Mortgage REIT Journal

Arbor Axes Dividend

2008-10-27T16:05:00.002-04:00

It was just under a month ago that commercial mREIT bellweather iStar Financial (SFI) decided to skip its third-quarter dividend and pay out the remainder of its 2008 taxable income as a fourth-quarter dividend. A couple weeks later, competitor RAIT Financial cut its dividend from $0.46/share to just $0.35/share. Now, it's Arbor's turn to take out the axe. Arbor Realty Trust, a New York-based commercial loan originator, sliced its dividend from $0.62/share to just $0.24/share for the third quarter and warned that it will not pay a fourth-quarter dividend at all.

Arbor explained the cut in the dividend thusly:

This [third quarter] dividend represents the estimated balance needed to distribute 100% of the Company's taxable income for 2008. Taxable income is expected to be less than the Company originally anticipated, primarily due to tax differences associated with certain of the Company's unconsolidated equity investments.

In recent years, the Company has paid out more than 100% of taxable income and, where possible, the Company has sought to maintain a consistent and recurring dividend. For 2008 and for the immediate future, the Company expects to limit dividends to 100% of taxable income. This decision reflects the continued difficult economic environment and the need to focus on capital retention.

All eyes now turn to competitors like Capital Trust (CT) and Anthracite Capital (AHR), who have already declared their third-quarter dividends. Will these two mighty players in the commercial mREIT arena see their dividends decimated in the fourth quarter of 2008?

Blog Notes

2008-10-09T16:20:00.004-04:00

As a result of my continued efforts to work with the good folks at Housing Wire, I will no longer be posting on a frequent basis at this blog site. I will continue to contribute to Seeking Alpha on an occasional basis, but the bulk of my efforts are going to be concentrated on my weekly Friday column at HW. I appreciate those who enjoy my posts; please check back from time to time, as I will post occasionally as time permits. Additionally, I'm always available to reply to media inquiries about mortgage REITs via email at patrick1980sc@gmail.com.

MREITs Shafted by SEC

2008-09-19T10:42:00.003-04:00

So the SEC is going on a tirade against short-selling after public pressure forced them to do something. So exactly how and why were the 799 financial firms selected for the temporary short-selling prohibition chosen? Granted, most of the companies on the list on bank holding companies, which makes sense. However, there were a few oddball choices, such as Apollo Investment Corp. (AINV), which is a business development company, and FBR Capital Markets (FBCM). None of the mortgage REITs, which are vital to loan origination in the primary market and a significant source of purchases in the secondary market, made the list. Aren't these financial firms as well with "frozen" assets on the balance sheet? While it's true that taxpayers aren't on the hook if an mREIT goes under, taxpayers aren't on the hook if Goldman Sachs (GS), Morgan Stanley (MS), or FBCM goes under either.

If public interest demands that we curb short-selling (a dubious proposition in itself, but that's a separate rant), we should extend the ban to all publicly-traded companies. Let's just artifically prop up everyone's stock price.

Monday mREIT Madness

2008-09-08T21:23:00.003-04:00

First of all, I apologize for not updating this blog in a few (okay, several) days, but honestly, the flow of news from the mREIT sector had slowed to a trickle. Tumbleweeds were blowing through. Then the Treasury bails out the GSEs and the dam broke loose! Let's do a point-by-point review of today's delicious mREIT drama:

The bull market is back for the agency mREITs. Credit Suisse bumped Annaly Capital (NLY) and Anworth Mortgage (ANH) to outperform, citing the removal of "GSE overhang" and removal of supply/demand imbalances in the MBS market. Bose George over at Keefe Bruyette reiterated his outperform rating on the entire agency mREIT sector. Stocks in the sector rose sharply, by an average of 10%.

Luminent (LUMCE.OB) finally ended the suspense and filed Chapter 11 bankruptcy. Arco Capital, which had previously extended a warehouse line to Luminent after it collapsed last August, has agreed to provide debtor-in-possession financing in exchange for a stake in the reorganized companies.

The boring dividend declarations: Annaly declared a dividend of $0.55/share, which indicates flat third-quarter results and an increased share count. PMC Commercial Trust (PMC) declared a dividend of $0.225/share, consistent with the prior quarter. I expect PMC to declare a special dividend at the end of the year, as it has a significant amount of undistributed taxable income through the first half of 2008.

The juicy dividend declarations: CapitalSource (CSE) cut its dividend to just $0.05/share, which it characterized as more in line with commercial depositories. CSE had warned of an impending dividend cut for a while, but investors seemed shocked by the severity of the decline. Shares tanked $2.09 (-16%) after the bell. BRT Realty Trust (BRT) declared a regular quarterly dividend of $0.62/share and a special dividend of $0.71/share, completing the distribution of its 2007 taxable income. However, I got to enjoy a satisfying I told you so! moment when BRT admitted that "we expect that our taxable income in 2008 will be substantially reduced and that we could possibly report a taxable loss for the year...we anticipate that the quarterly cash dividends in 2009, commencing with the dividend payable in January, 2009, will be at a substantially reduced rate." Duh, you can't use portfolio liquidation as a sustainable dividend strategy.

So there you have it. Agencies rocked, Luminent got clocked, CapitalSource got socked and BRT shocked. Stay tuned for more mortgage REIT madness!

ECC's Dividend Nearly Double Stock Price

2008-08-25T21:30:00.003-04:00

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

2008-08-25T21:13:00.003-04:00

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

2008-08-15T20:05:00.002-04:00

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

2008-08-10T18:25:00.003-04:00

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

2008-08-06T19:40:00.004-04:00

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.

Macklowe Mess Manhandles Capital Trust

2008-07-29T20:09:00.005-04:00

When UBS downgraded Capital Trust (CT) five weeks ago, citing the company’s low reserve levels and its belief that CT will have to take meaningful reserve charges in future quarters, analyst Tayo Okusanya couldn't have known how right he would be. Capital Trust recently posted an unexpected loss of $1.59/share for the second quarter and adjusted income of $0.73/share, well short of the $0.84/share earnings consensus.

CT's shocking loss came courtesy of a net $50 million exposure to mezzanine loans secured by Harry Macklowe-owned office buildings in Manhattan. To be fair, Capital Trust did mention this exposure in its first quarter conference call, noting that "Our Macklowe exposure is $50 million on the balance sheet...recent comps in the market support our position in the capital structure and we continue to believe that our investment is money good."

Oops. According to the second-quarter press release, "subsequent to quarter-end, the Company made the decision to record a $50 million reserve against this [Macklowe] loan based upon management's assessment of the probability of recovery." Whether it was really Capital Trust management that suddenly discovered the need for a full reserve or the urging of auditors Ernst & Young, we'll never know. What we do know, however, is that in addition to this quarter's $50 million probable loan loss, Capital Trust also owns a $12 million pari-passu participation in a first mortgage on a Southern California multifamily project that did not make its contractual interest payment during the first quarter. However, despite commencing foreclosure procedures, CT did not record a reserve against this loan "given its expectation for a full recovery of principal."

Right. And I bet they have an office building in Manhattan to sell me as well. In any case, Capital Trust's reluctance to recognize its losses leaves its stock on shaky ground. Shares were off 9% after hours in light trade.

The New Mortgage REIT Magic

2008-07-25T10:41:00.004-04:00

The origination market for the battered mortgage REIT sector has all but dried up, with few new loans being made. Many borrowers, even large commercial tenants, are simply trying to extend or modify existing loans. Even the few new borrowers in the market no longer meet most underwriting standards now that the securitization market is dead and the credit risk can't be offloaded. However, for those mortgage REITs who are largely match-funded with existing CDO liabilities and don't have immediate liquidity concerns, there is a question of how to best deploy loan repayments (and prepayments).

Enter a rather clever solution. Perhaps best thought of as an extension of marking CDO liabilities to market under FAS 159, a few mortgage REITs have chosen to begin buying back previously sold CDO tranches for cents on the dollar. The buy back of the CDO debt has many positive accounting implications. Assuming the CDO is consolidated and accounted for as a financing for GAAP purposes, the repurchase of the CDO debt allows the original issuer to extinguish the CDO liability on its books, reducing leverage ratios and more importantly, generating a gain on the extinguishment of debt. This gain is also a source of taxable income, allowing mortgage REITs who are facing realized tax losses from foreclosures to offset these losses and potentially support their existing dividend payouts. Gramercy Capital (GKK), for example, utilized this model during its second quarter, repurchasing $37.8 million of BBB to A+ rated CRE CDO bonds previously issued by Gramercy’s CDOs, generating gains of $17.6 million. These gains partially offset Gramercy's additional $23.2 million in loan loss provisions and allowed the Company to maintain funds from operations just above its dividend payout.

The purchase of the senior CDO debt would be even more effective for those REITs struggling with qualification issues. In addition to the positive accounting effects noted previously, the senior note holders have control over whether a CDO is liquidated once an event of default is declared. The repurchase of the senior CDO debt would allow the issuing REIT to recapture the diverted cash flow and allow the REIT to prevent the liquidation of the CDO and thus preserve the recognition of qualifying REIT income. Of course, the issuing REIT would have to proactively seek to repurchase the senior CDO debt before it becomes obvious that the CDO is in trouble.

Mortgage REITs may be up against a wall when it comes to originating attractive new investments, but they shouldn't forget about the magic that can be made by rediscovering old ones.

iStar Continues to Flame Out

2008-07-24T15:27:00.001-04:00

iStar Financial’s (SFI) woes continued to mount this week after last week’s ominous pre-announcement warning. Fitch downgraded iStar’s debt ratings to BBB- and placed the Company on Ratings Watch Negative. iStar is now at the very bottom of the investment grade ranks, which is key to being able to issue unsecured debt into the marketplace. Unsecured debt is iStar’s primary form of financing and is significant to the Company’s overall capital management. Fitch cited concerns over the Company’s ratio of EBITDA to fixed charges and the increased in secured debt, despite iStar’s move to increase liquidity through asset sales. Shares of iStar plummeted further this week; the stock has shed nearly two-thirds of its value since mid-May.

