Agency mREITs Turn In Strong Q1

Both Annaly Capital (NLY) and MFA Mortgage (MFA) reported solid first quarter results today, with Annaly's earnings looking particularly strong.

Annaly's core EPS of $0.51/share was in-line with estimates, and spreads improved by an impressive 58 bps on a sequential basis to 1.46%. Leverage remained at 8.1:1, however, which seems slightly aggressive. However, with no exposure to non-agency assets and no apparent painful margin calls, the 8.1:1 ratio appears reasonably comfortable.

Annaly's strong results are rooted in the Company's significant investment in fixed-rate assets several months ago. Repo financing had a weighted average cost of just 4.18% during the quarter and 3.85% at period-end. With funding becoming cheaper on the heels of yet another Fed rate cut, Annaly can look forward to several more quarters of wide spreads and flush earnings.

Annaly's book value at 3/31/08 was $13.38, so the stock is trading at 1.3x the after-hours closing price of $17.25. This valuation is on the lower end of Annaly's historical trading price, suggesting that the stock could have more room to run.

MFA also had a strong quarter, though GAAP earnings were tarnished by a $25 million loss on the sale of assets and a $91 million loss on swap terminations. Core earnings, however, came in at $0.20/share after backing out the capital losses from the asset sales and swap terminations. That $0.20/share is a good approximation of MFA's taxable income and lends support to the $0.18/share dividend. MFA declined to disclose REIT taxable income in its 10-Q.

Despite trading at just 1.1x book value, MFA still remains exposed to margin calls and markdowns on its portfolio of non-agency securities. Unlike Annaly, MFA does have some exposure to non-agency assets and consequently had to lower its leverage to 7:1 during Q1 2008. The de-levering will limit MFA's earnings power going forward. MFA's spread improved by just 25 bps to 0.90% sequentially, also hampering meaningful growth in taxable income.

CBRE is Serious About a Sale

Maybe there was more to the standstill agreement with Arbor Realty Trust than I thought. CBRE Realty Finance (CBF) disclosed today that it had amended its agreement with manager CBRE Melody & Company as follows:

• [The] modifications provide the Company with the right to terminate the management agreement without paying a termination fee to the Manager and with an option to acquire the Manager.
• The management agreement now also terminates automatically upon the closing of a strategic transaction by the Company without the payment of a termination fee.
• In addition, the restriction on CBRE's and CBRE Melody's ability to compete with the Company in the commercial finance debt space ends on April 30, 2008 (this restriction previously was to end on December 31, 2008).

With the stock still sagging and the opportunity to access CB Richard Ellis's commercial origination platform, a sale of CBF could be a win-win proposition for both parties.

Thornburg Faces SEC Scrutiny

By letter dated April 4, 2008, the Company received a notice from the SEC that it is conducting an investigation relating to the restatement of the Company’s financial statements for fiscal year 2007, margin calls that the Company received (or which were threatened) pursuant to its reverse repurchase agreements and related disclosures, and the valuation, impairment and/or disclosures concerning the accounting treatment for the Company’s mortgage-backed securities addressed in the restatement. The SEC’s notice states that it has not determined that any violations of the securities laws have occurred. The Company is cooperating with the SEC on a voluntary basis.

By letter dated March 6, 2008, the Company received notice from the NYSE that it is reviewing transactions in the Common Stock prior to the Company’s January 9, 2008 disclosure of the impact of recent market events in the mortgage industry on the Company’s GAAP book value. The Company is cooperating with the NYSE on a voluntary basis.

Say Hello to Hatteras Financial

Mortgage REIT Journal will be adding coverage of a new agency mREIT beginning today.

Hatteras Financial (HTS) is an externally-managed mortgage REIT formed in 2007 to invest in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities. HTS is externally managed and advised by Atlantic Capital Advisors LLC.

At March 31, 2008, the portfolio consisted of $3 billion in hybrid ARMs financed almost entirely through short-term repo agreements. As of March 31, 2008, the weighted average haircut under HTS' eleven repurchase facilities was approximately 4.52%, leverage was approximately 8.3:1 and the Company's liquidity was approximately 5.81% of its total assets.

Hatteras Financial Corp. completed an initial public offering of 10,000,000 shares of its common stock at a price of $24.00 per share last week. Shares traded up on Friday, opening at $24.14/share and closing at $24.65/share. Shares were up another 2% on Monday, indicating a bright outlook for HTS.

Deerfield Shares Driven Up By Disclosure

In a rare midday press release, Deerfield Capital (DFR) disclosed some preliminary results for the quarter that were well above Street expectations, particularly the expected book value of $3.00 - $3.50, 3.5x yesterday's closing stock price. The news that book value is still above $3/share and that the Company's liquidity profile has improved sent Deerfield shares soaring, up some 56% at last check.

