Mortgage REIT Insider: Agencies Gain on GSE Bailout

The bull market may be 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 also chimed in earlier this week, reiterating his outperform rating on the entire agency mREIT sector. Stocks in the sector rose sharply on Monday before shedding some enthusiasm (and price gains) later in the week. Still, sentiment remained strong for both Annaly and Capstead Mortgage (CMO), as both declared a $0.55/share dividend this week. Dividend Drama While Annaly and Capstead managed to keep payments high, others in the REIT sector weren’t so lucky.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 after the announcement. Analyst Michael Taiano at Sandler O’Neill commented that the drop was likely attributable to investor concern about cash flow at CSE, as well as disappointment that the payout ratio was well below that of many competing commercial banks. 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. 2008, however, will be a different story. With more and more of its loan portfolio going into foreclosure, BRT was forced to admit 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.” Uh-oh. Not surprisingly, shares tanked after the news. Meanwhile, struggling Alesco Financial (AFN) completely did away with its dividend, after sustaining a $86 million taxable loss on its investment in Indymac Bank debt. Alesco did take advantage of the tax shelter to repurchase some $78.8 million of its own convertible debt for about 42 cents on the dollar. The debt buyback generated $45.8 million in capital gains for Alesco, which still had $120 million in unrestricted cash after the repurchase. For its part, the company claims that it intends “to capitalize on distressed pricing of certain assets in the marketplace, which may include our own securities.” Finally, a sad note as another one of our beloved mortgage REITs bit the dust this week. Luminent Mortgage Capital, which first came public in 2003 as an Alt-A residential inventor, finally ended the suspense and filed for Chapter 11. Luminent, you’ll remember, is the mortgage REIT that put out a press release on July 30, 2007 stating that its “dividend is secure and will not be canceled.” On August 6, 2007, the Company announced it was suspending its dividend. The rest is history. Editor’s note: Patrick Harden is a Certified Public Accountant with three years of experience in auditing publicly-traded real estate investment trusts. For the past two years, he has been involved in the mortgage finance industry as a member of the financial reporting group at a publicly-traded mortgage bank. His column covering mortgage REITs runs every Friday. Disclosure: The author held no positions in any of the stocks mentioned when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.