Wounded Survivors Wearily Report In

The most seriously injured mREITs belated reported in today, capped off by Thornburg Mortgage's (TMA) announcement that it had finally closed its Hail Mary debt deal.

Impac Mortgage (IMH) still can't file its 10-K (not that Impac was a timely filer in the good days, but I digress...), but it has settled most of its repurchase obligations and made significant strides in bolstering liquidity.

Luminent Mortgage (LUM), which was all but left for dead last summer, is reinventing itself as a publicly-traded partnership that performs advisory services for distressed assets. I expect Deerfield Capital Corporation (DFR) to consider such a transaction in the near future. The move is similar to what KKR Financial (KFN) did back in May and may be part of a larger trend to move away from the fairly restrictive REIT requirements that limit hedging strategies and starve companies of liquidity.

Another quarter has come and gone and these companies are still alive, even if some are still on life support. Finally, the tide may be turning in their favor.

Fallen iStar to Shine Again?

In his "Stupid Investment of the Week", Chuck Jaffe at Marketwatch calls out commercial originator iStar Financial (SFI) as being overvalued and a dangerous stock to own, despite its robust dividend yield and stellar credit record.

Long-time investors in iStar probably have to agree, given the stock's 70% decline over the past year. But is there any downside for new investors?

The dividend yield is over 24%, so obviously the market is betting the dividend will be cut in the future. Over the long-term, iStar does face some headwinds given the sour market, but in the short-term, the Company has a significant amount of unrealized gains in its portfolio, so asset sales will generate plenty of taxable gains that can be used to support the dividend. Capital gain dividends aren't really a long-term solution, but iStar will be able to maintain the dividend at least through 2008 despite a slowdown in loan origination activity.

The Company's portfolio is composed of primarily commercial whole loans, which are composed of 75% senior / 25% mezzanine positions. Included in that mix is the $2 billion junior participation interest in the Fremont General (FMT) portfolio that iStar purchased earlier in the year. It remains to be seen how well that portfolio will hold up. Fortunately, iStar has an additional source of revenue stream from its $3 billion corporate tenant lease portfolio - a lower-yielding but more steady source of income.

iStar carries a significant debt load, but $12 billion of the total $12.4 billion is unsecured. Therefore, iStar has funds available to it if it wants to go to the secured debt market and encumber its corporate tenant lease portfolio. There are no repurchase agreements to raise margin calls, and if iStar can limit loan loss reserve charges going forward, it should be able to satisfy its covenants and maintain its investment grade rating.

It does appear that it will take iStar some time to achieve full value from the purchase of the Fremont commercial platform. As commercial originations slow during the weakening economy, iStar net asset growth may be slim to none. Therefore, a wider gap between taxable income (from gains on asset sales) and iStar's organic earnings is to be expected going forward.

Bottom line: iStar's not going anywhere for a while. The stock is fairly priced in this environment, but income-oriented investors will enjoy that juicy dividend for some time to come.

New Century: The Final Word

It's almost the one-year anniversary of first major subprime bankruptcy, New Century Financial (NEWCQ.PK) -- a watershed event in the massive credit crisis gripping the U.S. economy.

New Century, which billed itself as a "New Shade of Blue Chip", appears to have been shady from the start. You can read Michael Missal's scathing 581-page report here, in which he places blame on New Century management, an inappropriate tone at the top, and reserves some stunningly harsh words for New Century's auditor, KPMG, citing that firm's inappropriate guidance for some of New Century's accounting woes.

All in all, Missal claims that New Century made at least seven glaring errors in GAAP, which were ignored by the KPMG audit team and that "unhealthy" friction between the Board of Directors and senior management kept the Board from being effective.

Chimera Struggling Behind the Scenes

Chimera Investment Corporation (CIM) is quietly struggling to stay afloat after levering up at just the wrong time. Although the Company had reported leverage of just 0.5 to 1 at 12/31/07, the calculation excluded a $750 million payable for MBS, which was resolved at the end of January, when CIM entered into a $500 million repo facility with CSFB and a $350 million repo facility with Deutsche Bank -- levering up four-fold in the process just as competitor MFA Mortgage (MFA) was selling assets to de-lever its balance sheet.

