Wednesday's Trading Talk

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.

Mortgage REIT Insider: June 20, 2008

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

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

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

1. 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.
   
2. 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.
   
3. 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.
   
4. 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.
   
5. 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.
   
6. 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.
   
7. 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.
   
8. 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.
   
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.
   
10. 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.
    
11. 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.
    
12. 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.
    
13. 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.
    
14. 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.
    
15. 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.
    
16. 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.
    
17. 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.
    
18. 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

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
  
  

Tough Fed Talk Takes Axe to Agency mREITs

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

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.

Mortgage REIT Insider Redux

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

Mortgage REIT Insider

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

Agency mREITs are the New Black

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.

Mortgage REITs Rise From Ashes

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.

Tax Treatment of 2007 Dividends

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:

1. Ordinary taxable income
2. Capital gains income
3. 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.

Deutsche Bank "Mortgage REITs" Panel

A few of the companies in the mREIT universe are participating in Deutsche Bank’s “Mortgage REITs” panel on Thursday. Thus far, I've only seen announcements from Anthracite (AHR) and Gramercy (GKK).

Let's just hope that Deutsche Bank isn't participating. DB completed its acquisition of former highflying mortgage REIT, MortgageIT Holdings (MHL) in January 2007, and the company is all but done. Deutsche Bank paid $430 million for the Alt-A lender, which wound up shuttering its retail operations back in November.

mREITs Deliver Juicy Dividends

The commercial mREITs have been delivering some early Christmas gifts in the form of special dividends.

Gramercy Capital (GKK) declared a special of $2.00/share
iStar Financial (SFI) declared a special of $0.25/share
JRT Investors Trust (JRT) declared a special of $0.65/share
Capital Trust (CT) declared a special of $1.90/share

A common thread running through these stocks - they all have significant holdings in mezzanine CMBS and B-notes, and they are all originators, not just investors, of commercial loans.

Meanwhile, falling rates and slower prepayments combined to juice the dividends of the agency RMBS investors.

Anworth Mortgage (ANH) upped its dividend from $0.05/share to $0.12/share.
MFA Mortgage (MFA) raised its dividend from $0.10/share to $0.145/share.
Capstead Mortgage (CMO) boosted its dividend from $0.04/share to $0.24/share.
Annaly Capital (NLY) also raised its dividend from $0.26/share to $0.34/share.

Why mREITs are Getting Crunched

To qualify as a real estate investment trust for federal income tax purposes, a company must (among other things) pay out 90% of its ordinary taxable income ("TI"). Some companies also choose to supplement their payouts by also distributing their capital gains income, but this is not required. The distribution of the 90% of TI must be made in the taxable year to which they relate or, if declared before the timely filing of the tax return for such year and paid not later than the first regular dividend payment after such declaration, in the following taxable year. Basically, companies may choose to have their taxable income "spillover" into the next calendar year to support future distributions. On the other hand, some companies prefer to pay out 100% of their taxable income in order to maximize their dividends paid deduction. Suffice to say, taxable income is the metric that drives the dividend for mortgage REITs.

It is important to note that the IRS definition of taxable income and the FASB definition of GAAP income are two completely different animals. There are a number of differences between book and tax income, but the two largest adjustments affecting mortgage REITs are the provision for loan losses and mark-to-market valuation adjustments. For tax purposes, these types of losses may only be deducted when realized. Therefore, the provision for loan losses and mark-to-market writedowns are added back to book income to derive taxable income. Given the current market environment, you can see how there could be very large book/tax differences due to the writedowns and that taxable income may greatly exceed book income.

JER Investors Trust (JRT) summarizes the risk created by the book/tax differential very well in its latest 10-Q:

Certain of our investments...may generate substantial mismatches between taxable income and available cash. In order to meet the requirement to distribute a substantial portion of our net taxable income, we may need to borrow, sell assets or raise additional equity capital...there can be no assurance that we will be able to do so on terms acceptable or available to us, if at all.

