balked at giving NovaStar consent to incorporate its 2006 10-K into a registration statement without amending the annual report to include a "going concern" paragraph. Perhaps D&T will not sign off on the quarterly review without a going concern this time. We'll find out tomorrow.

Trouble Brewing at BRT?

BRT Realty Trust (BRT), a short-term commercial-focused lender, is the only mREIT the author knows that has a fiscal year-end not on December 31. BRT's fiscal year-end is September 30 - thus the company's 10-K is not due until December 14. However, an early September disclosure combined with the downward adjustments normally resulting from a year-end audit make me wonder if trouble is brewing at BRT.

BRT Realty Trust focuses on making subprime and hard money bridge loans to commercial projects - retail spaces and condo conversions, for example. These bridge loans carry a high interest rate and typically payoff quickly, as they are only a temporary source of financing. In the past, this quick turnover has offset the credit quality of the loans, as they matured quickly enough to prevent losses.

In early September, however, BRT reported that 21.6% of its loan portfolio will be classified as non-earning assets, which will reduce interest and other revenue by $1.8 million. What BRT didn't disclose is the amount of additional loan loss reserves it will need to take against these assets. As of June 30, the loan loss reserve against non-earning assets was approximately 7% of those non-earning assets. I believe BRT will need to bump this provision up to 10% of non-earning assets. Based on the press release figure of $55.858 million, BRT will need to record a current period provision of $3.917 million. An additional $3.917 million in ALLL plus the loss of $1.881 million in Q4 revenue plus additional $0.248 million in expected reduction in equity income yields a hit to income of about $6.0 million.

That $6.0 million would have been enough to push BRT into the red before accounting for the sale of its highly-appreciated stake in Entertainment Properties Trust (EPR). We'll see if BRT sells additional amounts in EPR for the fourth quarter to preserve positive net income. The remaining EPR stake could still be monetized for a gain of about $25 million.

Overall, BRT is trading at about 76% of book value, but lacking additional gains from appreciation in EPR and the likelihood of a loss from core operations, I expect to see book value fall to near market levels in the short-term.

CBRE Can't Catch a Break

CBRE Realty Finance (CBF), a commercial originator and investor, reported solid third quarter results outside of impairment charges. The question for CBRE going forward is whether or not these impairment charges will be one-time or recurring.

During the quarter, CBF recorded a net loss net loss available to common stockholders for the third quarter of $50.0 million, or $1.64 per diluted common share. Adjusted funds from operations ("AFFO") totaled ($48.1) million, or ($1.58) per diluted common share. These losses were driven by the recognition of $54.7 million of impairments on the Company's two foreclosed assets.

Excluding the impairment charges, AFFO would have been $6.6 million, or $0.22 per diluted common share - enough to cover the $0.17/share Q3 dividend.

CBF said it expects to achieve its previously stated 2007 dividend guidance of $0.80 per share from core activities with an expected dividend of $0.21 per share to be declared in the fourth quarter, which equates to a current yield of about 20%.

Most tellingly, book value per diluted common share was $9.65 at September 30, 2007, after the impairment charges, meaning CBF is trading at just 40% of book value.

It remains to be seen if CBRE's portfolio will continue to perform going forward, which traders are obviously betting against at this point. CBRE said in its earnings release that "[a]s of the date of this press release, there are no non-performing loans within the Company's debt portfolio."

Another issue for CBRE is future earnings given limited origination activity and access to funding. As existing investments payoff and mature, CBRE has thus far been unable to redeploy the capital into higher-yielding investments due to internal capital needs. Now that the balance sheet has stabilized somewhat, it will be interesting to see how CBF chooses to put to use available capital. The Company's existing joint ventures appear to be a strong niche for CBRE, one that might well be worth expanding given the limited availability of CDO issuance for funding purposes.

Overall, given the 20% dividend yield and upside potential due to the gap in market price and book value, CBF appears to be strong speculative play.

