Mortgage REIT Insider: Earnings Hits, Misses
It’s the heat of mREIT earnings season -- some folks sizzled, while others sagged. We’ve got the rundown for you in today’s column. Don’t Call It a Comeback At least not for the mighty Cohen clan, who control three specialty mREITs – Alesco Financial (AFN), RAIT Financial (RAS), and Resource Capital Corp. (RSO). All three companies delivered solid adjusted earnings, meeting or exceeding their recently declared dividends. RAIT in particular shined, beating estimates soundly on the top and bottom lines. Friedman Billings & Ramsey analyst Merrill Ross noted in a research report after the earnings call that the company has proved its 46-cent dividend is viable. Shares of RAIT soared 22 percent on Tuesday, as a result. These champs, however, still sustained some heavy blows. Struggling NovaStar -- once among the subprime mortgage industry's brightest stars -- admitted in a recent 8-K filing with the Securities and Exchange Commission that it couldn’t pay the quarterly interest on a TruPS included in Taberna Preferred Funding I, a RAIT affiliate. NovaStar has until May 30 to make the payment or Taberna might be forced to accelerate the debt, throwing NovaStar into bankruptcy and damaging the Taberna CDO rating even more. There was more CDO woe for Alesco (AFN) as well. Alesco admitted in its earnings release that it has received written notice from the trustee of its Kleros Real Estate III CDO that the controlling class debtholder has submitted a notice of liquidation. If more than one of Alesco’s four Kleros Real Estate CDOs is liquidated, Alesco may have to quickly obtain additional REIT qualifying assets in order to continue to qualify as a REIT. Steady as She Goes Commercial originator and investor Capital Trust (CT) missed by a penny, reporting $0.82/share net income, versus the $0.83/share analysts had expected. However, CT’s profit was all core earnings, as the company’s policy of holding investments to maturity prevented the need for significant mark-to-market adjustments. CT’s earnings, despite missing estimates, still exceeded the declared dividend by $0.02. Diversified REIT CapitalSource (CSE) beat the Street by a penny, coming in with $0.51/share in adjusted earnings. CapitalSource, who recently acquired Fremont Investment & Loan’s bank branches, thinks a depository strategy will boost net interest income enough to bring earnings back above its $0.60/share dividend run rate. Brokerage firm Ferris Baker Watts disagreed, however, downgrading the stock from a buy to hold after the earnings call. NorthStar Realty (NRF) missed on revenues, but was nonetheless in-line with earnings estimates. The commercial originator and investor posted an adjusted FFO of $0.35/share, just shy of the $0.36/share first-quarter dividend. The company also announced its intention to begin divesting its healthcare net lease portfolio, which has dragged down its return on equity. Finally, agency investor Anworth Mortgage hit targets of $0.21/share, in-line with the Street. he company was propelled by an accretive capital raise that allowed for a significant portfolio expansion. Additionally, net interest margins widened sharply, largely due to a falling cost of funds. Keefe Bruyette upgraded the stock on Thursday, as a result, and raised the price target to $8. Blight Appearing at Redwood? Residential investor Redwood Trust (RWT), which remained strong during the last half of 2007, may be starting to slip. Taxable earnings were hurt by $0.41/share in realized credit losses, coming in just $0.79/share, a 53 percent decline from the year-ago quarter. Redwood execs acknowledged that they anticipate actual credit losses to increase substantially in 2008, which could cause taxable income to be less than the regular dividend rate. Although Redwood intends to maintain its $0.75/share quarterly payout--and has plenty of spillover from 2007 to do so--the company said it is unlikely to pay a special dividend in 2008, preferring to carry over any excess taxable income to support the 2009 dividend. The stock tanked 9 percent on Thursday. Busted Loans Swamp BRT A sour result from BRT Realty Trust (BRT) rounds out this week’s earnings overview. A rise in nonperforming loans and foreclosures at BRT drove a $5.3 million increase in the loan loss provision, wiping out GAAP earnings. The company acknowledged that “it has been a very challenging time for us [this quarter].” Expect to see concern rise further about the viability of the $0.62/share dividend in the face of mounting losses. Earnings season comes to a close next week with reports from Crystal River Capital (CRZ), JRT Investors Trust (JRT), and Newcastle Investment Trust (NCT) headlining the action. Stay tuned. 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 RAS and NRF at the time of this writing.