Hanover Hanging On

Been a slow week in mREIT land, as most year-end dividends have been finalized and earnings season is long since over. There was, however, a late day 8-K filing from Hanover Capital (HCM) that it is electing to defer the quarterly interest payments on its TruPS. Under the terms of its trust preferred securities, Hanover may defer the interest payments for four consecutive quarters as long as it is otherwise not in default and it has timely filed all '34 Act reports.

Generally, deferring interest on any kind of preferred security is a last ditch method to preserve cash. We'll see how much longer Hanover can hold out before the well runs dry.

Hanover Hangs Up For Sale Sign

Hanover Capital Mortgage (HCM) is hanging out the for sale sign. Although the Company made no official comment, it filed a particularly interesting 8-K spelling out revised severance agreements and retention bonuses to be paid out "at the earlier of August 29, 2008 or a change in control". August 2008 just so happens to be the end of its one-year financing arrangement with Ramius, so Hanover's management is now highly motivated to sell the Company before the Ramius financing deal ends and collect those golden parachutes.

Hanover's Hangover

Hanover Mortgage Capital (HCM), a struggling subordinate RMBS investor, announced a further delay in reporting third quarter results. Hanover blamed turmoil in the credit markets, of course, saying it needed "more time to arrive at the fair value of certain of its assets for financial statement purposes and certain REIT compliance purposes."

The statement is a bit more ominous sounding if you recall Hanover's warning from the second quarter 10-Q:

Further, as of August 15, 2007, the Company’s position in Agency MBS...held primarily to meet compliance with the Investment Company Act of 1940, has been sold. ...[S]hould lenders refuse or become unable to loan to the Company sufficient amounts to purchase Agency MBS or prime mortgage loans to meet compliance requirements, the consequences may result in the Company’s being deemed an investment company.

Hanover also faces scrutiny regarding its transaction with Ramius:

We have agreed, pursuant to the terms of the Ramius MRA, to treat the entry into the MRA with Ramius as a sale for tax purposes. While we have a reasonable basis for believing that the transaction will indeed be treated as a sale for tax purposes, there can be no guarantee of such tax treatment. Failure to treat the Ramius MRA transaction as a sale for tax purposes could result in not only adverse tax consequences for us, but could, ultimately affect our ability to maintain our REIT status.

In short, Hanover's overhang from the August credit crunch leaves its future in some serious doubt.

Hanover's Mark-to-Mess

Hanover Capital (HCM) tried to slide in this 8-K where they admit to obtaining a waiver from lender Greenwich Capital of their "Tangible Net Worth" covenant. Hanover has agreed to maintain Tangible Net Worth of not less than $56,000,000, of which a minimum of $38,000,000 shall be comprised of stockholder’s equity. Hanover had $42.8 million in equity at June 30, so they easily lost well over $5 million in the current quarter -- after already taking a $14 million mark-to-market hit during the second quarter.

The losses are not surprising, given Hanover's investments in subordinate RMBS (i.e. BB+ and below rated tranches). Despite Hanover's claims that realized losses have been minimal, that brand of toxic paper will barely catch a bid these days.

Hanover, which suspended its return-of-capital dividend last quarter, closed at $1.35/share in regular trading.