Crystal River Tries to Sparkle

Crystal River Capital (CRZ) reported third quarter results on Thursday, turning in good results outside of the impairment charges we've come to expect.

Net investment income was $0.91/share, operating earnings were $0.81/share, and revised REIT taxable income was $0.75/share, well ahead of the $0.68/share dividend. The company shrunk the balance sheet significantly during the quarter, unloading agency RMBS to raise cash. Such action, combined with the improvement in net investment income, is a positive for CRZ in that it was able to redeploy its capital into higher-yielding investments while maintaining REIT qualification.

Crystal River appears to have learned its lesson quickly regarding the use of repurchase agreements. 91% of CRZ's portfolio was match-funded at the end of third quarter.

Crystal River has an interesting strategy with respect to its portfolio holdings. They hold a large amount of agency RMBS on one end, but also are heavily invested in subordinate commercial real estate and other ABS.

Overall, the Company continues to comfortably cover its dividend and it has the backing of Brookfield Asset Management to help provide funding. It will be interesting to see how Crystal River defines itself going forward.

The Company is trading between its GAAP book value and its economic book value, so it appears fairly valued for now. Nonetheless, the 19% dividend yield is more than adequate compensation for investors who are waiting on Crystal River to differentiate itself.

Dynamics Damn Delta

Delta Funding (DFC) finally reported delayed results Thursday afternoon, and it was not good news at all.

Delta reported a net loss of $39.6 million, or $1.70 per diluted share, for the quarter ended September 30, 2007. More importantly, Delta disclosed it has "been pursuing financing alternatives, and are in discussions with potential investors that may lead to a significant issuance of debt or equity securities, and may result in significant dilution for existing stockholders." That disclosure sent shares down 35% on Friday, as shareholders questioned Delta's very survival.

During the third quarter of 2007, the Company charged-off $12.5 million of loans, or 71 basis points annualized, against the allowance for loan losses. Loans delinquent greater than 90 days constituted 9.1% of the outstanding loan balance at September 30, 2007. This sort of credit performance underlines the serious deterioration of the economic profiles of subprime borrowers, as Delta claims to only originate full-doc, fixed-rate loans.

We'll see what alternatives Delta is able to find - Accredited may have been the last subprime boat to set sail.

Origen Fighting Against the Tide

Origen Financial (ORGN), the major player in originating and servicing manufactured housing loans, reported improved results for the third quarter. The Company posted GAAP net income of $0.11/share and bumped its dividend by a penny to $0.09/share.

Origen has recently shown signs of life after a long period of dormancy following the manufactured housing blow-up in 2001. Manufactured housing has been out of favor ever since interest rates hit historical lows and subprime financing enabled many marginal prospects to obtain financing for home ownership.

Nonetheless, Origen has survived, and with interest rates rising and the decline in subprime financing, they have profited from their increased market share of the manufactured housing market. However, the manufactured housing industry continues to struggle, with September shipments down 14 percent compared with September 2006, and year-to-date shipments down 22 percent from last year.

Although Origen was able to increase its originations 30 percent over last year's third quarter, the manufactured housing market continues its slide. It remains to be seen if Origen can overcome the rising tide of manufactured housing decline.

Anguished Anticipation - mREITs Not Yet Reporting

We've still got a few accelerated filers in the mREIT universe who have yet to report Q3 results, despite 5:30 p.m. today being the deadline for filing third quarter 10-Qs. None of the outstanding delinquents have good news to report.

Impac Mortgage Holdings (IMH) - Impac does a monthly filing, so there is some visibility to results through August 31. Impac is notoriously late on filing its 10-Q anyway.

Luminent Mortgage Capital (LUM) - Oh, poor Luminent. At least they're trying to file a 10-Q and not a bankruptcy 8-K. Might take them a while since I'm not sure they were ever able to replace Deloitte after D&T quit.

NovaStar Financial (NFI) - NovaStar is so unpredictable. They are typically a timely filer, however. Results will be poor due to the tax implications of their REIT revocation.

