Sy Says Buy Hatteras

Newly public Hatteras Financial (HTS) is popping higher today after some kind words from Sy Jacobs, who is founder and managing member of the Jacobs Asset Management hedge funds. In an interview with Barron's over the weekend, Jacobs said his fund is long HTS --

[Hatteras shares are] trading at just over one times book value... We [Jacobs' fund managers] estimate that they will earn $4.50 to $4.75 a share from mid-year '08 to mid-year '09, once the IPO proceeds are invested. As a REIT, they will pay out all -- or nearly all -- of their earnings in dividends. So at 25 recently, the stock was sporting an expected yield of around 19%. We think the stock gets to 30 at least. Between the appreciation and the yield, it's a great total return.

Shares of Hatteras Financial were up about 5% at last check to $26.25. That's just 5% above the IPO price of $25/share, but certainly a much better performance than American Capital Agency (AGNC), which was flat on the day. AGNC is still stuck near $19, below its IPO price of $20/share.

Mortgage REIT Insider Redux

Plug it once, plug it twice. If you haven't checked it out yet, I'm now authoring a column every Friday for my blogging buddy, Paul Jackson, over at Housing Wire. Lots of juicy comments about earnings, who's hot, and who's not. So please check it out, and while you're there, make sure you catch all of Paul's great commentary about the mortgage finance industry.

Aloha, American Capital Agency

American Capital Agency, a mortgage REIT that was formed by American Capital Strategies (ACAS) to invest in Agency securities, priced its IPO at $20 as expected. While the company sold only 10 million shares (versus 12.5 million as originally planned), the latest statement filed with the SEC on Wednesday suggests that parent ACAS purchased 5 million shares in a concurrent private placement and may acquire an additional 2.5 million shares in the private placement, which would result in a 43% ownership stake. Citi and Merrill Lynch acted as joint book-running managers for the offering, and the stock is expected to commence trading on the NASDAQ under the ticker symbol "AGNC" on Thursday.

Mortgage REIT Journal will begin covering the stock tomorrow. AGNC joins Hatteras Financial (HTS) as the newest agency mREITs on the block.

Crystal River's Dividend Washing Away

Update: Crystal River provided no significant information on the conference call regarding its future. The Company was downgraded by Wachovia this morning, but at under $6/share with a potential $0.25/share dividend going forward, it's looking really cheap.

Crystal River Capital (CRZ) released first-quarter earnings after the bell Monday, and the news was worse than expected. Despite posting better than expected net investment income of $0.99/share and operating earnings of $0.81/share, Crystal River disclosed that it had sold its agency MBS portfolio during March and April -- and that the agency portfolio had been contributing half of Crystal River's REIT taxable income. Shares tumbled 11% after-hours on the expected dividend cut and dismal forecast.

Taxable income came in at just $0.63/share for the first quarter, $0.05 short of the first quarter. With the agency portfolio sold, I expect CRZ to generate just $0.30/share of quarterly taxable income going forward. I expect the Company to cut the dividend to just $0.25/share for the remainder of 2008.

Crystal River said in a press release that "[a]s a result of the challenging market conditions for structured real estate securities and financing in general, which are expected to persist for some time, Crystal River's Board has been evaluating the Company's current investment strategy."

Separately, CRZ announced that its Board of Directors had appointed William Powell as its President and Chief Executive Officer (CEO), effective Tuesday, May 13, 2008. Powell joins Crystal River from his former position as co-head of Brookfield Asset Management's Real Estate Finance Funds Group, a possible sign that Brookfield may simply fold Crystal River back into its portfolio -- much like Hypo AG did with Quadra Realty several months ago.

Alesco Slammed on IndyMac Deferral

Alesco Financial's (AFN) CDO woes never seem to end. Today's blowup comes courtesy of ailing Alt-A lender IndyMac Bancorp (IMB), which announced (in addition to a worse-than-expected quarterly loss) that it would defer the interest payment on its trust preferred securities. AFN holds a portion of the equity interests in eight CDOs that include trust preferred securities issued by IMB.

The disclosure sent Alesco shares reeling and prompted the Company to issue a statement quantifying the impact of the IMB non-payment. AFN admitted that that IMB's deferral will trigger the over-collateralization tests in five of the eight CDOs for a period of time. Failing the O/C tests will cut Alesco off from the cash flow from these CDOs, although AFN will still record the interest income (as it is doing with the Kleros CDOs).

AFN claims it could maintain its current dividend stream despite the O/C test failures, but cautions that "[the Company] is reviewing a number of strategies for the company, including whether to continue to maintain its REIT qualification. Any change in strategy could impact the level of future dividend payments."