Just a month later, the agency-backed and AAA markets dislocated again, and Chimera's repos have created a liquidity problem for the newly-formed company. Chimera held cash and cash equivalents of just $6.0 million at December 31, 2007, and warned in its 10-K that "an increase in prepayment rates substantially above our expectations could cause a temporary liquidity shortfall due to the timing of the necessary margin calls on the financing arrangements and the actual receipt of the cash related to principal paydowns." Not good news when the AP is reporting that mortgage volumes spiked on refinancing last week.

Chimera has had to amend its repurchase agreement with Deutsche Bank twice since initiating it in January to bring the liquidity covenant down to $40 million from $100 million. For this, it has had to agree to

-- Provide daily liquidity reports through April 15, 2008

-- Provide mark to market positions and advance rates with respect to all loans and securities

In addition, Chimera agreed to allow DB the right to act as the lead underwriter in connection with the next securitization or other similar public or private pass-through disposition of any Loan sponsored by Seller or an Affiliate thereof, for a market-rate fee.

Although markets may be stablizing, Chimera's first quarter dividend obligation of $9.6 million is looming overhead, and unless markets continue to improve quickly, the Company could be squeezed dry of cash at the end of April.

Agency mREITs are the New Black

How many more agency mREITs can the market absorb?

First, we have the existing players -- Annaly Capital (NLY), Anworth Asset Management (ANH), MFA Mortgage (MFA), and Capstead Mortgage (CMO).

Bimini Capital Management (BMNM.PK) and New York Mortgage Trust (NMTR.OB) have also entered the arena by shifting their business models.

Then, a review of the S-11 filings shows that several more agency mREITs are in the pipeline:

-- American Capital Agency Corp (AGNC), which is sponsored by American Capital Strategies (ACAS)

-- Hatteras Financial Corp., which is sponsored by Atlantic Capital Advisors LLC

-- Point Asset Management (PNT), which is sponsored by Federated Investment Counseling

-- North Sound Mortgage Investments Corp., which is sponsored by French banking giant BNP Paribas

While falling interest rates have created a juicy environment for agency mREITs, which only have interest rate risk to manage, too many competitors may cause pass-through certificates and CMOs to become overpriced.

Thornburg to Lend Another Day

In an odds-defying triumph for the jumbo mortgage giant, Thornburg Mortgage (TMA) announced a $1 billion offering of convertible notes and a one-year standstill agreement with five of its repo counterparties. The move ensures Thornburg's continued survival, though it will be a long road back to the glory days TMA once enjoyed. Nonetheless, it is a testament to the determination and acumen of Thornburg's management to keep the franchise alive. Thornburg will not pay a common stock dividend for the remainder of the year, except for a year-end distribution of 87% of its 2008 taxable income to retain its REIT status.

Read the Thornburg release here.

JRT's Silence Should Make Investors Jittery

A Fed-fueled rally pushed shares of JER Investors Trust (JRT), a commercial-focused specialty finance mREIT to their September 30 book value, as shares jumped 6% to land at $8.45/share. But JRT has been strangely silent since December, when the Company announced a special $0.65/share dividend.

JRT disclosed late yesterday that it would need the allowed 15-day extension for filing its 10-K, claiming that "due to recent market disruptions the Company requires additional time to complete certain matters which affect certain items and disclosures in the Company’s Form 10-K." Strangely, competitors iStar Financial (SFI), CapitalSource (CSE), and NorthStar Realty (NRF) has no trouble filing on time -- even though their deadlines were two weeks earlier.

A late filing alone, however, doesn't raise the red flag -- it's when I reread JRT's third-quarter 10-Q that I get the jitters. The Company's portfolio was almost completely match-funded at December 31, 2006, but as of September 30, 2007, repurchase agreements accounted for over 20% of the Company's liabilities.