Note: Quadra Realty Trust (QRR) , CBRE Realty Finance (CBF), and Hanover Capital Mortgage (HCM) don't have their quarterly filings due until November 14. All three companies are holding earnings calls next week.

Arbor Realty Stands Tall

Arbor Realty (ABR), a diversified commercial originator and investor, blew away analyst estimates for the third quarter, delivering adjusting earnings of $0.70/share versus an expected $0.63/share. Arbor also beat on revenue, delivering adjusted revenue of $63.5 million versus an expected $60.5 million.

On a GAAP basis, Arbor did even better, posting net income of $1.02/share due to gains from equity participation interests. GAAP book value was $20.19/share, meaning that Arbor is trading at just 83% of book value.

Part of the reason for the skepticism surrounding Arbor is liquidity concern. The Company makes extensive use of repurchase facilities, which comprise 31% of ABR's total liabilities. However, Arbor recently closed on two new committed warehouse lines that do not carry margin call risk. These lines replace expensive, short-term bridge loan financing. In addition, Arbor sold an equity investment in October that allowed the Company to raise cash. Nonetheless, I look for management to discuss its current access to the securitization market and to clarify its funding strategy going forward, particularly as it relates to their position on match funding.

Fortunately for Arbor, it sold its entire portfolio of agency RMBS in the first quarter of 2007. Given the significant valuation adjustments on MBS that most mREITs took this quarter, it was a very well-timed move for Arbor. With an attractive 15% dividend yield and a solid balance sheet, Arbor looks poised for significant upside.

Bimini's Q3: Not Bad

Since being booted off the Big Board, Bimini Capital's (BMNN.PK) common stock has been under serious pressure, selling off 31% today to just $0.22/share. Although Bimini has certainly destroyed a serious amount of shareholder value through its disastrous foray into mortgage origination, Bimini has finally stemmed the tide of losses.

Book value is now $1.00/share, well above the common price. Bimini was also able to post positive REIT taxable income for Q3, although the company still has a YTD REIT taxable loss. Even a solid Q4 performance will not enable Bimini to earn taxable income for the year in excess of the dividend paid back in March, so Bimini will not pay a dividend until 2008. Nonetheless, the net interest margin of 88 basis points was much higher than other agency investors - a major positive for Bimini.

Hopefully Bimini has put the worst behind it and can focus on generating positive net income in Q4, since many of the one-time charges have now been flushed through the income statement.

Deerfield Delivers

Deerfield Triarc Capital (DFR), a diversified REIT, delivered solid results despite a headline net loss. DFR, like many of its peers, incurred significant losses during the quarter on asset sales, valuation impairments, and swap losses, driving GAAP net loss to $0.45/share. However, many of these charges do not effect taxable income, which drives Deerfield's dividend.

DFR posted $0.50/share in taxable income, well above the $0.42/share Q3 dividend. Year to date, Deerfield has earned $1.34/share in REIT taxable income but paid out just $1.26/share in dividends. With a book value of $10.64/share, Deerfield is trading at just 70% of BV.

Deerfield's deep discount to book value is partially explained by the Company's liquidity situation, which is bit thinner than some of its peers. Deerfield had a leverage ratio of 14 times equity at September 30, and as of October 31, 2007, DFR had unencumbered RMBS and unrestricted cash and cash equivalents of $128.5 million. However, Deerfield has 15 active repurchase agreements with aggregate exposure of $301 million, which places DFR at risk for additional margin calls and forced asset sales that could hamper continued REIT qualification.

Overall, Deerfield carries a higher risk profile than many of its peers given its investments in alternative assets and some non-prime backed RMBS. However, investors are more than adequately compensated with a 22.7% dividend yield.

AMAC Can't Make It Add Up

American Mortgage Acceptance (AMC) posted a shocking miss on FFO, losing $0.02/share versus a dividend of $0.225 for the third quarter. Shares fell by 40% in heavy trade before recovering somewhat after the conference call.