Disclosure: Author is long SFI at time of posting.

Gramercy's Tardy Tell-All

2008-07-23T23:31:00.003-04:00

No wonder Gramercy Capital (GKK) waited so late to release its second-quarter earnings - I'm sure they hope investors don't read the release. FFO for the quarter barely covered the dividend, and analysts are certain to question Gramercy's revised FFO guidance. The Company now sees full-year FFO of just $2.20 to $2.45 for fiscal year 2008 - despite already earning $1.32/share in the first six months of 2008 alone. GKK blamed the diminished expectations on an increase in non-performing loans and provisions for possible loan losses prompted by challenging economic conditions, severe illiquidity in the capital markets, and a difficult operating environment.

Gramercy's jump in its loan loss provisions was shocking. The Company's allowance nearly tripled after the Company recorded an additional $23.2 million in expected future losses. The hit to earnings would have been even more severe had it not been masked by the repurchase of $37.8 million of BBB to A+ rated CRE CDO bonds previously issued by Gramercy’s CDOs, which generated gains of $17.6 million.

Clearly, Gramercy's fundamentals are rapidly deteriorating, validating the stock's sharp fall during the past six weeks. Analysts will be quick to suggest the possibility of a dividend cut within the next two quarters, as Gramercy's $2.52/share annual dividend is no longer supported by the FFO outlook. While FFO is not equal to taxable income, it still remains an important bellweather for judging the health of the dividend. Given Gramercy's disclosures, it's difficult to tell if the Company had any spillover TI from 2007 that could possibly support a continuation of the $0.63/share dividend through the rest of 2008.

Earnings Releases: Just Whenever

2008-07-23T22:17:00.003-04:00

Just a quick rant to complain about the sputtering start of the Q2 mREIT earnings season. Dynex Capital (DX) had to replace its earnings release; book value and portfolio duration were misstated in the original version. At least Dynex got it done in a timely fashion -- FBR Group (FBR), which has a 9:00 am ET Thursday conference call, just released (it's after 10 pm Wednesday now) its second-quarter earnings. I skimmed the release; no serious accounting issues or any particular reason that FBR's earnings should have been delayed so long after the bell. Maybe I should just be happy to see a release -- Gramercy Capital (GKK) has yet to produce anything despite its 2pm ET conference call tomorrow.

Maybe I'm just cranky; maybe it's just a coincidence. In any case, it's an ominous start to the Q2 2008 earnings season.

Alesco Agony Reaches a Crisis Point

2008-07-15T19:17:00.003-04:00

With the seizure of Indymac Bancorp (IDMC.PK), Alesco Financial's (AFN) CDO agony has reached a crisis point. Alesco reported that the seizure of IndyMac will cause AFN to record a realized tax loss of approximately $86 million. The realized tax loss is expected to significantly offset AFN's expected 2008 taxable income including the non-cash income relating to the CDOs that are failing overcollateralization tests as of June 30, 2008.

In addition, subsequent to the original IndyMac deferral, four additional banks elected to defer interest payments on their trust preferred securities, which has resulted in the failure of overcollateralization tests in two additional CDOs in which Alesco holds equity interests.

Without taxable income, Alesco can remain a REIT for the remainder of 2008 without a dividend obligation. However, as its portfolio of CDOs continue to crumble, one has to wonder if Alesco's business model can remain viable.

CapitalSource Spins Off Healthcare Unit

2008-07-15T18:59:00.002-04:00

As CapitalSource (CSE) management described on the first quarter conference call, CSE is indeed spinning off its healthcare net lease unit. In a press release after the bell today, CapitalSource announced that its subsidiary, CapitalSource Healthcare REIT, would file an S-11 to register an IPO of the subsidiary. The IPO of common shares in CapitalSource Healthcare REIT is expected to raise at least $300 million for CapitalSource.

CapitalSource will continue to own the majority of CapitalSource Healthcare REIT following the IPO. CapitalSource Healthcare REIT will invest in income producing healthcare-related facilities, principally long-term skilled nursing facilities, through triple-net lease structures.

It remains to be seen how CapitalSource will satisfy the REIT requirements for the remainder for 2008.

Double-Digit Disaster

2008-07-15T16:32:00.004-04:00

This afternoon's deep dive on Dow plunged several mREITs into in a pool of double-digit percentage losses. These five mREITs also all notched 52-week lows. These shares have been steadily on the decline, so you know the shorts are going after them hard:

Chimera Investment (CIM), down 16% to $5.95
CBRE Realty Finance (CBF), off 22% to $2.17
Newcastle Investment (NCT), off 16% to $4.54
Resource Capital (RSO), off 10% to $1.66
Gramercy Capital (GKK), off 10% to $8.50

The forward annual yields on these fateful five stocks, based on today's closing prices, are as follows:

Chimera Investment, 10.7%
CBRE Realty Finance, 18.4%
Newcastle Investment, 22.0%
Resource Capital, 29.0%
Gramercy Capital, 29.6%

Says quite a lot, doesn't it?

Weekend Filings

2008-07-13T22:11:00.003-04:00

Just an update on a few late Friday afternoon filings...

Thornburg Mortgage (TMA) entered into a consent with the majority participants in the Override Agreement to change the requirement that a successful tender offer for the preferred stock from at least 90% to 66 2/3% of the Company's outstanding preferred stock. Thornburg has until September 30, 2008 to convince two-thirds of preferred shareholders to tender their shares in return for $5.00/share and 3.5 common shares.

Impac Mortgage (IMH) received a second notice from NYSE Regulation Inc. that the Company was not in compliance with NYSE continued listing standards relating to maintaining a consecutive thirty day average closing stock price of over $1.00 per common share. The Company has notified NYSE Regulation that it intends to submit plans within the required 10 day period to address the price deficiency. NYSE Regulation will consider the Company's plans as part of its continued listing assessment and make a determination regarding the expected course of action, which may include truncating the procedures applicable in cases of share price non-compliance or immediately initiating suspension and delisting procedures.

Luminent Mortgage Capital (LUMC.OB) noted that Arco, Luminent's primary repurchase agreement lender, declared an event of default after Luminent failed to meet a margin call. Arco is demanding immediate payment by the Company of the aggregate repurchase price of $182.6 million. While not included in the filing, Luminent is likely to seek Chapter 11 protection as a result of multiple debt defaults.

Agency mREITs Aching Over Fannie, Freddie Flu

2008-07-10T10:11:00.003-04:00

Persistent commentary about the potential insolvency of Fannie Mae (FNM) and Freddie Mac (FRE) pounded shares of agency mREITs today, as investors worried that the liquidity of this group holdings would dry up. Until recently, mortgage REITs investing in agency-backed MBS had enjoyed relative strength compared to non-agency peers because of the liquidity provided by the implicit government backing of the MBS holdings.

However, with spreads widening considerably on Fannie and Freddie debt, investors worry that the holdings of groups like Annaly Capital (NLY), Capstead Mortgage (CMO), Anworth Mortgage (ANH), and MFA Mortgage (MFA) will lose their liquidity privilege in the marketplace and lose their value, forcing painful margin calls and perhaps requiring significant asset sales.

Keep an eye on the Fannie and Freddie news in the coming days to see if agency mREIT shares can regain their liquidity privileges and recover share value.

New York Mortgage Trust: Nascent Again

2008-06-30T17:24:00.003-04:00

New York Mortgage Trust (NYMT) is nascent once more. After a rocky first quarter, the Company appears to have righted the ship during Q2, relisting on a major exchange (NASDAQ), upping earnings guidance, boosting the dividend, and significantly reducing delinquencies / REOs.

The Company posted a press release earlier today that declared a split-adjusted dividend of $0.16/share, up from the $0.12/share dividend in Q1. While still likely to be a return of capital, the cash flow is certainly there to support the dividend. I would rather see management buyback stock and utilize the available tax losses with the free cash flow, but the dividend payment does give the stock a floor and rewards very patient shareholders.

Most importantly, the Company resolved approximately $4.3 million in REO properties and approximately $4.9 million in loans greater than 60 days delinquent held in securitization trusts. As of June 30, 2008, the Company had 1.18% of loans greater than 60 days delinquent and 0.13% in REO properties as compared to 1.82% and 1.21% as of March 31, 2008, respectively. This kind of performance shows meaningful operating improvement and a continued turnaround.

Wednesday's Trading Talk

2008-06-25T09:52:00.004-04:00

Lots of technical issues affecting this week's trading as well as the Fed announcement today.

On the fundamental end, the Fed comments today will most strongly influence the agency mREITs. If the Fed appears more aggressive about the need to raise rates, there will be downward pressure on the agency mREITs.

Compounding the downward pressure on the agency mREITs is the fact that Annaly Capital (NLY) went ex-dividend today, Capstead Mortgage (CMO) goes ex-dividend tomorrow, and Hatteras Financial (HTS) goes ex-dividend tomorrow.

Several other mREITs are going ex-dividend tomorrow, including JER Investors Trust (JRT), Gramercy Capital (GKK), Capital Trust (CT), PMC Commercial Trust (PCC), Crystal River Capital (CRZ), Resource Capital (RSO), and CBRE Realty Finance (CBF).