At 9/30, JRT had $171.8 million outstanding under a repo agreement with Goldman Sachs...scheduled to terminate at the earlier of (a) the closing by the Company of its third collateralized debt obligation transaction or (b) January 1, 2008. The Goldman agreement did provide for a series of extension options that could extend the term through October 1, 2009, and JRT did avail itself of the option to extend until April 1, 2008.

The Company also had $87.9 million outstanding on a repo facility with Liquid Funding, an affiliate of Bear Stearns & Co. Inc, which was scheduled to terminate at the earlier of (a) the closing by the Company of its third collateralized debt obligation or (b) March 12, 2008.

Per JRT's 10-Q, each of the repurchase agreement facilities is subject to margin calls based upon fair market value determinations of the underlying collateral (largely non-investment grade CMBS). During the three months ended September 30, 2007, such margin calls totaled $30.9 million, with $23.0 million related to the Liquid Funding facility and $7.9 million related to the Goldman Sachs facility. Subsequent to September 30, 2007 and through November 6, 2007, the Company made payments of $13.9 million under its repurchase agreements related to margin calls on collateral.

Additionally, JRT sold 50% of its interest in the portfolio of our net leased real estate assets on October 30 for $39.2 million, yet no gain was recognized on the transaction. Could it be related to the $40 million in dividends the Company paid out to shareholders during the fourth quarter?

You could argue that I'm just cherry-picking the worst parts of JRT's 10-Q to produce a scary scenario. However, in this credit market, unless I hear otherwise, I'm going to assume the worst. If we can't even believe assurances from folks like Countrywide (CFC), Thornburg (TMA), and Bear Stearns (BSC), then yeah, silence is scary.

Thornburg Gets Stay of Execution

From Thornburg's S-3ASR this afternoon (emphasis added by me) to register debt and/or equity securities for sale:

Beginning in August 2007 and continuing through the current date, the fair value of our ARM Assets as well as our hedging instruments declined, our margin requirements on our financing increased and in August 2007 and the first quarter of 2008, we sold a significant amount of assets and terminated interest rate swap agreements in order to reduce our exposure to further margin calls on recourse borrowings and hedging transactions. We have received a significant amount of margin calls to date, which have significantly exceeded our available liquidity, and as a result, we have been unable to meet a portion of our margin calls. To date, we have received notices of default under reverse repurchase agreements from five lenders. Our receipt of notices of default triggered cross-defaults under all of our other reverse repurchase agreements and our secured loan agreements. Although we have entered into an override agreement with five of our remaining reverse repurchase agreement counterparties which freezes additional margin calls through March 2009, there is no assurance that we will be able to obtain sufficient liquidity in order to satisfy our liabilities, that the value of our purchased ARM Assets and hedging instruments will not decline further, that the override agreement described above will not be terminated by the counterparties if we do not meet certain conditions, and that, if that override agreement is terminated, that counterparties will not make additional margin calls or that we will be able to satisfy additional margin calls, if any, or that we will be able to continue as a going concern. The price of our Common Stock declined significantly as a result of these events and the impact on our results of operations. There is no assurance that our stock price will not continue to experience significant volatility as mortgage security prices continue to decline.

Is Deerfield Done?

From Friday afternoon's press release:

Deerfield Capital Corp. (DFR) today announced that, in order to increase liquidity, reduce risk associated with our residential mortgage backed securities portfolio and principally focus our growth on our asset management business, we completed the following transactions between February 15, 2008 and March 10, 2008: sold agency RMBS with an amortized cost of $1.8 billion; sold AAA-rated non-agency RMBS with an amortized cost of $103.2 million; and reduced the net notional amount of interest rate swaps used to hedge the RMBS portfolio by approximately $2.0 billion. The net losses realized on these transactions were approximately $61.3 million.