A failed 2007 CDO attempt was management's explanation for the poor results. AMAC had to take a $1.1 million charge (booked through G&A) for the writeoff of CDO costs and termination costs for the repo facility currently housing the planned CDO securities. Additionally, the Company had a $1.3 million impairment charge on its CMBS portfolio. Excluding those charges, FFO would have been approximately $0.26/share. American Mortgage Acceptance has distributed $0.675/share in dividends thus far this year versus earning only $0.59/share in FFO.

With a book value of $9.55/share, AMAC should consider repurchasing shares, but does not currently have the liquidity to do so pending the refinancing of its CMBS. The fourth quarter of 2007 will be a time of transition for AMAC as it looks to alternative financing structures outside the CDO market.

Newcastle's Results Don't Tell the Whole Story

Newcastle Investment Corp. (NCT), a diversified mortgage REIT recently grabbing headlines for its investment in distressed subprime loans, turned in less-than-exciting third quarter results due to significant impairment losses and losses on equity investments. GAAP losses were $0.74/share and FFO ex-items was $0.68/share, below the $0.72/share third quarter. Book value fell to $12.66/share.

Nonetheless, considering the subordinate nature of Newcastle's portfolio, credit performance was certainly much better than RAIT, for example. Should NCT continue to experience strong credit performance, future impairment charges should be limited and the high yields will produce strong FFO. NCT's confidence in its future performance is underlined by the announcement of its recent $100 million buyback announcement.

Commercial Stars Continue to Shine

Two outstanding companies in the commercial origination sector, iStar Financial (SFI) and Capital Trust (CT), both reported solid Q3 results today. iStar's results were a bit more muddied due to the Fremont acquisition closing in July, but adjusted earnings came in two pennies better than expected. Capital Trust posted GAAP earnings in-line with expectations.

Both companies continue to progress solidly despite the credit turmoil, with iStar even raising its dividend to $0.87/share, despite cutting its adjusted earnings forecast. Although iStar did not suffer too much from valuation adjustments this quarter, I believe we are beginning to see a similar trend of taxable income far outpacing GAAP results, even in the CRE mREITs.

I look for the commercial market to slow at a more gradual pace than the sudden bursting of the residential balloon. Let's hope both Capital Trust and iStar have made the right moves to weather the downturn.

JRT Runs Out of Juice

JER Investors Trust (JRT), a commercial investor and originator in the mREIT space, posted disappointing earnings for the third quarter amidst higher G&A expenses and valuation adjustments to its CMBS portfolio.

JRT had been a solid performer since its 2005 IPO, but the Company's strategy of investing in mezzanine and B notes began to work against it this quarter. JRT showed some signs of liquidity pressures during the quarter, which it alleviated by selling a stake in a non-core portfolio. The company earned FFO of just $0.43/share, below the 3Q dividend of $0.45/share. Year-to-date, JRT has distributed $1.34/share but earned FFO of just $1.22/share.

JRT was a winner in 2006, profiting from tight spreads on CMBS and the high yields available on B-grade financing. As the credit market tide has turned against it, JRT is looking more and more vulnerable. Book value per share fell to just $8.46, which makes the after-hours high of $11.14 (a 1.3x premium to book) look pretty pricey.

CapitalSource's Convenient Oversight

CapitalSource (CSE), a middle-market commercial lender and investor, was out with 3rd quarter earnings of $0.15/share, materially down from $0.45/share in 2nd quarter earnings. The reduction in current period income (and to be fair, I give CapitalSource credit for having positive net income) is due primarily to the $30 million valuation charge the Company took against its residential investment portfolio. Although the residential portfolio comprises over 25% of CSE's net investment income, it is rarely mentioned throughout CSE's earnings release, perhaps because the yield on the agency securities is so low compared to CapitalSource's other investments. It seems fairly obvious that those agency securities have been retained to help CSE maintain REIT compliance.