Since I've being watching mREITs, they tend to drop somewhat following their ex-dividend dates by more than the amount of the dividend. If your tax situation is such that you'd prefer capital appreciation than income, you may want to sell the dividend today.

Also, don't forget about the effects of the Russell rebalancing. There was quite a bit of downward pressure on high volume in trading of Impac Mortgage Holdings (IMH), Deerfield Capital (DFR), and Alesco Financial (AFN) shares yesterday. All three stocks are being deleted from the Russell 3000 on Friday.

CapitalSource Finally Gets a Clue

2008-06-23T14:20:00.005-04:00

A few months ago, I suggested that CapitalSource's (CSE) operational execution was being hindered by its overly broad SuperREIT structure.

At that time, it seemed pretty obvious to me that CapitalSource could unlock significant value by selling off its poorly performing residential mortgage portfolio, spinning off its profitable healthcare net lease REIT as a separate entity, and restructuring its corporate loan portfolio as a BDC.

I wasn't surprised, then, when CapitalSource announced some strategic changes in the wake of the Fremont bank purchase.

Closing the asset acquisition and commencing the operations of CapitalSource Bank may have other strategic implications for us in light of current market conditions.
Dividend Policy. As previously announced, we declared a $0.60 dividend for the second quarter of 2008, payable on or about June 30 to our stockholders of record on June 16. Upon the closing of the asset acquisition from FIL, we expect to reevaluate our dividend policy and may decide to retain a
majority of our earnings, consistent with dividend policies of other commercial depository institutions, to redeploy in attractive lending opportunities, subject to satisfying our minimum distribution requirements to qualify as a REIT for 2008.
Possible Healthcare Net Lease Transaction. With our focus on our commercial lending activities, we expect to continue to explore ways to monetize our investment in our healthcare net lease assets, including a possible initial public offering of the common shares of an entity holding these assets.
REIT Status. We intend to qualify to be taxed as a REIT for 2008, which may require us to acquire a significant amount of additional residential mortgage or other real estate assets due to the addition of the assets and operations of CapitalSource Bank to those of our existing taxable REIT subsidiaries. As we assess the impact of a depository franchise on our overall business operations, we intend to reexamine the strategic rationale for our REIT election, and we may determine not to elect to qualify as a REIT beginning in 2009 or thereafter.

So perhaps CapitalSource has gotten a clue. It wasn't maximizing the REIT structure, failing to properly manage its agency portfolio and making most of its profit in its corporate loan TRS. Perhaps the new CapitalSource will be able to improve GAAP earnings by focusing on the commercial financing business as a C-corp and utilizing cheap depository funding.

In any case, the implication for CSE shareholders is that the Company will be transforming from an income stock to a growth stock by the end of 2008. Look for CSE to sell of its agency portfolio early in 2009 and also spinoff its healthcare net lease portfolio shortly thereafter.

Mortgage REIT Insider: June 20, 2008

2008-06-20T15:43:00.002-04:00

It's Friday, or as I like to call it, heaven.

I've got another Mortgage REIT Insider posted at fellow blog Housing Wire.

Covered in this week's edition:

CapitalSource (CSE) takes it to the bank
Thornburg Mortgage (TMA) is still a wreck
Dividends, dividends, dividends!
MORE agency mREITs on tap
Russell rebalances will weigh on next week

Russell Rebalancing and mREITs

2008-06-16T15:59:00.003-04:00

In order to maintain true representation of global equity markets and avoid capitalization and style slippage, Russell annually rebalances the entire Russell family of indexes.

Annual reconstitution ensures that the indexes reflect the changes in the market over time and accurately represent the true opportunity set of institutional managers. Russell's U.S. and Global index families reconstitute simultaneously. On the last trading day in May, Russell ranks the 4,000 largest U.S. stocks by market capitalization. (These are the stocks included in the Russell 3000 and the Russell Microcap.)

The 2008 reconstitution of the Russell Indexes will take place after the market close on June 27, 2008.

Typically the annual Russell rebalancing creates huge up and down swings at the close of trading on the day of the rebalancing, as Russell index trackers chase the added stocks and dump the deleted stocks. Here's the rundown on stocks to watch in the mREIT universe:

Stocks Being Added (Likely Near-Term Price Boost)

American Capital Agency (AGNC) - Added to the Russell 3000, Russell Microcap, Russell Global

Capstead Mortgage (CMO) - Added to the Russell 3000, Russell Global (Deleted from the Russell Microcap)

FBR Group (FBR) - Added to the Russell Microcap

Hatteras Financial (HTS) - Added to the Russell 3000, Russell Global

Stocks Being Deleted (Likely Near-Term Price Pressure)

Alesco Financial (AFN) - Deleted from the Russell 3000, Russell Global

American Mortgage Acceptance (AMC) - Deleted from the Russell Microcap

BRT Realty Trust (BRT) - Deleted from the Russell 3000, Russell Global

Capital Trust (CT) - Deleted from the Russell Microcap

CBRE Realty Finance (CBF) - Deleted from the Russell 3000, Russell Global

Crystal River Capital (CRZ) - Deleted from the Russell 3000, Russell Global

Deerfield Capital (DFR) - Deleted from the Russell 3000, Russell Global

Impac Mortgage Holdings (IMH) - Deleted from the Russell 3000, Russell Global

MFA Mortgage (MFA) - Deleted from the Russell Microcap

Thornburg Mortgage (TMA) - Deleted from the Russell 3000, Russell Global

Dishing Out Dividends

2008-06-16T12:13:00.014-04:00

A number of the mortgage REITs have recently declared their second quarter dividends. Here's a summary for those of you keeping track:

Newcastle Investment (NCT) declared a second quarter dividend of $0.25/share, unchanged from the prior quarter. The ex-dividend date is July 2 and the payout date is July 30.
Capstead Mortgage (CMO) declared a second quarter dividend of $0.59/share, up $0.07 from the prior quarter. The ex-dividend date is June 26 and the payout date is July 21.
BRT Realty Trust (BRT) declared a second quarter dividend of $0.62/share, unchanged from the prior quarter. The ex-dividend date is June 23 and the payout date is July 7.
JER Investors Trust (JRT) declared a second quarter dividend of $0.30/share, unchanged from the prior quarter. The ex-dividend date is June 26 and the payout date is July 31.
Gramercy Capital (GKK) declared a second quarter dividend of $0.63/share, unchanged from the prior quarter. The ex-dividend date is June 26 and the payout date is July 15.
Alesco Financial (AFN) declared a second quarter dividend of $0.25/share, unchanged from the prior quarter. The ex-dividend date is June 18 and the payout date is July 10.
Capital Trust (CT) declared a second quarter dividend of $0.80/share, unchanged from the prior quarter. The ex-dividend date is June 26 and the payout date is July 16.
PMC Commercial Trust (PCC) declared a second quarter dividend of $0.225/share, up $0.025 from the prior quarter. The ex-dividend date is June 26 and the payout date is July 9.
Crystal River Capital (CRZ) declared a second quarter dividend of $0.30/share, down $0.38 from the prior quarter. The ex-dividend date is June 26 and the payout date is July 28.
Annaly Capital (NLY) declared a second quarter dividend of $0.55/share, up $0.07 from the prior quarter. The ex-dividend date is June 25 and the payout date is July 29.
Resource Capital Corp. (RSO) declared a second quarter dividend of $0.41/share, unchanged from the prior quarter. The ex-dividend date is June 26 and the payout date is July 28.
Hatteras Financial (HTS) declared a second quarter dividend of $0.75/share, its first dividend as a public company. The ex-dividend date is June 26 and the payout date is July 25.
American Capital Agency (AGNC) declared a second quarter dividend of $0.31/share, its first dividend as a public company. The ex-dividend date is June 30 and the payout date is July 29.
CBRE Realty Finance (CBF) declared a second quarter dividend of $0.10/share, down $0.05 from the prior quarter. The ex-dividend date is June 26 and the payout date is July 17.
New York Mortgage Trust (NYMT) declared a second quarter dividend of $0.16/share, up $0.04 (split-adjusted) from the prior quarter. The ex-dividend date is July 8 and the payout date is July 25.
iStar Financial (SFI) declared a second quarter dividend of $0.87/share, unchanged from the prior quarter. The ex-dividend date is July 11 and the payout date is July 31.
RAIT Financial (RAS) declared a second quarter dividend of $0.46/share, unchanged from the prior quarter. The ex-dividend date is July 14 and the payout date is August 12.
MFA Mortgage (MFA) declared a second quarter dividend of $0.20/share, up $0.02 from the prior quarter. The ex-dividend date is July 10 and the payout date is July 31.

Mortgage REIT Insider: June 13, 2008

2008-06-13T12:09:00.002-04:00

It's Friday, which means yours truly has another edition of Mortgage REIT Insider posted at fellow blog Housing Wire. Covered in this week's edition:

Commercial mREITs got clobbered this week
Agency mREITs didn't fare much better
Thornburg's woes reach a fevered pitch during a testy earnings call

Annaly Downgrade: Too Early in the Cycle?

2008-06-11T09:30:00.003-04:00

Shares of Annaly Capital (NLY) are slipping in early trade this morning after JPMorgan analyst Andrew Wessel downgraded the real estate investment trust on valuation.

Wessel downgraded the stock to "Neutral" from "Overweight," and said the stock has recovered to a fair value over the last few months. Wessel thinks the Federal Reserve is going to raise interest rates later this year, which would increase Annaly's expenses and reduce its profits.

Fair enough. But Annaly withstood seven straight quarter-point increases in the federal funds rate during 2004-2005 before the dividend was materially impacted. Furthermore, Annaly is quite efficient at using 2-year swaps to lock in its funding costs, so the mere threat of future rate increases will have no near-term impact on the Company's results.

