At Hatteras, a REIT Bet that the Mortgage Mess has a Silver Lining

While the bad economic news is still out there, at least one REIT is betting that the mortgage crisis yet has an untapped silver lining — and went public Tuesday to prove it. Believing that agency-backed mortgage securities will be a safe bet going forward, Hatteras Financial Corp. (HTS) saw its initial public offering backed by investors, with shares gaining as much as 4 percent above the initial offer price of $24/share. In this sort of economic climate, that the company went public and saw shares boosted at all should be seen as a vote of confidence, sources told HW. Shares were down slightly in morning trading on the New York Stock Exchange. Via the Associated Press:

“You have to admire their willingness to step into a market where it wasn’t clear that we’re at a bottom,” Holmes said. He said that one advantage to these companies is that they have clean books of business. Other analysts are more cautious. “I still feel that this sector is and will have some growing pains.” said Scott Sweet, managing director of research firm IPO Boutique. “I’ve seen this many, many times over the years when people prematurely believe the worst is over, when in fact it is not so,” Sweet added. “We were cautious about Hatteras,” said Renaissance Capital Chairman Kathleen Shelton Smith. “We think that it’s a highly leveraged strategy and those are still risky strategies.”

Hatteras is pursuing a strategy of investing only in hybrid adjustable-rate single-family residential mortgage pass-through securities and collateralized mortgage obligations guaranteed by a U.S. government agency or a U.S. government-sponsored entity. Like many mortgage REITs pursuing similar strategies — and the number is growing — Hatteras is highly leveraged. At the end of March, its leverage ratio was a reported 8.3 percent. That is, it held about $2.74 billion in repurchase agreements at the end of the year, while it had about $329 million in equity on its balance sheet. It’s unclear if the funds from the IPO will significantly shift leverage at Hatteras, although the company did say in its prospectus that it would use the funds to grow its portfolio of roughly $3.04 billion in agency MBS. Hatteras won’t be the last agency mREIT to jump into the IPO mix, either; American Capital Strategies, Ltd. (ACAS), a $19 billion private equity fund, filed an updated prospectus with the SEC earlier on Monday for American Capital Agency Corp., its own agency mortgage REIT. American Capital said it expects to price its IPO at $20/share; the REIT will be the first foray into RMBS investments for the nation’s largest publicly-traded alternative asset manager.

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