CapitalSource elected to maintain a dividend payout of $0.60/share, despite posting adjusted earnings (roughly equivalent to taxable income) of just $0.50/share. Year-to-date, CSE has earned $1.82/share of adjusted earnings and paid out dividends of $1.78/share. The dividend coverage is pretty minimal - reflecting CapitalSource's bullish outlook for the fourth quarter.

The conference call was very positive and confident, and CapitalSource does focus on a niche -- healthcare -- that is largely noncyclical. Nonetheless, CapitalSource feels very comfortable about its ability to access the securitization market -- a view that is in sharp contrast to that of its peers.

CapitalSource converted from being a BDC to the REIT structure at the beginning of 2006, so management is largely untested at satisfying REIT requirements during times of stress. Investors in CapitalSource may wish to review the Q carefully for hints that maintaining REIT status will be a challenge at year-end.

Earnings Avalanche

This week marks the absolute height of earnings season for the mREIT universe, and I'm struggling to keep up with my day job, earnings releases, and conference calls. Please bear with me.

CapitalSource and iStar Financial both released solid reports this morning before the bell. Both stocks are up sharply in early trading. I'll post additional commentary on their results later today. Look for JRT Investors Trust, Capital Trust, and New York Mortgage Trust to post results after the bell today.

MFA Peddling More Stock

MFA Mortgage (MFA) filed a post-effective amendment to its existing shelf registration to announce the offering of 15,000,000 more common shares, or about double the offering size it completed in October.

MFA plans to use the proceeds to "acquire additional high quality MBS, on a leveraged basis, consistent with our investment policy and for working capital, which may include, among other things, the repayment of our repurchase agreements." Nothing new there. The only item of interest I saw in the prospectus was "On November 5, 2007, we sold approximately $139 million of AAA rated MBS for a realized capital gain of approximately $348,000." That's good news for the whole mREIT market if those AAA-rated MBS were non-agency.

Alesco's Results Have Familiar Theme

Update: I read through Alesco's conference call transcript, and management confirmed that they don't envision any trouble satisfying the REIT qualification tests, although they are continuing to consider voluntary conversion to a partnership structure. Alesco also guided to a $0.31/share dividend.

Alesco Financial (AFN) reported results after the bell today, and much like RAIT and Redwood, Alesco posted a significant GAAP loss but fared well on a taxable income basis.

Alesco's third-quarter loss was $8.36/share, driven by a $521.3 million loss on the Kleros Real Estate CDOs. On an adjusted basis, after adding back the valuation adjustments, Alesco earned $0.31/share in taxable earnings, equal to the third quarter dividend. AFN estimates that its adjusted book value is $5.62/share.

While Alesco's results are similar to its peers in terms of heavy valuation losses, Alesco has more risk in that the continued downgrades of the Kleros CDOs are reducing the value of qualified REIT assets, thus putting Alesco at risk for failing REIT asset and income tests. Alesco admitted that "As of November 1, 2007, none of the Kleros Real Estate CDOs are making cash distributions to AFN. The Kleros Real Estate CDOs have all failed overcollateralization tests as a result of significant ratings agency downgrade activity."

Although Alesco continues to generate taxable income from other investments, I hope management will add some color on the upcoming conference call as to whether there will be enough qualified REIT income to maintain Alesco's status as a REIT.

Mark-to-Market Mars Redwood's Results

Redwood Trust (RWT) reported results after the bell, but the headline numbers yield nothing but confusion. As Redwood explains in its Redwood Review, the current GAAP methodology requires many financial assets to be marked-to-market, but does not allow for the matching liabilities to be reduced. As a result, Redwood recorded a valuation adjustment of $757 million, which does not impact taxable income, but created a GAAP loss of $2.18/share for the quarter. GAAP book value fell to $5.31/share.

However, Redwood manages its business on the basis of maximizing cash flows. Therefore, the economic reality of the valuation adjustment does not match the GAAP impact. Redwood was forced by accounting rules to mark down its investments below its remaining economic risk. Further, although the investments are now carried at no basis, they will continue to generate cash in the form of interest income. Redwood believes the actual economic book value of the company is approximately $31/share.