If one thinks of Annaly's cycle of results as a U-shaped curve, then perhaps we've hit the top of the curve and will be coasting downward for the next few quarters. However, there is still a long way to go before Annaly hits the ground -- and plenty of time to enjoy juicy dividends before the tightening ends the ride.

At $16/share, Annaly's forward dividend yield will approach 12%. Investors with an eye towards income versus capital appreciation might be interested in coasting down with Annaly in the near-term.

Alesco Declares Dividend, Doubt

2008-06-10T16:21:00.000-04:00

The good news: Alesco Financial (AFN) maintained its dividend at $0.25/share for the second quarter.

The bad news: How more dividends will be declared if Alesco terminates its REIT status?

Alesco announced today that it was declaring a Q2 dividend of $0.25 per common share. However, James McEntee, President and CEO of Alesco Financial, cautioned, "Our REIT taxable income to date supports the payment of a $0.25 dividend per share for the quarter. AFN is continuing to review strategic alternatives for the company, including whether to continue to maintain its REIT qualification. Any change in strategy or operating results could impact the level of future dividend payments."

With the Kleros CDOs moving closer and closer to liquidation, it is likely that Alesco will remain a REIT for 2008, but will convert to a publicly-traded partnership (PTP) for 2009 and beyond. Alesco's money-making bank and insurance TruPS portfolios are not qualifying REIT assets, and with the lowered spread available on RMBS (limited repo lines available makes it difficult to lever up RMBS to profitability), it makes sense that the Company will end its run as a REIT.

Tough Fed Talk Takes Axe to Agency mREITs

2008-06-10T11:21:00.002-04:00

The latest comments from a Fed official have agency mREITs reeling in today's trade. Boston Federal Reserve President Eric Rosengren confirmed on Tuesday that the Fed believes total inflation, not the so-called core rate, is really what monetary policy should target over the long-run.

Rosengren expressed concern over continued high commodity prices, noting that "...it seems to be taking quite a long time to date for long-run supply and demand influences to rein in oil price increases."

Oil prices are at record highs near $139 a barrel, and the average cost of gasoline nationally has surpassed $4 a gallon for the first time. These trends put upward pressure on prices and raise the threat of inflation.

Investors now believe the central bank will leave benchmark rates on hold at their current 2% level. Tough talk on inflation from a string of Fed officials have also prompted the markets to begin pricing in an eventual rate hike, as early as October.

The agency mREITs reacted strongly to the threat of accelerated rate hikes. At last check, Annaly Capital (NLY), Capstead Mortgage (CMO), MFA Mortgage (MFA), Anworth Mortgage (ANH), and Hatteras Financial (HTS) were all trading lower by more than 5%.

Catch Up on the Action - Mortgage REIT Insider

2008-06-06T12:56:00.003-04:00

It's Friday, which means yours truly has another edition of Mortgage REIT Insider posted at fellow blog Housing Wire. Covered in this week's edition:

Chimera Investment's (CIM) leverage woes
Thornburg Mortgage (TMA) is still taking a time-out
Capital Trust (CT) has a new source of capital
BRT Realty Trust's (BRT) buyer bust
New York Mortgage Trust (NYMT) makes the long trek to the NASDAQ
NovaStar Financial (NOVS.PK) may be taking its dying breaths

Please enjoy and I hope it makes up for the lack of posting this week -- I do have a day job after all.

Charming Chimera Learns Painful Lesson on Leverage

2008-06-02T17:14:00.006-04:00

The initially successful Chimera Investment Corp. (CIM), which came public back in November, is having to admit they may have bitten off more than they can chew.

I originally posited in March that Chimera was quietly struggling to stay afloat after levering up at just the wrong time -- levering up four-fold just as competitor MFA Mortgage (MFA) was selling assets to de-lever its balance sheet.

After torching MFResidential's planned IPO, the poor conditions in the non-agency RMBS market chopped into Chimera, who slashed its quarterly dividend by 37.5%.

Matthew Lambiase, CEO and President of Chimera, commented on the dividend situation thusly: “Specifically, conditions compelled us to adjust our ramp-up pace and run our leverage at a more defensive level as we headed into the second quarter.”

In other words, maybe that $500 million repo facility with CSFB and a $350 million repo line with Deutsche Bank back in January wasn't such a good plan.

To be fair, Chimera did manage to complete a $619.7 million securitization, a long-term financing transaction whereby it securitized its then-current inventory of mortgage loans. Perhaps a lesson well learned.

Thornburg Ensnarled by SEC

2008-06-02T16:40:00.003-04:00

Who knew one late quarterly filing could cause this much drama? Thornburg Mortgage (TMA) needs more time to sort out its mess. The Company again postponed the filing of its first quarter 10-Q, citing the ongoing complexity of the accounting issues raised by infamous Hail Mary deal of March 31. Until Thornburg dutifully sorts out its homework, it's gonna face the wrath of quite a few angry investors.

Thornburg Mortgage’s delay in filing its Form 10-Q impacts the timing of several other pending transactions. Until the Form 10-Q is filed, the Company cannot file (1) the prospectus supplements for the registration of resales of Senior Subordinated Notes and common stock issued upon exercise of warrants (meaning MatlinPatterson is stuck with a sizable illquid investment), or (2) the Registration Statement on Form S-4 and related documents relating to the previously announced exchange offer for the Company’s preferred stock (meaning those guys can't get their $5/share payoff until September 30, 2008.)

Unrelated to the matters described above, on May 29, 2008, the Company received a letter from the NYSE stating that the Company is not in compliance with the NYSE’s continued listing criteria under Section 802.01C of the NYSE Listed Company Manual because the average closing price of the Company’s common stock has been less than $1.00 for 30 consecutive trading days. (emphasis added)

To cure this deficiency, the Company’s common stock must regain a $1.00 share price and a $1.00 average share price over 30 consecutive trading days. If the Company has not cured the deficiency within six months, the common stock will be subject to suspension and delisting procedures. The Company intends to cure this deficiency by implementing a reverse stock split, and has notified the NYSE of its intent. Shareholder approval of the reverse stock split is not required. Specific information regarding the timing and details of the reverse stock split will be released at a later date. (emphasis added)

With all the gymnastics and gyrations Thornburg has performed in the last year, a reverse split should be no problem.

Sy Says Buy Hatteras

2008-05-27T14:33:00.003-04:00

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

2008-05-24T10:02:00.001-04:00

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

2008-05-14T22:00:00.002-04:00

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

2008-05-12T22:17:00.005-04:00

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

2008-05-12T15:02:00.002-04:00

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

2008-05-10T14:48:00.005-04:00

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

2008-05-08T22:11:00.003-04:00

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

2008-05-06T22:55:00.003-04:00

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

2008-05-06T22:07:00.004-04:00

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.

Agency mREITs Turn In Strong Q1

2008-04-30T20:21:00.003-04:00

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

2008-04-29T20:59:00.003-04:00

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

2008-04-29T09:59:00.001-04:00

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

2008-04-28T22:09:00.005-04:00

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

2008-04-25T14:44:00.002-04:00

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

2008-04-24T15:10:00.002-04:00

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

2008-04-24T15:03:00.004-04:00

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?

2008-04-21T22:38:00.005-04:00

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

2008-04-18T11:23:00.003-04:00

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

2008-04-18T10:58:00.003-04:00

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

2008-04-15T11:28:00.005-04:00

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

2008-04-09T12:43:00.002-04:00

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

2008-04-08T21:45:00.002-04:00

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?

2008-04-07T16:11:00.003-04:00

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.

Wounded Survivors Wearily Report In

2008-03-31T21:33:00.004-04:00

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?

2008-03-28T09:46:00.005-04:00

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

2008-03-26T17:44:00.003-04:00

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

2008-03-26T10:06:00.003-04:00

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

2008-03-21T17:36:00.002-04:00

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

2008-03-19T09:32:00.002-04:00

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

2008-03-18T15:44:00.005-04:00

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

2008-03-17T18:17:00.003-04:00

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?

2008-03-17T15:05:00.003-04:00

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

2008-03-14T15:30:00.003-04:00

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

2008-03-14T10:20:00.002-04:00

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

2008-03-13T09:44:00.004-04:00

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?

2008-03-12T13:06:00.004-04:00

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

2008-03-09T18:49:00.003-04:00

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

2008-03-07T13:47:00.002-05:00

(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

2008-03-06T09:26:00.004-05:00

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

2008-03-05T21:31:00.004-05:00

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?

2008-03-04T21:02:00.006-05:00

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?

2008-03-03T18:02:00.004-05:00

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.

Deerfield Slashes Assets, Dividend

2008-02-29T20:39:00.004-05:00

In its recently filed 10-K, Deerfield Capital (DFR) revealed that it has suffered an "exacerbated" strain on liquidity during the first quarter of 2008 (henceforth dubbed the "UBS flu", see this article for explanation) and resulted in the "acceleration of our strategy to decrease investment in AAA-rated non-Agency RMBS and to seek to liquidate other assets to significantly reduce leverage in our balance sheet in an effort to support liquidity needs." DFR dumped $2.8 billion in agency RMBS and $1.3 billion in non-agency RMBS -- over half of its December 31 balance sheet.

Not surprisingly, the asset sales will significantly affect Deerfield's future taxable earnings. The Company warned in the 10-K that

In connection with REIT requirements, we have historically made regular quarterly distributions of all or substantially all of our REIT taxable income to holders of our common stock. As discussed, we recently sold the vast majority of our AAA-rated non-Agency RMBS portfolio and significantly reduced our Agency RMBS holdings at a significant net loss. We therefore expect our future distributions in 2008 and perhaps thereafter, to be substantially less than amounts paid in prior years. Additionally, we may pay future dividends less frequently and distribute only that amount of our taxable income required to maintain our REIT qualification. Furthermore, we may elect to make future dividends in the form of stock rather than cash. We may not have adequate liquidity to make these or any other distributions. Any future distributions we make will be at the discretion of our Board and will depend upon, among other things, our actual results of operations.

