Mortgage REIT Insider: Redwood Rolls the Dice

Redwood Trust (RWT) has officially jumped back into the game. In a prospectus filing with the Securities and Exchange Commission earlier this week, the company announced that it was launching a 17 million share offering to finance the acquisition of additional residential and commercial mortgages. During the fourth quarter, the company purchased $50 million in RMBS for 64 cents on the dollar and continued its investment strategy into 2009, purchasing another $17 million during the first week of January.

In the prospectus, the company noted that its GAAP book value fell to just $9.02/share, while the non-GAAP economic book value dropped to $11.10/share. Despite Redwood’s aggressive re-entry to the market, the preliminary fourth-quarter results and the ire of dilution took its toll on Redwood shares regard;ess, which fell 16 percent following the announcement of the secondary offering.

Truth in tax treatment

It’s that time of the year when the mortgage REITs announce the tax treatment of their dividends, which provides much insight into the “real” dividend coverage. BRT Realty Trust (BRT) disclosed that $1.73/share of its $2.57/share in 2008 dividends were related to capital gains, primarily from sales of its shares in Entertainment Properties Trust (EPR). Just 32 percent of the dividends were covered by ordinary taxable income, confirming BRT’s decision to suspend its unsustainable dividend going forward.

Meanwhile, investors can now fully comprehend the extent of taxable losses from the Macklowe mess at Capital Trust (CT). CT disclosed that $1.91/share of its $2.20/share in 2008 dividends was nothing more than a return of capital. The company earned just $0.29/share in 2008 taxable income, well below its previous quarterly dividend of $0.80/share. Capital Trust has also suspended its dividend for the time being; it remains to be seen if the company will be to reinstate the dividend in 2009. Don't hold your breath.

CDOs continue cracking

Fitch Ratings dropped the hammer this week on $10B in CDOs secured by REIT trust preferred securities; all the affected deals belonged to Cohen-controlled entities Resource America (REXI) and RAIT Financial Trust (RAS). Eleven deals that RAIT inherited from its ill-fated merger with Taberna Realty Finance were downgraded; all the AAA securities were cut to the bare minimum investment grade category. Most of the junior tranches, including some originally given AA ratings, have failed the overcollateralization tests, causing cash to be diverted to the senior tranches. It’s yet more pressure on RAIT, which is struggling to maintain operating earnings high enough to support its $0.35/share quarterly payout.

Disclosure: The author was long shares of RAS and held no other relevant positions when this story was published.

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