GAAP results notwithstanding, Redwood performed well on a taxable basis, posting taxable income of $1.74/share for the quarter and bringing undistributed taxable income up to $3.85/share. Redwood declared a $0.75/share regular dividend for the fourth quarter and a $2.00/share special dividend, leaving $1.10/share, plus an estimated $1.40/share in 4Q taxable income, or a total of $2.50/share in 2007 taxable income to spill over into 2008. That's more than three quarters' worth of the regular dividend. Redwood says it believes it will be able to pay a $3.00/share special dividend in 2008.

As current securitizations mature, I expect Redwood to suffer more actual credit losses that will begin to eat into taxable income. However, by retaining and deferring the maximum amount of taxable income possible, Redwood has given itself a cushion to weather the next two years of this housing bust cycle.

Redwood announced plans to repurchase up to 5,000,000 shares of its common stock. Investors cheered the plan and the special, pushing Redwood up to $27.50/share in after-hours trade.

Chimera Prepares to Come Public

Chimera Investment Corp. (CIM), a new mortgage REIT, filed another amendment to its registration statement this morning, pricing the offering at approximately $15/share, which would give the Company an initial market cap of around $500 million. Chimera will be managed by FIDAC, a wholly-owned subsidiary of Annaly Capital (NLY). Annaly will also own 9.8% of Chimera.

Chimera's investment portfolio is expected to be composed of purchased residential mortgage loans that have been originated by select high-quality originators, including the retail lending operations of leading commercial banks, and non-Agency RMBS. This is in contrast to Annaly’s strategy, which concentrates on Agency RMBS.

Chimera's IPO will be an interesting litmus test on a couple of different fronts:

1. Can Annaly's personnel manage investments in private-label RMBS, CMBS, and CDOs?
2. Will the market be receptive to a new mortgage REIT in this environment?

Chimera's investment strategy will be very similar to that of Luminent Mortgage Capital (LUM), which crashed back in August after defaulting on repurchase agreements. Although Annaly has been very successful in managing interest-rate risk, its management has not been tested with respect to credit risk.

Gramercy Grabs American Financial

Gramercy Capital Corp. (GKK), a commercial real estate specialty finance mREIT, announced earlier today that it is buying American Financial Realty Trust (AFR), a net lease REIT for approximately $3.4 billion in a cash-and-stock deal.

Gramercy will acquire American's stock for $5.50 per share in cash and 0.12096 shares of its stock. American stockholders will own about 31% of Gramercy's outstanding shares when the transaction closes. The deal also includes the assumption of American's debt.

The acquisition shifts Gramercy from a pure specialty finance company to a diversified business with commercial real estate finance and property investment operations. The deal will boost Gramercy's assets by 65% and shift its portfolio to a 50-50 mix of net leased real estate and real estate backed securities.

After the transaction is complete, Gramercy expects to own approximately 27 million square feet of commercial real estate in 37 states to add to its $3.5 billion of debt investments.

Gramercy claims it is "uniquely qualified" to extract value from AFR's portfolio of bank-related properties, which is a plausible claim. Although Gramercy has only limited experience with net leased properties, its external manager, SL Green, has extensive experience leasing to members of the banking and financial services community.

The deal puts an end to the two-year struggle to right the ship at American Financial. AFR has been selling assets to try to improve profitability for its core portfolio, but success has been limited. With the company’s shares near all-time lows and the rumblings about a slowdown in the CMBS market, Gramercy appears to have made a very timely call.

RAIT's Rocky Results

Update: I read through the transcript of RAIT's conference call this afternoon. My biggest takeaways / points of interest were:

1. that RAS had five TruPS issuers in default as of 10/30.
2. RAIT has $375 million of exposure from remaining retained interests
3. RAIT believes it can sustain and grow the $0.46/share dividend
4. RAS is looking to opportunistically buy back stock, but the Company has limited cash for this purpose
5. RAIT's domestic business plan does not include securitizations in the near future. CDO issuance will be supplanted by warehouse credit lines and joint ventures.