In other words, Deerfield expects to have a net operating loss carryforward from the asset sales, meaning that there is no dividend obligation and DFR may elect not to pay a dividend at all until the NOL is used up.

Ignore GAAP, It's All About the Cash

2008-02-28T20:09:00.005-05:00

Mortgage REITs manage their businesses based on long-term opportunities to earn cash flows. Their common stock dividend distributions are driven by the REIT tax laws and their taxable income as calculated pursuant to the IRS tax code. Their reported results for GAAP purposes differ materially, however, from both their cash flows and their taxable income.

The earnings releases today highlight just how useless GAAP currently is for evaluating a mortgage REIT's financial performance. Just by adopting FAS 159 on January 1, RAIT Financial's (RAS) GAAP book value jumps from $6.78/share to $23.35/share, simply by virtue of being able to mark its CDO liabilities to market. (RAIT also benefitted from the deconsolidation of certain variable interest entities, but that's a completely separate rant.)

The write-downs, write-ups...it's sound and fury, signifying nothing for most of the mortgage REITs. I've stopped worrying about the bottom line number and turned my attention instead to the availability of liquidity in the marketplace. The lack of liquidity, as I noted in an earlier post about Newcastle Investment (NCT), is prohibiting investment growth and pressuring future taxable income.

Many of the diversified REITs have had to resort to asset sales to boost cash, including Deerfield Capital (DFR), which sold $1.5 billion in RMBS during the fourth quarter. Newcastle dumped $1.3 billion in assets during Q1 2008, and RAIT sold an undisclosed amount of RMBS during Q4 2007. Even iStar Financial (SFI) wound up selling off its investment in a timber JV.

The bigger question is from where will the financing for portfolio growth come going forward. RAIT and NorthStar Realty (NRF) both seem to be headed to the bank to seek term credit facilities. iStar is moving to encumber its net lease portfolios. Everyone is scrounging for liquidity in a post-securitization market. The survivors will be those who can adapt enough to find alternate sources of liquidity and take advantage of the less-competitive landscape going forward.

Disclosure: I'm long RAS.

Obligatory Thornburg Blurb

2008-02-28T18:16:00.001-05:00

The mainstream media has done a pretty good job covering the Thornburg Mortgage (TMA) dust-up over margin calls related to its jumbo loan holdings. I recommend the Marketwatch piece for more information on the story.

If you ask me, Thornburg is a great buy on this dip -- as long as they face margin calls and not collateral seizures. If TMA is allowed to sell assets "selectively" (as the Company put it), they won't have to sell distressed securities and can raise cash using their more liquid MBS. If TMA gets hit with collateral seizures again, back to the 7s we go.

Newcastle's Need for Liquidity Puts the Dividend at Risk

2008-02-27T21:26:00.003-05:00

Newcastle Investment Trust (NCT), a diversified REIT sponsored by Fortress Investment (FIG), announced dismal fourth-quarter results today, posting a GAAP quarterly loss of $2.01/share. The loss was driven by a huge $202.6 million other-than-temporary impairment charge, primarily related to NCT's portfolio of subprime RMBS and residual interests. The writedowns do not have an economic impact on NCT's business, but do give insight into the market's continued distate for subprime assets.

More interestingly (at least to me), was the update that Newcastle provided for the first quarter of 2008. The Company has sold $1.3 billion of assets, about 16% of the balance sheet, since December 31. The sales resulted in a $14.2 million net loss. Of the $1.3 billion, NCT was only able to unload $45 million in junk assets, while $770 million of the assets sold were agency-backed securities. The nature of the sales suggest that NCT was a bit desperate for liquidity, and the sale of a material amount of the portfolio at a significant loss may pressure future taxable income. While Newcastle fully covered its 2007 dividends with taxable income, I would be cautious with NCT stock until the first quarter dividend is declared.

CapitalSource Can't Cover Its Dividend

2008-02-26T20:58:00.003-05:00

Analysts may have hinted at it last week during CapitalSource's (CSE) fourth-quarter earnings call, but today the truth was confirmed -- CapitalSource is not covering its dividend with taxable income.

After the bell yesterday, CapitalSource put out a short press release announcing that the tax characteristics of its 2007 dividends were available on the Company's website. Those who've read my blog know that I track tax characteristics as a measure of a mortgage REIT's dividend health.

Despite CSE management playing up the $0.60/share quarterly dividend in its last earnings release:

Given the strength and performance of our business and, in particular, credit metrics that remain at the low end of historical ranges, we declared a $0.60 per share cash dividend for the first quarter of 2008 yesterday and we are projecting a $0.60 per share quarterly cash dividend for the balance of 2008...

The truth is that two-thirds of CapitalSource's 2007 dividends were classified as a return of capital. That's right, fully $1.60/share of the $2.38 in '07 dividends amounted to CSE shareholders being handed back their original investment. Thus, if you were invested in CapitalSource at the beginning of 2007, and you sold CapitalSource shares to harvest tax losses, well, your capital loss just got cut by $1.60/share.

In other words, CSE can't generate enough taxable income to maximize the advantages of being a REIT. Instead of owning up to this and retaining the excess capital tax-free, CSE chose to keep pumping out dividends and diluting existing shareholders through its DRIP and direct stock purchase plan -- during one of the worst credit crises in recent history. If nothing else, CapitalSource could have retained the capital and repurchased common shares as a better means of supporting shareholder value.

By their very nature, REITs maximize their value when they can fully utilize their tax-advantaged structure. CapitalSource, meanwhile, reported an effective tax rate of 33.2% for 2007. Being a mortgage REIT is not just about paying a dividend. It's about utilizing a complex structure to deliver returns on shareholder equity.

Could Carving Up CapitalSource Create More Value?

2008-02-21T20:18:00.005-05:00

CapitalSource (CSE), a diversified REIT, reporting a disappointing $0.07/share fourth-quarter GAAP loss amidst serious derivative losses, mark-to-market losses on its MBS portfolio, and a growing provision for loan losses.

CapitalSource seemingly brushed off the actual results, focusing instead on a healthy dividend outlook and a less competitive landscape for 2008. Analysts on the call seemed a bit dazed and confused, with Moshe Orenbuch at Credit Suisse asking:

And then, I guess with respect to your thoughts on kind of the adjusted earnings level versus the dividends, someone asked a question or kind of inferred that since part of that dividend is paid at the start, is there a period of time where you are willing to under earn the dividend, how should we think about that?

Maybe you should think beyond the smoke and mirrors that CapitalSource is throwing up. The Company has a strong record of delivering on its investments, but the overall structure is suffering under management's one-stop shop attitude. CSE bills itself as a SuperREIT, a hybrid diversified vehicle that can do it all. Unfortunately, the REIT structure is not quite as accommodating as CSE would like for it to be.

CapitalSource's entire reasoning for converting to REIT structure was to enjoy significant tax advantages. However, CSE posted an "overall effective tax rate in 2007, expressed as a percentage of consolidated pre-tax GAAP net income, [of] 33.2%." Obviously, the Company is earning most of its income within its TRS subsidiaries and not with the tax-sheltered qualified REIT subsidiaries.

CSE is basically structured as conglomerate of three separate divisions: 1) a corporate finance TRS, 2) a healthcare net lease REIT, and 3) some sort of structured finance segment. It's a BDC, a healthcare triple net lease REIT, and a poorly performing mortgage REIT all in one!

Seems pretty obvious to me that CapitalSource could unlock significant value by selling off its poorly performing residential mortgage portfolio, spinning off its profitable healthcare net lease REIT as a separate entity, and restructuring its corporate loan portfolio as a BDC. The Company already operates with low leverage, and could eliminate a lot of repurchase agreements by disposing of the residential mortgage portfolio holding up its REIT status.

CapitalSource can perform from an operations standpoint. I wish they'd give themselves the opportunity to do so.

FBR Framing Future

2008-02-21T18:33:00.003-05:00

Friedman Billings Ramsey (FBR) has done a nice job winning me over ever since I questioned their use of the REIT structure a couple months ago. At that time, I wondered if FBR might be considering a partnership conversion. After reading through the Q407 earnings call transcript, I think FBR is back on track to succeeding as a REIT.

FBR has done an excellent job of restructuring its balance sheet, dumping the riskiest assets and eliminating commercial paper as a source of funding. The company has deployed the capital freed from asset sales into the purchase of agency-backed securities, a return to FBR's "core business, the conservative substantially hedged agency mortgage backed security strategy."

Most importantly, FBR has set itself up to generate qualified REIT income through its mortgage management segment, which may help FBR to monetize its $372 million of net operating loss carry-forwards and $268 million of capital loss carry-forwards. At a minimum, the NOLs will allow FBR to retain tax-free earnings at the REIT and shield the Company from a dividend obligation. It may choose to repurchase shares, since FBR is trading once again below economic book value of $3.10/share (including the expected FNLC recovery).

FBR very nearly destroyed itself by trying to do too much within the REIT umbrella, as active mREITs and those with numerous nonqualified activities can quickly stretch themselves too thin.

Mortgage REIT Roundup - February 15th

2008-02-15T10:09:00.004-05:00

Just a few odds and ends here that merited a quick note...

