Mortgage REIT Insider: CapitalSource Takes it to the Bank

CapitalSource Inc. (CSE) announced this week that it had received all necessary regulatory approvals for its takeover of Fremont General Corp.’s 22 retail bank branches and $5 billion in deposits. CapitalSource said that it will complete the Fremont transaction early in the third quarter and launch CapitalSource Bank at that time; the regulatory approvals will permit CapitalSource Bank to purchase up to $2.2 billion of loans from CapitalSource. On the heels of the regulatory approvals, CSE also announced plans for 30 million share secondary offering, which chairman and CEO John Delaney characterized as a “play offense” capital raise designed to “seize opportunities in the current favorable market conditions.” Market analysts tended to interpret that cryptic statement to mean that CapitalSource may soon begin trolling for possible additional takeovers. Shareholders agreed with Delaney that the raise was offensive, but not in the way he’d have hoped: ire of dilution pushed down shares of CSE below $13 after the plan was announced. Shares were at $13.74 in early trading Friday on the New York Stock Exchange. Thornburg still tackling trouble Thornburg Mortgage Inc. (TMA) can’t seem to stay out of the headlines. The company finally filed its long-awaited 10-Q on Wednesday, but the quarterly report contained some dire news for investors and the market. First, Thornburg received a notice from the SEC that the regulator is conducting an investigation into the restatement of the company’s 2007 financial statements, margin calls that it received, and how it marked the value of MBS on its books. Second, the NYSE said that it is reviewing transactions in Thornburg 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. As if the legal woes weren’t enough, Thornburg still faces significant liquidity challenges, trotting out the dreaded “going concern” warning — particularly if the interest rate on its senior subordinated notes is not reduced. To reduce the interest rate on the notes, Thornburg has to get an extension on the tender offer for its preferred shares; it also must get two-thirds of each class of preferred stock to be tendered. And judging by the venom spewed on last week’s earnings call, TMA has a very steep battle ahead. Shares of Thornburg tanked on Thursday, dropping 65 percent to just $0.23/share; they were up 2 cents to $.25 per share Friday morning. Dishing out dividends Several companies declared their second quarter dividends this week, with most mREITs maintaining their previous payouts. There were a couple of exceptions, however. In the good news department, Annaly Capital (NLY) bumped its payout 14.5 percent from $0.48/share to $0.55/share. The increase marked ten raises in a row for Annaly — but still did little to help the sagging stock price, which remained in the $16 range during the week. By contrast, Crystal River Capital (CRZ) cut its payout from $0.68/share to just $0.30/share, after selling off its agency RMBS portfolio at the end of the first quarter. Crystal River had warned that the agency portfolio was providing about half of the company’s REIT taxable income, so investors likely already priced this in. Investors cheered the move, as a result, pushing up shares after the announcement. Part of the reason for cheering is that the $0.30/share dividend leaves the stock with a very competitive forward yield of 22 percent, FWIW. The biggest dividend surprise this week, however, came courtesy of Hatteras Financial (HTS), which declared its first dividend as a public company, a healthy $0.75/share distribution. Shares of Hatteras rallied sharply on the declaration, but lost momentum in early afternoon trading on Friday. More agency IPOs Galiot Capital (GTC), a new mortgage REIT intending to invest in agency RMBS, announced terms for its upcoming IPO on Thursday. The company plans to offer 16.7 million shares at an expected price of $15. Galiot will be managed by Fischer Francis Trees & Watts, a fixed-income investment firm and subsidiary of BNP Paribas [[BNP.PA]]. The company’s stock is expected to begin trading the week of June 30 – July 3. Madison Square Capital (MDQ), a self-advised REIT also intending to invest in agency RMBS (who isn’t, these days?) also announced terms for its IPO. The company plans to offer 22.2 million shares at an expected price of $15. No word yet on when the IPO will launch, but it is expected to begin trading in the next few weeks. Russell rebalancing The Russell family of indexes will undergo its annual rebalancing next Friday, which should make for some interesting trades next week. The Russell indexes are populated based on market capitalization, so its no surprise that ten mortgage REITs will be deleted from the indexes next Friday. Only Hatteras Financial, American Capital Agency (AGNC) and Capstead Mortgage (CMO) are being added to the Russell 3000. 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 was long CMO, and held no other positions of relevance, when this story when it was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.