Earnings season got off to a rocky start this week with miscues by all of the reporting mortgage REITs. Dynex Capital Inc. (DX) had to replace its earnings release; book value and portfolio duration were misstated in the original version. