Mortgage REIT Insider: Attack of the Analysts

The earnings reports have arrived, and the analysts have been busy crunching the numbers in their valuation models. Here’s some of the verdicts handed down thus far: UBS AG (UBS) analyst Tayo Okusanya lowered his rating on Capital Trust (CT) to “Sell” from “Neutral,” saying the company’s heavy exposure to short-term and subordinated loans lower its value of its assets. Okusanya is also concerned about the company’s $730 million of so-called “repo” financing coming due in the fourth quarter because funding costs might increase or the lines of credit may be reduced. Okusanya slashed his price target from $15.50 to $8.50, well below CT’s current share price. Capital Trust stock sank on the downgrade, dipping below $14/share on Thursday. FBR Capital Markets (FBCM) analyst Merrill Ross downgraded shares of NorthStar Realty Finance (NRF), JER Investors Trust (JRT) and Anthracite Capital (AHR) to “Market Perform” from “Outperform,” and reduced share price targets on all three of the companies. Ross cited continued credit market instability, poor visibility on commercial real estate valuations, and a continued lack of liquidity in the CRE market as evidence that investors should “move to the sidelines and wait.” Ross cut her price target from $14.50 to $9.00 for NorthStar, from $12.00 to $7.50 for JER Investors Trust, and from $12.50 to $7.50 for Anthracite. Ross did note in Anthracite’s case, however, “[f]or investors content to collect dividends and willing to take the credit risk, we would buy the shares on dips that may come from broader market jitters.” So things are kind of negative, to be blunt; but there was one upgrade amongst all the activity. Okusanya did boost iStar Financial (SFI) to “Neutral” from “Sell,” saying the company’s liquidity position isn’t as bad as originally thought. Okusanya said iStar should generate about $5 billion in cash proceeds next year with only $2.3 billion in upcoming debt obligations. Okusanya said even if management produces only half of the $5 billion in loan repayments that it expects, the company still won’t have to raise capital through a stock issuance to meet debt and funding obligations. Late to the Party A few of the diversified mortgage REITs waited until early this week to report second-quarter earnings, and the results were decidedly mixed. Deerfield Capital (DFR) turned in a GAAP profit of $0.08/share, and reported a book value of $3.37/share. Suffering shareholders were thrown a few bones, as the company declared a cash dividend of $0.085/share to pay out spillover taxable income from 2007, announced a $1.0 million share buyback, and retained UBS to “explore strategic alternatives.” DFR shares nearly doubled on Tuesday, jumping from $0.69/share to $1.28/share, though the stock did give back some of those gains later in the week. Newcastle Investment (NCT) reported a second quarter loss in FFO of $1.66/share (!), after booking a $63.2 million charge related to its subprime securities portfolio. Adjusted earnings, however, were a healthy $0.52/share — well above the $0.25/share quarterly dividend. NCT noted on its earnings call that it was looking to opportunistically buy back debt or selectively add to its investment portfolio given its improved liquidity position. Meanwhile, Crystal River Capital (CRZ) continues its plunge into the abyss. Due to realized losses and a projected decline in cash flows, CRZ expects to generate significant tax operating losses in 2008 and in future periods, which may cause the company’s operating earnings to exceed its taxable income for the next several years. Accordingly, Crystal River cut its quarterly dividend again, to just $0.10/share. Book value fell to just $2.46/share after a GAAP loss of $3.04/share, mostly driven by impairment charges and mark-to-market adjustments totaling $87.7 million. The company did, however, manage to generate positive operating earnings of $0.67/share. 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 shares of SFI and held no other relevant positions when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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