As a result of the sales of substantially all of the AAA-rated non-agency RMBS and a large portion of the agency RMBS, we may not be in compliance with [the 75% asset] test at the end of the quarter. To remain qualified as a REIT, the Company will need to acquire additional qualifying assets or dispose of a significant portion of our nonqualifying assets by March 31, 2008, or within 30 days thereafter.

Deerfield dipped below the $1/share mark today, reflecting significant doubt that DFR can either 1) unload its nonqualifying assets at a reasonable price or 2) find financing to purchase additional qualifying assets (which could be Treasuries or RMBS).

DFR noted that it is "pursuing strategies" to maintain REIT qualification and "may explore alternative corporate structures in order to maximize value for our shareholders". For Deerfield, time is running out and cash is running short.

Origen Left Out in the Cold

Origen Financial (ORGN) is officially shut out of the game. Origen, a manufactured home lender and residential mREIT, was one of the last remaining "active" mREITs still doing business during fourth quarter 2007. (Active mREITs act like banks by originating, holding and securitizing mortgages and mortgage-backed securities.) Still, as I noted in this post from January, securing cheap financing is critical for Origen. As the Company noted in its 10-Q, "[c]ontinued access to the securitization market is very important to our business." If Origen cannot attractively price future securitizations, the Company has few alternatives for financing its originations.

Well, the tide never turned for Origen, which reported just that very news in its late night fourth-quarter earnings release. From the earnings release:

Origen's business model is dependent on the availability of credit, both for the funding of newly originated loans and for the periodic securitization of pools of loans that have been originated and funded by short-term borrowings from warehouse lenders. The securitization process permits Origen to sell bonds secured by the loans it has originated. The proceeds from the bond sales are used to pay off the warehouse lenders and recharge the availability of funding for newly originated loans. If warehouse funding is not available, or is available only on terms that do not permit Origen to profit from loan origination, Origen's origination of loans only can be continued at a loss. If there is no market for securitization at rates of interest and leverage levels acceptable to Origen, Origen's only alternative for satisfying its obligations under its warehouse line is to sell the manufactured housing loans to a purchaser. If purchasers are unwilling to pay at least the full amount advanced to borrowers plus all related fees and costs, sales of loans are not profitable for Origen.

As the capital markets have not recovered since the summer 2007 seize, Origen has run out of time to free up more capital for origination.

In February 2008, to satisfy its primary lender, the company sold an asset-backed bond for $22.5 million, in order to fully pay off $19.6 million of obligations secured by this bond and three others that the company continues to hold. Sale of this bond resulted in the company recording an asset impairment charge in 2007 of $9.2 million.

Origen's warehouse facility, which has an outstanding loan balance of approximately $146.4 million, expires on March 14, 2008. As Origen depends on securitization of its loans to pay down its warehouse line, the absence of a profitable financing in the securitization market requires that Origen sell its loans that are currently on its warehouse line in order to pay off the warehouse line.

The absence of a profitable exit in the securitization market and reduced pricing in the whole loan market requires that Origen suspend originating loans for its own account until these markets recover.

Shares tanked on the news, dropping below the $1/share mark for part of the trading day. Not surprisingly, management is evaluating a potential sale of some or all of the Company. The credit crunch claims another victim.

Newcastle Update

I love it when I'm right (because it's not often). As I suggested a couple of weeks ago in this post about Newcastle Investment (NCT), liquidity pressure did cause NCT to materially cut its common stock dividend, from $0.72/share to $0.25/share. Shares of NCT were lately down 18% on the news.

Annaly Selloff is Overdone

Annaly Capital Management (NLY), the bellweather for the publicly-traded agency mREITs has suffered a serious setback in its stock price after private agency investor Carlyle Capital was margin called to the point of bankruptcy this morning. The Carlyle situation, which was brought by historically wide spreads between Treasury bonds and agency-backed securities, rattled investors who thought GSE-sponsored securities were immune from the credit crisis. Even long-time Annaly bull, Jim Cramer, dumped his buy rating on the stock last week and sold out of the position.