Deerfield declined to declare a dividend for the quarter, but did acknowledge its $7.6 million 2007 taxable income spillover. As I've discussed before, Deerfield is exploring "alternative organizational structures...as well as other strategic alternatives in order to maximize value for DFR shareholders." For now, however, the Company has satisfied the REIT asset and income tests for the first quarter and remains compliant. The spillover dividend would not have to be declared until September 15, 2008, so Deerfield has a bit more time to mull over its options.

Catfight Comes to a Climax-Free Close

In truly disappointing fashion, CBRE Realty Finance (CBF) and Arbor Realty Trust (ABR) ended their long-standing catfight with the disclosure of a 12-month standstill agreement. Arbor agreed to drop its proxy contest and agreed to vote in favor of CBRE’s Board nominees in exchange for the right to bid on CBF should it choose to sell itself within the next 12 months.

Not much in it for Arbor, but then the $8/share they bid for CBF last fall isn’t looking so hot right now either.

FBR’s Flush First Quarter

FBR Group (FBR) swung to a first-quarter profit on the reversal of $73 million in pre-bankruptcy losses for First NLC Financial Services, the Company’s former subprime mortgage origination subsidiary.

FBR is continuing its return to a core strategy of managing a portfolio of agency-backed hybrid ARMs while utilizing its NOLs to shield itself from distribution requirements, though the Company said it will be reviewing reinstatement of the dividend over the next quarter. In any case, FBR is at least earning income at the REIT level once again -- although it had significant losses in the TRS.

The Company also said it was seeing haircuts on repo financing remaining stable at about 5% for its agency-backed portfolio. FBR expects to return to a cash operating profit by the end of the third quarter.

Investors liked what liked Chairman Eric Billings had to say, sending the stock higher by about 12% at last check. Nonetheless, FBR is still trading at just 85% of its 3/31 book value, and with net interest margin continuing to widen, FBR might just be a steal at these levels.

Is New York Mortgage Trust's Dividend Nothing But Fool's Gold?

New York Mortgage Trust (NMTR.OB) announced a $0.06/share common stock dividend for the first quarter of 2008. The dividend pleasantly surprised investors, who sent the stock up 12% on slightly higher than normal volume.

As nice as it is to see that NYMT can pay a dividend, I can't believe it's anything but a return of capital. At December 31, 2007, the Company had $27 million of net operating losses for tax purposes and the associated deferred tax asset had a full valuation reserve against it.

Furthermore, the Company had to raise $57 million in capital in a PIPE transaction during the quarter, and disclosed in the 10-K that as of March 31, "in aggregate, our Agency MBS portfolio was financed with approximately $431.7 million of reverse repurchase agreement borrowings with an average advance rate of 91% that implies an average haircut of 9% for the entire portfolio."

That's an extremely high haircut compared to the 5% that the agency mREITs are looking at and even higher than the 7% rate that forced Crystal River Capital (CRZ) out of agency securities.

So why declare a dividend when you don't have taxable income or even taxable gains? Perhaps the dividend is an attempt to appease the investors who paid $4.00/share for NYMT stock just two months ago and could have gotten it last week for $2.00/share. Time will tell, but if the dividend is nothing but a return of capital, NYMT shareholders have just been handed fool's gold.

Giving CapitalSource a Break

While I'm in the mood for mea culpas, I have to mention CapitalSource (CSE). I have never gotten as much mail as I have about my recent critiques of CapitalSource (CSE). I still remain pretty critical of the Company's broadening business model, but I guess I can give them the benefit of the doubt. I've never recommended shorting CSE or anything like that, however -- I just feel as though their execution could be sharper. Call it urging a B-student to strive for an A. They got a sweet deal on the Fremont bank branches, so let's see what investments they make with those cheap deposits.

iStar: iSorry I Doubted You

Since my March 28 posting on iStar Financial (SFI), when I claimed that "iStar's not going anywhere for a while. The stock is fairly priced in this environment...", the stock has soared from a low of $13.76 to over $19 today, as option traders and shorts scramble to cover their positions. Yeah, nice 38% return I missed. However, I really don't think there's much more upside to the stock, since the current momentum seems to be driven by short-covering, not fundamentals. If you want to get into iStar, wait until after the first-quarter results are released. Then again, maybe I should just become a contrarian indicator.

SuperREIT Swoops Up Fremont's Branches

I've complained before about CapitalSource (CSE) getting too big to focus on its core competencies, but with the acquisition of the Fremont branches, CapitalSource is looking less a mortgage REIT and more like, well, Countrywide (CFC). In fact, this deal reminds me a bit of the IndyMac (IMB) restructuring from a REIT to a thrift back in 1999 after liquidity concerns forced IMB to seek new sources of funding in order to grow the business.