Dynex Capital (DX) reported fourth-quarter earnings of $0.05/share and a GAAP book value of $8.22/share. The Company also declared a $0.10/share common stock dividend despite having continued net operating loss carryforwards (and therefore no taxable income). Dynex is optimistic about its future prospects, electing to pursue an agency MBS strategy in addition to its previously announced efforts in CMBS. Dynex stock was up on the earnings news and the future outlook.

MFA Mortgage (MFA) shares sank despite reporting $0.16/share in fourth-quarter earnings and improving its net interest margin by 29 basis points versus the prior quarter. Book value, however, was just $6.76/share, which may have prompted the pullback in the share price from a 1.6x book valuation to just 1.4x book value.

New York Mortgage Trust (NMTR.OB) announced that it had privately placed 15 million shares at $4.00.share. The $57 million in expected net proceeds is expected to be used to purchase agency MBS. NMTR continues to seek strategies to produce taxable income that can be used to offset their sizable deferred tax asset.

Mortgage REITs Rise From Ashes

2008-02-12T20:14:00.000-05:00

It's hard to believe, but one of the hottest sectors in the market right now is in the center of credit crisis gripping the capital markets. Mortgage REITs, which were all but left for dead in early 2007, have exploded on the scene as the Fed has lowered interest rates and more investors have dared to call a bottom in the lending market.

On Tuesday, business development company bellwether American Capital Strategies (ACAS) decided to throw its hat in the ring, filing a $400 million IPO for American Capital Agency Corporation, a newly-formed REIT focused on agency-guaranteed residential mortgage backed securities. American Capital's decision to enter the arena is hardly surprising given the 53% year-over-year gain for the stock of established agency mREIT Annaly Capital Management (NLY) and the astonishing 122% year-over-year return by Capstead Mortgage (CMO). Although ACAS has no experience operating a REIT, it does have considerable experience meeting the onerous qualifications of being a BDC and it has hired talented and knowledgeable personnel. With the temporary expansion in conforming loan limits, there may well be a greater supply of agency-backed RMBS available to American Capital.

Meanwhile, the existing agency mREITs are busy exploring new territory themselves. Following the success of Annaly's launch of Chimera Investment Corporation (CIM), which is trading some 25% above its November IPO price of $15, MFA Mortgage (MFA) has also filed its own $250 million IPO for MFResidential Investments, Inc. (proposed ticker: MFR). Much like Chimera, MFR will focus on investing in investment-grade non-agency RMBS. In the prospectus, MFR's management cites

[c]oncerns about increased mortgage delinquencies, declining home prices and rising unsold home inventory have caused many investors to question the underlying risk and value of mortgage assets across the ratings spectrum. Many traditional mortgage investors have suffered losses in their residential mortgage portfolio, resulting in a decline in the availability of capital to fund the purchase of mortgage assets. These factors have resulted in mortgage assets trading at lower prices and higher yields, creating attractive spread investment opportunities for us.

Hard to believe that just two years ago, MFA was trading at just $6/share, while subprime lender New Century Financial (NEWCQ.PK) was trading north of $38/share. Such is life in the mREIT jungle. It will be interesting to see how this new cycle of mortgage REITs fare.

Why Arbor Realty's Chasing CBRE Realty Finance

2008-02-10T20:27:00.001-05:00

I wasn't really sure why Arbor Realty Trust (ABR) was pursuing CBRE Realty Finance (CBF) until I read through the transcript of Arbor's conference call earlier today. As a bit of an aside, Arbor hit another home run on earnings, delivering full-year earnings of $4.44/share, yet creating enough tax deferment in the gains on their equity kickers to limit the 2007 special dividend obligation to just $0.15 - $0.20/share. It's precisely this sort of shrewd forward-looking business decisions that has differentiated Arbor from its peers and limited ABR's exposure during the credit crunch.

So the question again, why go after CBRE Realty Finance? I suspect Arbor is seeking to expand its origination platform -- and they have the opportunity to exploit (if somewhat begrudgingly)CBF's relationship with CBRE/Melody, the mortgage origination and servicing subsidiary of CBRE.

On Arbor's 4Q call, David Choksi at Lehman Brothers really surfaced the most serious issue at Arbor -- "And then, Ivan in your comments, you sounded somewhat of a cautious tone, given the prepayments you have upcoming, you are just seeing liquidity. What’s kind of the timing to redeploy those proceeds?"

Indeed, Arbor originated five new loans and investments totaling $116 million during the quarter, but seven loans paid off with an outstanding balance of approximately $138 million. Ivan Kaufman, Arbor's CEO, tapdanced around the answer, citing liquidity needs, etc.

Choksi pressed on, asking "And then, one final question. Ivan, you mentioned that you were looking at JV opportunities. Can you elaborate on some of the things that you are looking at?"

Kaufman appeared very interested in this possibility, replying "And clearly, if we could utilize other people’s capital and just a little bit of our capital and enhance our returns through promotes, that would be an attractive structure for us and we’ve been evaluating those options."

CBF has $76.8 million invested in joint venture equity investments, but it is looking to exit these investments quickly for liquidity purposes. Arbor, on the other hand, has the ability to take a longer-term view of these JV investments and monetize them at attractive times.

In short, Arbor's talent for managing investments is becoming constrained by its access to opportunities. Arbor has recognized an avenue to access more originations through a (forced) partnership with CBRE and has recognized that CBF does not have the ability and experience to run a commercial REIT. Perhaps CBF's shareholders will agree.

Earnings Roundup - Thursday Edition

2008-02-07T20:20:00.000-05:00

Chimera Investment Corp (CIM) reported core earnings for the period commencing November 21 and ending December 31, 2007 of $1.3 million or $0.03 per average share. The Company reported a GAAP loss for the period commencing November 21 and ending December 31, 2007 of $2.9 million or $0.08 per average share. The difference between the Company’s Core Earnings and GAAP results is related to the Company’s unrealized losses on interest rate swaps at December 31, 2007 - meaning the Company is not designating its hedges under FAS 133.

Capstead Mortgage (CMO) reported net income of $15,860,000 for the quarter ended December 31, 2007 compared to net income of $2,350,000 for the fourth quarter of 2006. After considering preferred share dividends, the Company earned $0.31 per diluted common share for the fourth quarter of 2007 compared to a loss of $0.14 per diluted common share for the fourth quarter of 2006. Not surprisingly, Capstead's results benefitted from several accretive equity raises and aggressive Fed rate cuts.

BRT Realty Trust (BRT) announced its results of operations for the first quarter of its fiscal year. For the three months ended December 31, 2007, BRT reported total revenues of $7,508,000 and net income of $3,230,000, or $.28 per share on a diluted basis. For the three months ended December 31, 2006, total revenues, net income and net income per share on a diluted basis were $12,745,000, $8,289,000 and $.95 per share, respectively. BRT's results suffered as a result of a decrease in interest and fee income on outstanding loans. The decrease in interest on loans was due to (i) a decline in the average balance of loans outstanding, (ii) the increase in non-earning loans, and (iii) a decline in the rate earned on the portfolio. During the quarter ended December 31, 2007 two loans, aggregating $18,700,000, became non-earning.

AMAC's Advisor Provides Repo Refuge

2008-02-05T19:56:00.000-05:00

It didn't require Scooby and the Mystery Machine to decipher American Mortgage Acceptance's (AMC) oddball Friday 8-K. The 8-K disclosed a hasty written consent to amend AMC's bylaws regarding affiliate transactions -- specifically, to allow for a majority vote of the Board to sell property to AMC's sponsor, Centerline Holding (CHC). Why was AMC in such a hurry to amend its bylaws when the Board would surely be meeting in a couple of weeks to review fourth-quarter results?

A good memory and a terrible nerdy habit of devouring SEC filings reminded me of this disclosure from the third-quarter 10-Q:

[I]n October 2007, we decided not to pursue a second CDO securitization. In connection with that determination, we entered into an agreement that will terminate our Citigroup repurchase facility on February 28, 2008....

We also plan to sell all of the first mortgages pledged as collateral for the Citigroup line to a third party and recognized an impairment loss of $1.3 million as of September 30, 2007, reflecting the market value of the loans as of that date….

To the extent that any of these assets remain on the facility after February 1, 2008, the rate will increase to a range from LIBOR plus 0.95% to LIBOR plus 1.60%.

Is it possible that AMC was in a big hurry to unload mortgages financed by the Citi line? Decide for yourself, but the issue seemed pretty clear-cut for me when I saw this Tuesday afternoon 8-K disclosure:

On January 30, 2008, the Registrant sold four first mortgage loans to an affiliate of Centerline. This sale resulted in sales proceeds of $23.3 million, of which $16.5 million was used to repay principal amounts on a repurchase facility collateralized by these investments. Based on the amortized cost of $24.6 million prior to the sale, the transaction resulted in a realized loss of $1.3 million.

American Mortgage shares closed Tuesday at $2.08/share, down 88% from its 52-week high.

Arbor Realty Again Ups the Ante

2008-02-04T22:28:00.000-05:00

As I guessed last week, Arbor Realty Trust (ABR) is taking its pursuit of CBRE Realty Finance (CBF) to a proxy fight. You can review Arbor's proposed slate of directors in this SC 13D/A. The filing states that "...the Nominees, if elected, intend to evaluate all strategic alternatives to enhance and maximize, stockholder value, including, but not limited to: (i) seeking a business combination or sale of the Company; (ii) reviewing the performance of CBRE Realty Finance Management, LLC, the manager of the Issuer (the "Manager"); (iii) replacing the Manager; and (iv) seeking the reimbursement of fees previously paid to the Manager, if warranted."

As a side note, Arbor apparently didn't submit its alternate slate in time, so they filed suit to prevent CBF from rejecting their slate.