But is Annaly really that much at risk? The Company's leverage was 8.7 to 1 at December 31, 2007, and Annaly completed a $1 billion equity offering shortly after year-end. With respect to repurchase agreements, the Company did not have an amount at risk greater than 10% of the equity of the Company with any counterparties as of December 31, 2007, indicating that Annaly has a diverse array of counterparties for its repurchase agreements, so there is little risk that one nervous counterparty could deliver a fateful margin call. Through December 31, 2007, NLY did not have any margin calls on its repurchase agreements that it was not able to satisfy with either cash or additional pledged collateral.

The credit markets are volatile and unpredictable, as shown by the Thornburg Mortgage situation. However, I believe Annaly is too far up the food chain and has sufficient liquidity to fall victim to the credit crunch. If Annaly's securities become illiquid, then Fannie and Freddie are both at risk. The government cannot allow this to happen for fear of a complete systemic economic meltdown. With a dividend yield of 14% and a stock price that's just 1.06x book value, Annaly is delivering solid risk-adjusted returns. It's well worth rolling the dice on.

How Much Longer Will Alesco Financial Remain a REIT?

Alesco Financial's (AFN) conference call was dominated by questions about the Company's structure going forward, particularly after AFN disclosed that it may struggle to remain a REIT if two or more of its Kleros CDOs are forced into liquidation. I first wondered about this issue back in November, but since then, the issue has heated up further.

Alesco's qualifying real estate investments are mostly tied up in their consolidated Kleros CDOs, which have all failed overcollateralization tests and are no longer pumping cash flow into Alesco. However, AFN is still allowed to recognize qualifying REIT income from these CDOs despite the events of default that have diverted cash flow. Because of AFN's heavy investment in non-qualifying REIT assets, it just narrowly satisfies the REIT qualification tests each quarter.

Five of Alesco's Kleros CDOs have actually technically experienced an event of default (per S&P), so the CDO noteholders have the option to liquidate these transactions. However, Alesco only consolidates Kleros I, II, III, and IV. Although liquidations are only opted for about 25% of the time, just two liquidations could cause Alesco could fail its REIT asset tests at the end of this quarter.

Mortgage REITs Manage Onwards

It was quite obvious that March came in like a lion, mauling the entire mortgage REIT sector. Even the mighty agency mREITs fell victim to fears about liquidity and forced asset sales.

At it stands now, mortgage REITs face two very difficult issues that threaten their business models. Identifying and procuring suitable investment opportunities is proving very difficult -- it's like catching a falling knife right now. The spreads are wide and no one wants to let go of their paper into a distressed market. New originations have fallen off tremendously from 2005-2006 levels, so there's very little unseasoned paper available. Secondly, even if suitable investments can be found, financing them will be a challenge. The securitization market is completely frozen and has remained so for sometime now. Repurchase agreements are becoming highly expensive and they expose the borrower to nasty margin calls.

A key point I looked for in the fourth-quarter earnings calls was how the mortgage REITs planned to manage their business going forward. Two companies really stood out to me as having a solid grasp on the challenges at hand -- Redwood Trust (RWT), which I've liked for a long time, and Crystal River Capital (CRZ), which I've worried about in the past.

In the case of Crystal River, I think the Company has matured over the last year. They are being careful about match-funding all their investments, and they've shifted their focus to the commercial market, directly owning triple-net properties instead of just buying up CMBS. I think Crystal River will benefit over time from its relationship with Brookfield Asset Managment (BAM) and that the Company will gradually shift from being a pure-play specialty finance company to a commercial real estate originator and investor.

Redwood Trust believes its competitive advantage in managing credit-enhancement securities will allow it shift through the rubble of subprime RMBS and CDOs and identify investment opportunities. Redwood plans to acquire these securities through a third-party fund vehicle, offering limiting parternship units to investors. Thus Redwood can indirectly raise capital to purchase assets. RWT plans to purchase securities through these joint ventures and hold them to maturity, so the success of the fund will depend solely upon the performance of the securities and RWT's due diligence. It's an excellent way to shift risk off-balance sheet and to also spread risk among the limited partners rather than having Redwood purchase the securities outright.

