Mortgage REIT Insider: Agency mREITs Catch GSE Flu
Dominating the mortgage REIT landscape this week were the persistent (bad) headlines about the insolvency and potential government bailout of Freddie Mac (FRE) and Fannie Mae (FNM); HW readers are likely well aware of the issues here by now. Receiving less attention, but no less damaging, has been the effect of the GSE flu on mortgage REITs. Brokerage firm Sterne Agee swiftly downgraded shares of Anworth Mortgage (ANH) from Buy to Hold on Thursday, citing the "systemic" risks from Freddie and Fannie that may pressure agency-backed MBS values. The downgrade came in spite of Anworth's 45 percent dividend increase for the second quarter. Investors fear that a major drop in MBS values could raise the possibility of significant margin calls to the agency mREITs, leading to swift asset sales or non-economic equity raises. (Agency mREITs are entirely funded with short-term repurchase agreements, instead of term financing.) Accordingly, the sector sold off sharply throughout the week, particularly punishing shares of bellweather Annaly Capital (NLY) and rookie Hatteras Financial (HTS). Reuters reported earlier in the week that options volume in Annaly was over ten times the normal volume, for example. Capital Trust bounces back The commercial mREITs fared slightly better than their agency counterparts this week after analysts at UBS AG (UBS) upgraded Capital Trust (CT) from Sell to Neutral on expectations of "decent" second-quarter results. Despite the upgrade, analyst Omotayo Okusanya remained concerned about earnings and dividend risk. Because Capital Trust holds most of its investments to maturity, a weaker performance in CMBS, particularly the subordinated notes held by Capital Trust, could lead to a sharp increase in loan loss provisions. The REIT also faces the challenge of refinancing some of its credit lines later this year, as well. These issues, however, may not impact earnings until later in the year or early in 2009, said Okusanya. He expects Capital Trust to cut its dividend to 60 cents from 80 cents by early next year. Shares of CT rebounded somewhat after last week's selloff, as a result. Crystal River polluted by rumors A controversial article at Seeking Alpha -- note all 100+ comments on the story, if you have the time -- suggesting that Crystal River Capital's (CRZ) second quarter writedowns could bankrupt the company sent shares into a veritable tailspin this week. Crystal River shares, which had been under pressure ever since the company sold off its agency RMBS portfolio and slashed its dividend, cratered after the article suggested that it may not have the liquidity to settle its outstanding credit default swaps or payoff its repurchase agreement. The REIT put out a short statement Monday noting that it still had approximately $70 million of undrawn capacity on its secured revolving credit facility, but the news didn’t give investors any comfort. The selling continued throughout the week; shares were at $2.40 when this story was published. Normally tight-lipped competitor JER Investors Trust (JRT), a similarly-oriented mREIT, put out an 8-K updating its liquidity and credit performance after its shares began to see a similar tumble. The company pared some of the week’s losses after the filing, which disclosed that the company’s cash balance is up and repo debt has decreased. 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 other positions in publicly-traded firms mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.