Deerfield Shares Driven Up By Disclosure

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

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

Wounded Survivors Wearily Report In

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

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

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

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

Is Deerfield Done?

From Friday afternoon's press release:

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

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

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

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

Deerfield Slashes Assets, Dividend

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.

Deerfield Divests Assets - Will It Affect the Dividend?

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.

No Drama in Deerfield's Disclosure

Update: I received an email from Deerfield's CFO -- the inquiry was in fact disclosed in the second quarter 10-Q and relates to a general inquiry of asset managers regarding practices related to CMO and REMIC transactions. Nothing sinister here.

Deerfield Triarc Capital (DFR) soared almost 15% today (though it gave up some of that gain after hours) on news that it is acquiring its manager, Deerfield & Co. from Triarc Companies (TRY). The newly announced deal is DFR's second attempt to acquire Deerfield - and represents a much more economic deal than the original deal terms announced in April.

However, hidden in the "boilerplate" safe harbor disclosure was this merger risk related to DFR: "the costs, uncertainties and other effects of legal and administrative proceedings, including a current inquiry by the Securities and Exchange Commission". A review of prior DFR filings makes no mention of any SEC inquiry, although there was a string of comment letters and responses related to the 2006 10-K and Q1 2007 10-Q. Nonetheless, the risk factors makes it sound as though something more than a comment letter is going on.

Deerfield Delivers

Deerfield Triarc Capital (DFR), a diversified REIT, delivered solid results despite a headline net loss. DFR, like many of its peers, incurred significant losses during the quarter on asset sales, valuation impairments, and swap losses, driving GAAP net loss to $0.45/share. However, many of these charges do not effect taxable income, which drives Deerfield's dividend.

DFR posted $0.50/share in taxable income, well above the $0.42/share Q3 dividend. Year to date, Deerfield has earned $1.34/share in REIT taxable income but paid out just $1.26/share in dividends. With a book value of $10.64/share, Deerfield is trading at just 70% of BV.

Deerfield's deep discount to book value is partially explained by the Company's liquidity situation, which is bit thinner than some of its peers. Deerfield had a leverage ratio of 14 times equity at September 30, and as of October 31, 2007, DFR had unencumbered RMBS and unrestricted cash and cash equivalents of $128.5 million. However, Deerfield has 15 active repurchase agreements with aggregate exposure of $301 million, which places DFR at risk for additional margin calls and forced asset sales that could hamper continued REIT qualification.

Overall, Deerfield carries a higher risk profile than many of its peers given its investments in alternative assets and some non-prime backed RMBS. However, investors are more than adequately compensated with a 22.7% dividend yield.

Deerfield's Dividend Stays Intact

Deerfield Triarc (DFR), a diversified portfolio investor, recently announced that its third-quarter dividend would continue at a rate of $0.42/share, confirming the stock's astronomical yield of over 18%.

Deerfield has been plagued recently by concerns that it will be unable to purchase its external manager, Deerfield & Company LLC, from Nelson Peltz-controlled Triarc Companies (TRY). The two companies terminated their original arrangement on October 19, and DFR shares have remained under pressure since the credit crunch escalated in August.

Nonetheless, Deerfield continues to generate taxable income from its diversified portfolio of largely-unencumbered loans. Shares of Deerfield were recently rising 4% on the news.