As they say, easy come, easy go. Right now, it's become pretty easy for mortgage lenders and specialty finance companies to go under. Nonetheless, I believe Redwood Trust and Crystal River Capital will be survivors.

Thornburg Update

(From Thornburg Mortgage's (TMA) 8-K filing on Friday night:)

...[T]here is substantial doubt about the Company’s ability to continue as a going concern without significant restructuring and the addition of new capital. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s available liquidity to meet margin calls resulting from changes in the fair value of its purchased ARM assets collateralizing reverse repurchase agreements and the continued availability of financing for its ARM assets.

The Company had readily available liquidity of approximately $580.0 million at December 31, 2007. Through the close of business on March 6, 2008, the Company had received $1.777 billion in margin calls since December 31, 2007 and had satisfied $1.167 billion of those margin calls primarily by using its available liquidity, principal and interest payments, and proceeds from the sale of assets. As of the close of business on March 6, 2008, the Company had outstanding margin calls of $610.0 million which significantly exceeded its available liquidity at that date.

Also through the close of business on March 6, 2008, the Company had received notices of event of default under reverse repurchase agreements from four different lenders. The Company’s receipt of the notices of events of default has triggered cross-defaults under all of the Company’s other reverse repurchase agreements and its secured loan agreements, and the related lenders could declare an event of default at any time. The Company has been in continuing discussions with all of its lenders, and, to the best of its knowledge, the lenders that issued notices of event of default have not yet exercised their rights to liquidate pledged collateral.

The Company is working to meet all of its outstanding margin calls within a timeframe acceptable to its lenders, through a combination of selling portfolio securities, issuing collateralized mortgage debt and raising additional debt or equity capital. Since December 31, 2007 and through the close of business on March 6, 2008, the Company reduced its portfolio of ARM assets financed with recourse financing by approximately $4.6 billion, of which $1.9 billion has been permanently financed, in order to reduce its exposure to margin calls. The Company has also raised $488.0 million in equity capital since December 31, 2007 and seeks to raise additional capital in order to provide a more stable base of liquidity during an expected period of difficult market conditions for at least several months.

Liquidity Fears and Repo Flu Infect Agency mREITs

Bloomberg is reporting that agency mortgage-backed bond spreads have reached their highest levels since 1986. Meanwhile, Reuters is reporting that Dutch-listed affiliate of private equity firm Carlyle Group said it received margin calls totaling more than $37 million from seven financing parties on Wednesday and was unable to meet the demands for extra collateral to cover its market positions for four of them. This branch of Carlyle invests in agency RMBS.

This news has spread fear and doubt to the agency mREITs today, who are all off sharply in early morning trade. All the agency mREITs have thus far been virtually unaffected by the credit crunch, as their paper is implicitly guaranteed by the GSEs and has remained liquid throughout the credit freeze. However, as buyers remain on strike and the credit crunch continues to travel up the mortgage security food chain, investors are nervous that even the agency mREITs may receive significant margin calls under the terms of their repurchase agreements. Should spreads widen to the point where margin calls go out to the agency mREITs, the effect would be devastating, since this group of mREITs typically does not utilize term-financing. Their entire portfolios are funded by repo agreements and warehouse lines.

Should the crisis deepen to the point that GSE-backed paper is subject to forced sales, even Fannie and Freddie could be seriously crippled by the downward mark-to-market spiral that would result.

Thornburg: A Victim of Its Own Success

In a terse post-bell 8-K filing, Thornburg Mortgage (TMA) said it failed to meet a $28 million margin call from JPMorgan Chase (JPM), triggering a series of "material" cross-defaults on various lending agreements.

JPM's lending agreements with Thornburg total about $320 million, a small fraction of the $11.5 billion in reverse repurchase ("repo") agreements that TMA had as of December 31, 2007. Nonetheless, JPMorgan refused to budge, notifying Thornburg that it planned to exercise its rights under the loan agreement (i.e. seize the underlying collateral) due to the default. Shares of TMA obviously tanked on the news.