Perhaps Alesco can withstand one deferral, but if another IndyMac situation arises (and one has to believe it will), Alesco's CDO machine will overheat and crash.

PMC Commercial Poised to Pop

PMC Commercial (PCC) is one mortgage REIT that's flying way under the radar - no analyst coverage, no quarterly earnings calls. The micro-cap (~$80 million market cap) commercial originator has seen its stock sink 30% in the past two months, falling from $10 in March to just $7 in May. But has PMC's pounding been overly punitive?

Before I get into the first quarter earnings, let's take a look at PMC's business model. The Company that primarily originates first-lien, real estate-collateralized loans to small businesses, primarily in the limited service hospitality industry. PMC has two subsidiaries that act as non-bank Small Business Administration 7(a) Program lenders, which means that the Company is able to originate loans that are guaranteed up to 75% by the SBA. It also means that portions of 7(a) loans guaranteed by the agency can be transformed into AAA rated government bonds and sold on the secondary market.

Obviously, in the current economic environment, PMC's business would be expected to decline, so secular pressure on the stock is not surprising. PMC's fundamentals, however, are telling a different tale.

During the first quarter, the Company originated approximately $17.1 million of loans, but funded $8.9 million in April -- an increase of 56% over the first-quarter run rate. Impairments and provisions ticked up just $10,000 over the prior quarter, so credit metrics on the retained portfolio showed no deterioration. Most importantly, the Company earns taxable income of $0.31/share -- versus a $0.20/share dividend. Since management has indicated that it intends to maintain the $0.20/share payout throughout the year, PMC may end the year with excess taxable income if loan fundings remain strong. If I had to guess, I believe PMC will be able to declare a special dividend of $0.20 - $0.25/share. Such a distribution would lift the annual forward yield to over 13%.

PMC is a small-cap stock and thinly traded, so buyers beware. For those with some money to play with, however, this stock could prove to be an untapped gold mine.

Mortgage REIT Insider

If you haven't checked it out yet, I'm now authoring a column every Friday for my blogging buddy, Paul Jackson, over at Housing Wire. Lots of juicy comments about earnings, who's hot, and who's not. So please check it out, and while you're there, make sure you catch all of Paul's great commentary about the mortgage finance industry.

Another Quarter, no Dividend Coverage at CapitalSource

No stranger to the blog, CapitalSource (CSE) earns some grouching over its failure to explain why it continues to declare a dividend that is 117% higher than its core earnings. John Delaney blithely explained the modest recent gap thusly:

Second, I was actually very pleased with the adjusted earnings performance of the business at $0.51 per share for the quarter, particularly since we recognized $0.09 in quarterly adjusted earnings loss, related to the reduction of our agency portfolio by over $600 million. We have continued to reduce our agency portfolio, and today it stands at about $1.6 billion, down from its peak of about $4 billion.

The reason for this reduction is simple. We didn't need as many agencies for recompliance, and we elected to reduce the portfolio, not because we had to, but simply because we could, and it resulted in a dramatic reduction in any funding risk against this portfolio.

More like, we don't like agencies, we don't know to manage them, we just have to have them. Just ignore them and focus on our better lines of business.

RAIT Goes From Rocky to Roaring

Embattled diversified REIT RAIT Financial Trust (RAS) had a dismal 2007. The stock tanked and RAIT was forced to slash its dividend almost in half. The Company came roaring back with a vengenance today. For Q1 2008, adjusted earnings per diluted share, the metric which the Company essentially uses to set the dividend, more than covered the most recently announced payout. Friedman Billings Ramsey analyst Merrill Ross wrote in a research report the company has proved its dividend is viable.

The $0.07 beat on adjusted earnings and $7 million beat in investment revenue lifted the stock powerfully today. It was a roaring 22% day for RAIT, who definitely deserves some love, trading far below its economic book value.

However, my skeptical eye couldn't hope but notice at the very end of press release, RAIT acknowledged that:

During the three-months ended March 31, 2008, we revised our definition of
adjusted earnings to exclude 32,056k in capital losses [enough that the losses
had to be added back to show operating earnings.] Capital losses, while economic
losses, do not currently impact operating performance or dividend paying
ability.

This is true, but RAIT did rely on a net capital gain distribution when it announced the tax treatment of its 2007 dividends.

One another note, then back to the RAIT party. Former REIT NovaStar had placed it trust preferred securities in two Taberna investment securities. NovaStar can no longer make the preferred payment. Taberna and NovaStar have worked out a forbearance agreement until May 30, but the value in those TruPS is long gone.

Disclosure: I'm long shares of RAS.