For its part, CBF issued an acidic press release in response, saying "Our board of directors decided we have better things to do with our Company's money and resources than litigating something like this...We will take Arbor at its word that it misread our bylaws, and move on. Our Board of Directors is dedicated to maximizing stockholder value and will look forward with interest to hearing what the members of Arbor's dissident slate have to say."

Earnings Roundup - Monday Edition

2008-02-04T22:11:00.000-05:00

Editor's note: This week will be very heavy with earnings announcements in the mREIT universe. Each day this week, I plan to do an earnings roundup to at least provide some coverage for each company reporting.

Thornburg Mortgage (TMA) reported fourth-quarter GAAP diluted EPS of $0.33, well above the consensus estimates of $0.27. Thornburg has completed a restructuring of its balance sheet and expects to be able to begin growing and financing the portfolio in 2008. The Company saw significant improvement in net interest margins and spoke positively of being able to create agency securities if the conforming loan limits are raised.

Annaly Capital (NLY) reported fourth-quarter "core" EPS of $0.37, in-line with the consensus estimates of $0.37. Annaly benefited from gains on MBS sales during the period, from net interest margin expansion, and from continuing with its accretive equity offerings.

Alt-A Investors Mount a Comeback

2008-02-01T19:36:00.000-05:00

Maybe it was just the rate cuts, maybe it was talk of a bailout for insurers, but money has been flowing into the Alt-A investors over the past two weeks.

Redwood Trust (RWT), which closed at $33.41 on January 22, has risen 34.5% since to close at $44.94 today. Likewise, Impac Mortgage (IMH), which I had admittedly left for dead, has climbed from $0.75/share to $1.71/share in the same time frame - a stunning 128% gain. Even Luminent Mortgage (LUM) has rallied 57%, moving up from $0.56/share to $0.88/share. Both stocks have a chance of regaining compliance with the NYSE listing requirements if the trend continues.

Of the three, I am of course the most interested in RWT. Although it's still well off its mid-60s highs, RWT has weathered this storm much better than most companies. Even so, it's not yet clear sailing for Redwood. Earlier this week, S&P put several classes of its Acacia CDOs on creditwatch negative.

PMC Plans Ahead

2008-01-31T13:18:00.000-05:00

Update: PMC seems committed to trying to do a securitization deal. It's the only mREIT presenting at the American Securitization Forum 2008 Conference this weekend.

As a bit of a follow-up to yesterday's post about Quadra Realty's (QRR) lack of a back-up plan regarding the use of securitization funding to support its portfolio, I'd like to contrast that with one of the most forthright 8-K filings I have read in a while, courtesy of PMC Commercial Trust (PCC) late yesterday. PMC, a Dallas-based small business lender and REIT had the following to say:

On January 28, 2008, PMC Commercial Trust amended its (i) revolving credit facility to increase the amount available under the facility from $20 million to $45 million and (ii) warehouse facility (the "Conduit Facility") which, among other things, extended the Conduit Facility’s maturity date from February 2008 to May 2, 2008.

The interest rate spread on our Conduit Facility will remain the same during the extended period. The Conduit Facility cost of funds is the pass-through rate as defined in the facility documents plus 0.85%. The "pass-through" rate is the rate that the Conduit Facility pays for its commercial paper and historically has approximated LIBOR.

The Conduit Facility allows for advances based on the amount of eligible collateral sold and has minimum collateral requirements. In addition to the extension, the amendment increased the amount of collateral required under the Conduit Facility. Due to PMC Commercial Trust having excess collateral that meets eligibility requirements of the Conduit Facility, we do not expect this change in collateral requirements to have a material impact on us.

The funds to repay principal under our Conduit Facility are typically obtained through securitizations of the loans collateralizing advances under the Conduit Facility. As a result of current market conditions, we expect that the interest rate spread would be at or above the spread on our prior variable-rate structured transaction of LIBOR plus 1.25%. Therefore, we may delay completion of a securitization until market conditions are more favorable.

While we can give no assurances, prior to May 2, 2008, we anticipate that we will either extend the maturity date of the Conduit Facility by as much as a year and/or complete a securitization. Accordingly, to allow us to continue our loan origination platform without disruption, we have increased the amount available under our revolving credit facility, hich matures December 31, 2009, from $20 million to $45 million. We currently have approximately $24 million of Conduit Facility borrowings outstanding and have no borrowings outstanding under our revolving credit facility.

PMC is honestly acknowledging that securitization is not an economically viable option right now and it stating its plans to increase its warehouse facilities on reasonably favorable terms in order to continue growing the portfolio going forward. It's all subject to the usual boilerplate risk, but it beats the evasive (and annoying) "we're reviewing all available financing options". Review time is over. Test time is here. On the funding question, PMC seems to be passing.

Quadra's Failure Raises More Questions for mREITs

2008-01-30T10:43:00.000-05:00

The boom in launching diversified mortgage REITs during the mid-2000s has officially busted. Hypo Real Estate Bank International AG is folding its US commercial mREIT, Quadra Realty Trust (QRR), back into its portfolio less than 12 months after Quadra's February 2007 IPO.

There was no commentary in the press release announcing the acquisition other than the terms and the price of the tender offer. Quadra shareholders will get a total of $11/share in cash and a special dividend. Shareholders who bought into the IPO at $15/share last year have seen a 30% capital loss (not considering the dividends Quadra has paid of $0.42/share).

The offering was pretty much a bust from the outset, as Quadra barely traded above its IPO price for a few days before settling into a constant decline. I believe the reason for Quadra's failure is set out pretty plainly in the Company's IPO prospectus:

Although our Manager has been active in real estate operations and lending for many years, it has no experience operating a REIT and operating a business in compliance with the numerous technical restrictions and limitations set forth in the Internal Revenue Code or the Investment Company Act applicable to REITs.

Hypo had no prior experience with managing the day-to-day cash flow challenges that REITs impose, and without access to the capital markets (particularly CDOs) to fund Quadra's portfolio, liquidity was being squeezed by margin calls and haircuts on the warehouse lines. There was, quite simply, no back-up plan if CDO issuance was not an option.

I don't believe Quadra is the only commercial mREIT struggling to find its footing as capital markets remained closed. As earnings reports roll in next week, a key issue for management at the CRE mREITs is to have a well-defined strategy for managing the business in the absence of CDO issuance.

Tax Treatment of 2007 Dividends

2008-01-23T19:36:00.001-05:00

Time for one of the more-telling but least-referenced metrics to evaluate mREITs - the tax characteristics of their dividends. Typically in January or February, the mREITs announce the classification of their dividends for tax purposes. The dividends are classified as one of the following flavors:

Ordinary taxable income
Capital gains income
Return of capital

Ordinary taxable income are taxable earnings generated through the normal course of business. 90% of an mREIT's ordinary taxable income must be distributed by the time it files its current year tax return (i.e. 2007 ordinary TI must be distributed by September 15, 2008). Dividends classified as ordinary taxable income are generally considered to be "earned".

Capital gains income resulted from the sale of appreciated investments or other assets. Distribution of capital gains income is optional for mREITs, but may occur if a large gain is realized on a one-time sale of portfolio investments and management determines that returning some or all of the profits to shareholders is an important part of overall return. Regular dividends generally should not be supported by capital gains income, however, as this is a unsustainable strategy in the long-term.

Returns of capital basically indicate that the dividend was not earned but instead represents a return of shareholder equity. In essence, shareholders loaned money to the corporation interest-free, only to receive it back in the form of a dividend months later.

In this post, which I will update on a periodic basis, I'll compile the tax treatment of 2007 mREIT dividends so you can see if your mREIT is covering its dividend with ordinary income.

Capital Trust (CT): Paid $5.10/share in 2007 dividends (4 regular @ $0.80/share and a special of $1.90/share). All classified as ordinary taxable income.
Bimini Capital (BMNM.PK): Paid $0.10/share in 2007 dividends. All classified as a return of capital.
Redwood Trust (RWT): Paid $5.00/share in 2007 dividends (4 regular @ $0.75/share and a special of $2.00/share). All classified as ordinary taxable income.
Alesco Financial (AFN): Paid $1.23/share in 2007 dividends (1 regular @ $0.30/share and 3 regular @ $0.31/share). All classified as ordinary taxable income.
Arbor Realty Trust (ABR): Paid $2.46/share in 2007 dividends (1 regular @ $0.60/share and 3 regular @ $0.62/share). $2.32/share was deemed to be ordinary taxable income. $0.14/share was deemed to be a capital gain distribution.
Anworth Mortgage (ANH): Paid $0.27/share in 2007 dividends (1 regular @ $0.12/share and 3 regular @ $0.05/share). All classified as ordinary taxable income.
PMC Commercial Trust (PCC): Paid $1.20/share in 2007 dividends (4 regular @ $0.30/share). $1.068/share was deemed to be ordinary taxable income. $0.132/share was deemed to be a capital gain distribution.
iStar Financial (SFI): Paid $3.595/share in 2007 dividends (3 regular @ $0.825/share, 1 regular at $0.87/share and a special of $0.25/share). $3.262/share was deemed to be ordinary taxable income. $0.333/share was deemed to be a capital gain distribution.
RAIT Financial Trust (RAS): Declared $2.56/share in 2007 dividends (1 regular @ $0.80/share, 1 regular @ $0.84/share and 2 regular @ $0.46/share). However, because RAIT paid the final dividend of 2007 in 2008, it is electing to include it with 2008 for tax classification purposes. (Bad news - RAIT didn't earn enough taxable income to cover the full 2007 dividend.) $2.07/share was deemed to be ordinary taxable income. $0.01/share was deemed to be a capital gain distribution. $0.02/share was a return of capital.
Newcastle Investment (NCT): Paid $2.85/share in 2007 dividends (1 regular @ $0.69/share and 3 regular @ $0.72/share). All classified as ordinary taxable income.
Anthracite Capital (AHR): Paid $1.48/share in 2007 dividends (2 regular @ $0.29/share and 3 regular @ $0.30/share). All classified as ordinary taxable income.
MFA Mortgage (AHR): Paid $0.415/share in 2007 dividends. All classified as ordinary taxable income.
New York Mortgage Trust (NMTR.OB): Paid $0.10/share in 2007 dividends. All classified as a return of capital.