But why jump at the chance to seize residential-mortgage backed collateral instead of working something out with Thornburg? Because JPM (and everyone else) knows that Thornburg's paper is of excellent credit quality, its just temporarily an illiquid investment. When mortgage investors use repo agreements to finance their assets, they do so on a "haircut" basis -- they have to overcollateralize the repo agreement by a certain percentage. Therefore, if JPM seizes the collateral and holds it long enough for the credit markets to thaw, they stand to realize an immediate built-in gain because the AAA paper is likely worth more than par, yet JPM "acquired" it at a fire-sale price.

Contrast the JPM-Thornburg situation with the Wachovia-NovaStar Financial situation. NovaStar has been out of compliance with its Wachovia lendings for months, yet Wachovia continued to waive the default. Unlike Thornburg, NovaStar's paper is subprime and unlikely to recover in value enough to make Wachovia whole. Wachovia does better by taking its chances that the NovaStar mortgages will perform to an extent that NovaStar can repay its obligation. If Wachovia declared NovaStar in default and seized the collateral, WB would be locking in a significant loss.

However the Thornburg situation ultimately resolves itself, the greedy grab by JPMorgan underlines the risk of dealing with ruthless Wall Street investment banks.

Can Capital Trust's Results Be For Real?

Update: CT filed its 10-K this morning. CT had a $19.6 million unrealized loss on derivatives. Even more troubling, "At December 31, 2007, 58 CMBS investments with an aggregate carrying value of $618.4 million were carried at values in excess of their market values. Market value for these CMBS investments was $555.3 million at December 31, 2007." None of that loss flowed through the income statement.

Capital Trust (CT) reported fourth-quarter GAAP earnings of $1.62 per diluted share, blowing away consensus estimates of $1.00/share. On a GAAP basis, Capital Trust significantly outperformed competitors CapitalSource (CSE) and iStar Financial (SFI), both of whom reported quarterly losses.

In all fairness, Capital Trust has a history of solid operating performance and has delivered good risk-adjusted returns. Unsuspecting shareholders, however, may not be hearing the whole story - at least not until CT files its 10-K next Friday.

CMBS exposure has raised concerns for the investment banks, and spreads on the CMBX are hitting record territory day after day. Yet CT reported no "other-than-temporary" impairment on its $877 million of mezzanine (BB+ and BBB- rated) CMBS. Meanwhile, iStar took a $133 million charge for its corporate loan portfolio, but Capital Trust's income statement showed no such impairment charges.

What about derivative losses? CapitalSource took an enormous charge for loss on its derivative contracts, but again, Capital Trust's income statement is silent on the issue. The income statement does, however, include a one-time gain on the sale of an equity method investment, which provided for more than half of CT's quarterly net income.

A careful review of Capital Trust's balance sheet shows that the accumulated comprehensive income swung by $16.5 million, presumably as a result of an increase in unrealized losses. When combined with the one-time gain of $15.1 million on investment sales, Capital Trust could have swung to a fourth-quarter loss of $3 million for the quarter.

CT's accounting appears to be within the boundaries of GAAP, and the Company continues to operate with relatively low leverage compared to its peers. Nonetheless, it's hard to believe that Capital Trust believes it could fully recover the carrying value of its loan and CMBS portfolios in the current credit environment.

Will Thornburg Be Credit Crunch's Latest Victim?

I doubt that anyone reading this blog didn't hear the name "Thornburg" at least a couple times. Thornburg Mortgage (TMA) has become the poster child for the credit crunch gripping U.S. capital markets. I believed that the company had fully weathered last summer's crisis and was beginning to make a serious comeback. Now, more assets will have to be sold out of the portfolio or Thornburg will have to do another deeply dilutive offering.

It was encouraging to see that the Company did manage to complete a $992 million securitization - at least someone realizes that Thornburg has good paper. Unfortunately for TMA, most market participants want no paper at all.