Scott Valentin at FBR Capital Markets asked precisely the question that concerned me the most

Then as far as the REIT status, are there any implications in terms of trying to manage the REIT compliant assets with the bank?

CEO John Delaney poo-poohed Valentin's concerns, responding

No, actually one thing we can probably comment on is our agency portfolio, which a lot of people know has been driving our REIT optimization -- REIT compliance. We have actually been able to downsize that because we had overinvested in that. That portfolio is probably now down to $2.5 billion. And we think it is going to go smaller because we don't need quite as many assets. So managing the REIT structure right now has not been that difficult for us. So this doesn't change any of that.

CapitalSource hasn't proven to me that it can run a mortgage REIT just yet. Now they're going to run a bank in the middle of a severe financial crisis. I guess CSE really is the SuperREIT.

Origen Will Be Okay

Origen Financial (ORGN) shares soared today on news of a $46 million cash infusion that will enable to the Company to pay off its existing debt and avoid an event of default. The cash comes courtesy of a secured financing arrangement with the William M. Davidson Trust u/a/d 12/13/04 (the “Lender”), an affiliate of one of the Company’s principal stockholders. The Lender is a grantor revocable trust established by William M. Davidson as the grantor. Mr. Davidson is the sole member of Woodward Holding, LLC, which owns approximately 6.8% of the Company’s common stock. The sole manager of Woodward Holding, LLC is the Chairman of the Origen Board of Directors.

Ron Klein, CEO of Origen, remarked that

We are extremely pleased with this financing. Given the pending expiration of the extended term of our credit facilities, and amid difficult credit markets, we are fortunate to have arranged this financing on competitive terms.

"Competitive" must be relative - the financing consists of a secured note bearing interest at 14.5% per year secured by all of Origen's assets. The note matures in three years, subject to a one-year extension option by Origen. As part of the financing, Origen issued 5-year warrants to the lender to purchase 2,600,000 shares of Origen common stock at an exercise price of $1.22 per share.

I guess compared to Thornburg's $1.35 billion financing, Origen got a pretty good deal. Even though the interest rate is high, it does enable Origen to continue managing and servicing its existing portfolio for another four years while the Company waits for the capital market turmoil to subside.

Curtains on Crystal River's Agency Portfolio

Crystal River Capital (CRZ) released its investor presentation for the Credit Suisse 2008 Global Real Estate Conference via this 8-K late this afternoon. As I suspected in this previous post about Crystal River, the Company is shifting its focus to Brookfield-backed funds, commercial real estate, and triple net lease buildings. During the first quarter, CRZ disclosed that the haircuts on agency portfolios financed with repo agreements surged from 3% to 7%. In response, Crystal River sold its entire agency portfolio to boost liquidity and redeploy funds to different asset classes.

I'm surprised Crystal River didn't file an 8-K to disclose the additional asset sales, but nonetheless, it's apparent that the dislocation in the agency MBS sector was swift and severe.

Anthracite: The Silent Bailout?

Commercial mortgage investor Anthracite Capital (AHR) is one mREIT that has remained out of the crosshairs during the current liquidity crunch. Nevertheless, the Company has been silently scrambling for financing as the crisis hit a peak in March. During the first quarter of 2008 alone, Anthracite received (and met) margin calls of $84 million -- more than it received during all of 2007.

The Company continually sought waivers and extensions from its lenders throughout the first quarter, and the same day that Thornburg Mortgage (TMA) announced its dilutive to stay alive, Anthracite also announced that it had priced a transaction for the sale of $93.5 million of its convertible preferred stock and common stock to a DLJ Real Estate Capital Partners fund (an affiliate of Credit Suisse) in a privately negotiated transaction.

The terms of the transaction provide for the sale of $23.4 million of common stock at $6.69 per share, the closing price of the Company's common stock on Friday, March 28, 2008, and $70.1 million of cumulative redeemable convertible preferred stock. Dividends payable on the convertible preferred stock would be 12% per annum and the purchaser would have a right to convert the preferred stock into common stock at a conversion price that represents a 12% premium to the closing price of the Company's common stock on March 28, 2008.

Additionally, the Company's advisor BlackRock (BLK) has been supporting Anthracite from the sidelines, providing it with a $60 million warehouse line and agreeing to lower its management fee and accept payment of the fee in Anthracite stock.

Anthracite's CEO, Christopher A. Milneris scheduled to speak at the Credit Suisse 2008 Global Real Estate Conference in New York on Wednesday afternoon. I'll be interested in hearing his prepared remarks -- which should include an update on Anthracite's liquidity and reasoning for doing the dilutive DLJ deal.