Mortgage REIT Insider: Dividends Dry Up

The commercial real estate bust continues to take its toll, particularly for the New York-based commercial mortgage REITs. This week, three of the major commercial mREITs announced that realized taxable losses had all but eliminated their dividend requirements for the rest of the year. Arbor Realty Trust (ABR) cut its third-quarter dividend to just $0.24/share, a 61 percent reduction in its quarterly payout. That payout will be Arbor’s last dividend for 2008, as the company doesn’t plan to pay a fourth-quarter dividend. Former sector highflyers iStar Financial (SFI) and Gramercy Capital (GKK) went a step further, reconfirming their intentions not to pay out a third-quarter dividend and cautioning that a fourth-quarter dividend declaration would be highly unlikely. The two companies had previously made quarterly payouts of $0.87/share and $0.63/share, respectively. iStar and Gramercy also released their third-quarter results this week. iStar posted a shocking $2.30/share GAAP loss, much worse than analysts’ expectations. Despite recording $68.3 million of gains associated with the early extinguishment of debt and $20.0 million of gains from the sale of four corporate tenant lease assets, these gains were dwarfed by $411.1 million in additional loan loss provisions and $88.1 million of impairments. The lone bright spot in iStar’s report was the activation of the company’s $50 million stock buyback. SFI repurchased 2.4 million shares of common stock during the third quarter of 2008 at prices that were well below the Company’s book value. Meanwhile, Gramercy fared somewhat better than iStar, posting net income of $0.14/share. Although GAAP earnings widely missed analysts’ estimates, the company did earn funds from operations of $0.60/share after buying back $21 million in outstanding CDO debt and booking a gain of $11.7 million on the repurchase. Despite the disappointing news, many investors were relieved that things weren’t much worse, particularly with respect to bank and bond covenants. Gramercy in particular rallied on the results, surging some 80 percent higher in Thursday trading. Capital Trust Bucks Trend Unlike the commercial mREITs discussed above, Capital Trust (CT) climbed to the top of the heap after reporting GAAP earnings of $0.61/share, ahead of analysts’ estimates. Due to CT’s policy of holding nearly all of its investments to maturity, the company’s GAAP earnings tend to correlate more closely with taxable income, indicating that Capital Trust’s $0.60/share dividend is viable for the time being. Capital Trust recorded no additional loan loss provisions during the quarter, but did admit that it had recently foreclosed on two properties with a combined carrying value of $17 million. No provisions were recorded on the foreclosures due to the company’s expectations that it will fully recover the value of the collateral. Capital Trust’s track record with recoveries, however, is a bit spotty given the major hit the company took last quarter after it was forced to fully reserve a $50 million mezzanine loan against a Harry Macklowe-owned New York office property. Despite the balance sheet exposure to potential write-downs, investors seemed pleased at CT’s improved cash position and overall liquidity profile. Shares were up sharply in Tuesday’s trading after the earnings announcement. Agency Assessments Another round of strong earnings results among the major agency mREITs this week. Sector bellweather Annaly Capital (NLY) and recent IPOs Hatteras Financial (HTS) and American Capital Agency Corp. (AGNC) all reported GAAP earnings that exceeded analysts’ estimates for the third quarter. A closer look at all three earnings reports, however, reveals some caveats that may dull the shine on these earnings updates. Annaly reported core earnings of $0.61/share, which excluded a $31.8 million write-down on the company’s investment in Chimera Investment Corp. (CIM). The drop in Chimera’s market capitalization prompted Annaly to impair the value of its CIM stock holdings at the expense of $0.06/share in GAAP earnings. Although recognition of the impairment does not affect taxable income, Annaly cannot sell Chimera stock without realizing a taxable loss on the transaction. Hatteras Financial also topped earnings estimates by posting third-quarter GAAP earnings of $1.11/share. The beat was primarily a result of lower-than-expected premium amortization, as prepayment rates dropped into the lower single digits. The company did admit that it had yet to receive $7.1 million in unreturned repo collateral from bankrupt Lehman Brothers. Depending on the outcome of Lehman’s bankruptcy proceedings and changes in the value of the collateral, Hatteras could be exposed for the entire amount in a future period. Finally, American Capital Agency blew past earnings estimates for its third-quarter, posting $1.26/share in GAAP earnings or $0.14/share above expectations. The company sold off $0.7 billion in MBS during the quarter, or just under a third of its securities portfolio. The sale resulted in a $0.3 million loss, which was more than offset by a $4.3 million gain on derivatives resulting from AGNC’s newly-implemented “option strategy”. After backing out these one-time items, AGNC’s core earnings were just $0.98/share, slightly below the third-quarter dividend of $1.00/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 HTS and AGNC 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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