RAIT Financial Trust (RAS) reported rocky third quarter results before the bell this morning. The GAAP net loss was $4.02/share, primarily due to asset writedowns of $342 million. After backing out the writedowns and other non-recurring items, RAIT actually had adjusted earnings of $0.54/share. Taxable income for the quarter was $0.44/share, slightly below the Q3 dividend of $0.46/share. On a year-to-date basis, however, RAIT has paid dividends of $2.10/share while earning taxable income of $2.16/share.

Tangible book value fell to $11.63/share, but shares of RAIT are trading far below that figure. The Company was recently trading as low as $7.50, or just 64% of book value.

RAIT’s results were dismal, as expected, but not nearly as bad as they could have been. However, the Company still remains exposed to further writedowns and cash losses due to their concentration of investments in REIT and homebuilder trust preferred securities. RAIT’s capital structure is also somewhat shaky, as the Company increased total debt by $700 million during the quarter, sold $287 million in assets, and still has over $200 million in outstanding repurchase agreements.

While RAIT looks to be a bargain from a valuation standpoint, there are too many unanswered questions remaining to recommend this rocky REIT.

Redwood Gets Ratings Boost

In a surprising piece of *good* news from the ratings agencies, S&P upped its ratings on 50 classes of mortgage pass-through certificates from 17 Sequoia Mortgage Trust transactions. Sequoia is the private-label for Redwood Trust's (RWT) securitization. S&P also affirmed its ratings on other classes issued by various Sequoia Mortgage Trust series.

From S&P's press release:

The raised ratings reflect a significant increase in credit support percentages to the subordinate classes due to the rapid paydown of principal, the shifting interest structure of the transactions, and minimal losses. Projected credit support percentages are at least 1.71x the loss coverage levels associated with the raised ratings. The majority of series experiencing upgrades paid down to less than 38.12% of their original pool balances. Total delinquencies among the upgraded deals range from 0.46% (series 2005-4, loan group 1) to 7.04 (series 2005-2) of the current pool balances; 90-plus-day delinquencies (including REOs and foreclosures) range from 0.00% (2003-4 and 2005-4) to 2.79% (2005-2). Cumulative losses were no higher than 0.03% of the original pool balances for these series.

The affirmations are based on credit support percentages that are sufficient to maintain the current ratings on the securities. Subordination provides credit support for these transactions. The collateral backing the certificates consists of 25- and 30-year prime jumbo adjustable-rate mortgage loans, which only require interest payments for the first five or 10 years, and are secured primarily by single-family detached residential properties.

Capstead's Lawyers Logged Lots of Hours for this Q

Just finished skimming Capstead Mortgage's (CMO) third-quarter 10-Q - the first 10-Q to be filed by a mREIT this quarter. Not too much beyond what was in Capstead's earnings release except for the six pages of risk factors -- much more in the way of disclaimers and warnings than Capstead had ever put in a 10-Q. It wasn't all boilerplate, either. The most interesting piece of information (to me) was this disclosure: "As of September 30, 2007, the Company’s largest single counterparty (Cantor Fitzgerald & Company) accounted for $1.45 billion in repurchase arrangements that had an average maturity of 18 months." That means Cantor is the counterparty for 32.5% of all Capstead's repurchase agreements - a significant risk if Cantor decides to tighten up margin requirements in the future.

MFA Mortgage Mostly In-Line

MFA Mortgage (MFA) reported a GAAP loss of $0.15/share, which was in-line with blog expectations. The company believes that quarterly earnings excluding capital losses was $0.12/share. Net interest spread improved to $0.36/share and book value was $6.93/share, excluding the effects of the early Q4 capital raise. MFA, which tumbled somewhat yesterday, still trades at $8.56/share, or 1.23x book value, which is relatively cheap compared to peers like Annaly and Capstead. Nonetheless, the Fed's stance on ending future rate cuts seriously limits future upside for MFA beyond current levels.