Arbor Turns Up Heat on CBRE

2008-01-22T17:47:00.001-05:00

I noted Arbor Realty Trust's (ABR) interest in CBRE Realty Finance (CBF) about two months ago, when Arbor unsuccessfully offered a $8/share bid for CBF. Two months later, with CBF shares still well below the $8/share offer price, Arbor is mightily wielding its 9.4% stake in CBRE Realty. Earlier today, the company issued an open letter to CBF's CEO, demanding an update on the CBR Realty portfolio, specifically with respect to two troubled deals and CBF's November assertion that "[w]e [CBF] have no non-performing loans in our debt portfolio."

Although there is no indication that Arbor is getting any closer to acquiring CBRE Realty, open letters such as this one often serve as a precursor to a hostile takeover and puts CBF on notice that Arbor is not going away any time soon. One long-time investor in the mREIT sector, Wally Weitz, may be putting his bets on a deal sooner than later. In a recent 13G filing, Weitz disclosed that he had recently upped his stake in CBRE from 6.5% to 8.1%, his first addition to his position in nearly a year.

Agency mREITs Soar on Fed Panic

2008-01-22T12:06:00.000-05:00

The Fed's panic-driven emergency 75 basis points sent the agency mREITs soaring, up 3.5% to 5.0% as last check. Annaly Capital (NLY) in particular looks to benefit as it holds a large portion of fixed-rate securities in its portfolio.

Meanwhile, Anworth Mortgage (ANH) had the good fortune of announcing a very timely 11 million common stock offering, which will raise about $90 million in net proceeds. Shares surged despite the news of the offering because the Fed rate action, so Anworth will benefit from attractive pricing for this issuance.

Origen Shares Tank on Ambac Agony

2008-01-18T16:15:00.000-05:00

Manufactured home lender and residential mREIT Origen Financial (ORGN) has seen its shares sink by some 40% over the last three months. I surmise much of the recent tumble, despite improved operating results, is fallout from the turmoil at Ambac Assurance (ABK).

Ambac has underwritten Origen's last three securitization deals, and the credit enhancement it provided Origen's tranches of manufactured home loans were crucial to securing a AAA rating, particularly for the $126.7 million in notes issued and placed through the 2007-B trust in October. Even with the Ambac guarantee, the AAA tranche priced at one-month LIBOR plus 120 basis points.

Securing cheap financing is critical for Origen, which disclosed a net interest spread of just 1.86% as of September 30, 2007. As the Company noted in its 10-Q, "[c]ontinued access to the securitization market is very important to our business."

Ambac's downgrade from AAA to AA and the implications of writing no new business creates a spiraling effect for Origen.

With respect to existing securitizations, although Origen sold most of the tranches, it has retained approximately $43 million in residual interests. These residuals are financed by a repo facility with Citigroup, which has already increased the haircut on the residuals once during the third quarter and also exercised margin calls. Additionally, even though Origen sold the tranches, the sales did not meet the true sale requirements of FAS 140 and were recorded as financing transactions, meaning that Origen will have to absorb any mark-to-market losses. While such losses have no economic recourse to the Company, it will impact GAAP equity and book value.

Perhaps more importantly, however, is the impact on future securitizations. If Ambac discontinues writing new business, Origen will have to try find credit enhancement guarantees from another monoline insurer or significantly increase its overcollateralization in order to profitably securitize future loans. If Origen cannot attractively price future securitizations, the Company has few alternatives for financing its originations.

Origen has a unique niche within the residential lending universe, and although it has difficulty securing acceptable ratings for its collateral, its loans have performed remarkably well given the nature of manufactured home lending. The Company has already secured funding from insiders, and given the depressed share price, Origen could be a candidate for a management-led or private equity takeout.

Deerfield, Gramercy Drag Down CRE mREITs

2008-01-17T17:03:00.000-05:00

News of Deerfield Capital's (DFR) writedowns and asset sales combined with Gramercy Capital's (GKK) penny miss on FFO estimates pushed shares of commercial-focused mREITs lower today. Particularly hard-hit were Quadra Realty Trust (QRR), dropping 10%, and NorthStar Realty Finance (NRF), which shed 9.7%. Also in the losing column, on sector weakness and the threat of significant Fitch downgrades, were Anthracite Capital (AHR) (-9.4%), Crystal River Capital (CRZ) (-8%), and JRT Investors Trust (-8.7%).

Look for commercial mREIT shares to remain under pressure through the end of January, until a potential Fed rate cut (January 30) and additional earnings news (February 4-7) shakes the sector out of its doldrums.

Fitch Focuses on B-Piece CRE CDOs

2008-01-16T22:03:00.000-05:00

With a hat tip to PJ at HousingWire, Fitch Ratings has placed 188 tranches from 18 CMBS-Backed CDO "repack" transactions (representing $8.4 billion) on Rating Watch Negative. "Repack" transactions are basically financial alchemy, in which issuers take mezzanine-grade ABS, bundle them together, create a senior/subordinate structure, and form a CDO that receives ratings as high as AAA. This is nothing new; most mREITs (except the agency RMBS investors) engage in this type of activity. Included in the potential downgrades are $596 million from three Anthracite Capital (AHR) CDOs, $541 million from two Crystal River Capital (CRZ) CDOs, and $918 million from one JER Investors Trust (JRT) CDO.

We previously noted the troubles with Crystal River's CDOs, but Anthracite's and JRT's troubles are new. JRT's potential downgrades are particularly alarming given the dollar amount of tranches under review and the fact that JRT will bear most of the exposure as the purchaser of all the non-investment grade CDO notes. The CDO is just over a year old and backed entirely by B-grade CMBS and residuals, so the collateral is shaky at best.

Deerfield Divests Assets - Will It Affect the Dividend?

2008-01-16T20:29:00.000-05:00

Update: Deerfield shares dove some 18% at today's open on the news.

Deerfield Capital Corp (DFR) announced today that it was taking mark-to-market adjustments of $75.5 million and $14.6 million, respectively, on its RMBS and ABS portfolios. These charges are non-cash valuation adjustments that will not affect taxable income (and consequently, the dividend).

More importantly, Deerfield disclosed the sale of $1.5 billion in RMBS and $0.3 billion in the Pinetree CDO. That amount represents about 20% of DFR's balance sheet and likely reflects the cash draining effect of rolling over its repo lines, which totaled some $7 billion at 9/30/07 and were all 90 days or less in duration.

Though it reduced DFR's exposure to subprime collateral, the assets sold likely represent some of the Company's highest-yielding assets and may cause a material hit to taxable income during 2008. Although Deerfield had a decent amount of undistributed taxable income at 9/30/07, a continuation of dividends at the current rate will eat into any 2007 spillover fairly quickly.

Crystal River's CDO Could Cause Problems

2008-01-16T05:38:00.000-05:00

Crystal River Capital (CRZ), a diversified mortgage REIT managed by Brookfield Asset Management (BAM), is a relative newcomer to the mREIT universe. The Company came public in July 2006, one of the last successful mREIT offerings before the downward credit spiral began.

However, the Company commenced operations in March 2005, and operated as a private entity for over a year before its IPO, so significant business activities took place prior to coming public. One such activity was the launch and deployment of Crystal River Capital CDO 2005-1, a diversified issuance backed by whole loans, CMBS, and RMBS. As disclosed in the third quarter 10-Q, CRZ retained "all of the non-investment grade securities, the preference shares and the common shares" related to the 2005-1 CDO.

Normally, CDO issuance is viewed positively for mREITs, since they allow for "match-funding" of assets and liabilities. That is, cash flows from the collateral pool pays the interest on the debt securities issued by the CDO. The problem arises when the collateral pool does not perform as expected and is downgraded by the rating agencies. Such a downgrade can trigger failure of overcollateralization tests and divert cash flow from subordinate holders to the senior classes. Somewhat esoteric, I know, but the bottom line is that Crystal River retained the junior classes of the 2005-1 CDO and sold the senior tranches, betting that the CDO would perform as expected.

Enter a serious problem. On January 11th, S&P cut the rating of 2005-1's investment grade tranches F,G, and H to junk, which may trigger the failure of O/C tests and certainly cuts the value of the non-investment grade tranches held by CRZ. Thus CRZ is still liable for payments on the debt securities but may not receive the corresponding cash flows from the collateral pool.

While CRZ is able to weather some failures in collateral performance, if additional senior tranches are downgraded in the future, a significant mismatch in interest income and interest expense may occur.

Luminent to Lose Listing?

2008-01-15T21:49:00.000-05:00

It's just a matter of time before the Big Board boots Luminent Mortgage Capital (LUM). The struggling mortgage REIT disclosed earlier today that the NYSE had notified it of its noncompliance with the share price deficiency rule, as LUM hasn't traded near a buck in over a month.

Although Luminent claims it will be able to cure the deficiency within the allowed six-month window, LUM's market cap of $28 million is just above the $25 million threshold for REITs. Furthermore, as I noted in this post, Luminent won't be able to hang on to its REIT status beyond September 2008.

Much like NovaStar and Impac, Luminent's life as a viable entity continues to hang in the balance.