The front-end loading of taxable income generated by mREIT business functions accelerates dividend obligations ahead of the more straight-lined receipt of cash flow from their investments. Therefore, most mREITs must borrow, securitize, or consistently tap the equity markets to maintain sufficient liquidity. If access to the capital markets is suddenly closed, many mREITs don't have vital access to cash and must resort to asset sales at fire-sale prices. This phenomenon has affected many companies, including NovaStar Financial (NFI), Thornburg Mortgage (TMA), and Luminent Mortgage (LUM).

Wachovia Global Real Estate Securities Conference

A number of mortgage REITs are participating in this week's 11th Annual Wachovia Global Real Estate Securities Conference. Those participating are listed below, along with links to their presentations (as they become available):

Arbor Realty Trust (ABR)

Quadra Realty Trust (QRR)

CapitalSource (CSE)

Crystal River Capital (CRZ)

NorthStar Realty Finance (NRF)

Gramercy Capital (GKK)

FBR Capital Markets Presentations

The following companies have announced upcoming presentations at the 2007 FBR Capital Markets Investor Conference. I'll post links to the presentation slideshows as they become available:

Crystal River Capital (CRZ)
Alesco Financial (AFN)
NorthStar Realty Finance (NRF)
RAIT Financial Trust (RAS)
Resource Capital Corp. (RSO)
KKR Financial Holdings LLC (KFN)
CapitalSource (CSE)
Anthracite Capital (AHR)
JER Investors Trust (JRT)

MFA Mortgage Investments (MFA)

Commercial mREITs Charts are Telling

This article in the Wall Street Journal (behind firewall, see summary at Calculated Risk) represents some media confirmation of what we all suspected - falling property values in commercial real estate. While the current expectation of the market is not for the same kind of severe collapse in CRE that we have witnessed in the residential market, the opportunities for the commercial lenders and investors are fairly limited at this point.

Additionally, anecdotal evidence reveals that many recent commercial deals were done using optimistic forecasts for lease payments increases and occupancy improvement - trends that have not borne out 12-18 months after the deal was done.

The commercial mREITs, while generally smacked around by the credit crunch, have also undergone intense selling in recent weeks despite strong earnings reports. iStar Financial (SFI), for example, has dropped about $10 (27%) since the middle of August despite raising its dividend and only mildly easing forward guidance. NorthStar Realty Finance (NRF), Capital Trust (CT), and Anthracite Capital (AHR) also show a similiar pattern despite reporting decent third-quarter earnings.

The declines in these names and the related chart action show an eerie similarity to the year-ago charts of NovaStar Financial (NFI), New Century Financial (NEW), and Accredited Home Lenders (LEND) - all of whom continued to post decent results for the third quarter of 2006 yet saw serious declines in their stock prices during the fourth quarter of 2006.

Tread carefully in the commercial mREITs. While valuations are compelling at these levels, a collapse in the CRE market seems to be foretold in their charts.

Anguished Anticipation - mREITs Not Yet Reporting

We've still got a few accelerated filers in the mREIT universe who have yet to report Q3 results, despite 5:30 p.m. today being the deadline for filing third quarter 10-Qs. None of the outstanding delinquents have good news to report.

Impac Mortgage Holdings (IMH) - Impac does a monthly filing, so there is some visibility to results through August 31. Impac is notoriously late on filing its 10-Q anyway.

Luminent Mortgage Capital (LUM) - Oh, poor Luminent. At least they're trying to file a 10-Q and not a bankruptcy 8-K. Might take them a while since I'm not sure they were ever able to replace Deloitte after D&T quit.

NovaStar Financial (NFI) - NovaStar is so unpredictable. They are typically a timely filer, however. Results will be poor due to the tax implications of their REIT revocation.

Note: Quadra Realty Trust (QRR) , CBRE Realty Finance (CBF), and Hanover Capital Mortgage (HCM) don't have their quarterly filings due until November 14. All three companies are holding earnings calls next week.

Earnings Avalanche

This week marks the absolute height of earnings season for the mREIT universe, and I'm struggling to keep up with my day job, earnings releases, and conference calls. Please bear with me.

CapitalSource and iStar Financial both released solid reports this morning before the bell. Both stocks are up sharply in early trading. I'll post additional commentary on their results later today. Look for JRT Investors Trust, Capital Trust, and New York Mortgage Trust to post results after the bell today.