ECC's Dividend Nearly Double Stock Price

Crashed subprime REIT ECC Capital (ECRO.PK) had a surprise of its own Monday night -- it's making a cash distribution of $0.16/share, despite having a common stock price of $0.096/share. The dividend is almost double the common stock price! Obviously the price of the common will rise in response, but what happens to the share price when the stock goes ex-dividend?

Thornburg's Surprise Second Quarter

Can Thornburg Mortgage (TMA) finally be taken off the respirator? After the most turbulent quarter in the Company's 25+ year history, the second quarter results show that the business may have settled down somewhat.

Thornburg posted shocking second quarter GAAP earnings of $0.84/share versus $0.66/share a year ago. Of course, TMA's financials are no longer comparable, to, well, anything -- let alone the prior year. The Company's earnings were largely due to a $536.9 million fair value gain related to the Principal Participation Agreement (the “PPA”) and Additional Warrant Liability. TMA also picked up paper gains of $24.9 million on markups to the Senior Subordinated Loans.

Thornburg did eat a $209.6 million impairment loss on its MBS portfolio, which was partially offset by a $14.3 million net gain on the sale of ARM Assets and REO and a $23.0 million gain on the extinguishment of the company’s remaining asset-backed commercial paper debt.

Nonetheless, Thornburg is getting closer to digging out from the Override Agreement that is strangling the Company's financials. With over 2/3 of all classes of preferred stock tendered (as of now, though the numbers are a bit tight on the Class F series) and $352 million remaining in the liquidity reserve, Thornburg's heartbeat is thumping a little louder.

Mortgage REIT Insider

I have another column up over at Housing Wire. This week's column includes

• the analysts attack
• the diversified REITs dish the dirt in the confessional.

Give it a read. You know you want to.

BRT Realty Burning Through Backstop

Commercial mortgage REIT BRT Realty Trust (BRT), an originator of short-term bridge financing, is pumping out some smokin' hot dividends. In the Company's most recent 10-Q, it disclosed that in additional to its regular quarterly dividend of $0.62/share, BRT would also be paying a $0.70/share special dividend. Including the special dividend, BRT's annual yield rises to a stunning 27%.

Remember the old adage: Where there's smoke, there's fire. BRT is rapidly burning through its legacy investment in Entertainment Properties Trust (EPR), an equity REIT that invests in retail center. Sales of EPR shares have been supporting BRT's earnings for several quarters now, and until this most recent quarter, prevented the Company from recognizing a net loss. For the third fiscal quarter, however, BRT suffered a loss of $0.48/share after recording an addition of $6,400,000 to its allowance for possible loan losses ($0.54 per share) and an impairment charge of $4,019,000 ($0.34 per share), primarily related to real estate acquired in foreclosure and deed in lieu of foreclosure.

The provision increase and impairment losses, however, aren't taxable until realized -- but the significant gains from sales of EPR shares are taxable income. These capital gains are artifically accelerating BRT's taxable income, either forcing or enabling (depending on your point of view) the REIT to continue its high dividend payouts despite its significant drop in loan originations and foreclosure issues.

BRT, however, is rapidly burning through its backstop in EPR shares. BRT's holdings in Entertainment Property Trust shares has declined from 332,576 shares at June 30 to just 141,287 shares as of the date the 10-Q was filed. Thus, BRT has sold off 57% of its remaining EPR holdings in the current quarter (BRT's fiscal fourth quarter) alone.

Once BRT finishes divesting its shares in EPR, its taxable earnings will be solely dependent on earnings from its loan origination business, which is in rapid decline. BRT can use the gains from its share sales to support the dividend until September 2009, but after that, if business doesn't heat up, the dividend is likely to go up in smoke.

Redwood Ravaged by Credit Losses

Redwood Trust's (RWT) shocking second-quarter results are a painful reminder of a very important mortgage REIT tenet: over time, cumulative GAAP and taxable income should converge, suggesting that GAAP income should increase or taxable income decrease over time relative to the other.

Unfortunately for Redwood, it's quite clearly the latter case. Estimated taxable earnings for this quarter were just $4 million ($0.11 per share). These taxable earnings included $30 million (-$0.92 per share) of taxable income deductions related to credit losses, up from $14 million in the prior quarter. RWT also noted that it expects credit losses will increase in subsequent quarters, perhaps not peaking until 2009 or 2010. These increased credit losses will continue to pressure REIT taxable income throughout the period.

As a REIT, Redwood's minimum dividend distribution requirements is determined by its REIT taxable income. The Company is now estimating that 2008 REIT taxable income generated in 2008, together with the undistributed REIT taxable income carried over from 2007, could fall somewhat short of full-year distributions at the regular dividend rate of $0.75/share. Considering that Redwood had over two quarters' worth of 2008 dividends covered by 2007 spillover, the current year's taxable earnings have decelerated at a dramatic pace. For the second half of 2008, Redwood had only $1.32/share in undistributed REIT taxable income.

Although Redwood's Board of Directors reaffirmed its intention to maintain the regular quarterly dividend rate of $0.75 per share for both the third and fourth quarters of 2008, the Company expects that the amount of undistributed taxable income carried over into 2009, if any, will be minimal. The dividend is clearly in jeopardy for 2009 and beyond.

Trading at the lofty valuation of 1.3 times GAAP book value, RWT shares are in trouble without the support of a generous dividend yield. Although Redwood management has done an excellent job of managing its liquidity through the year-old credit crisis, the frozen securitization market has completely undercut the RWT business model.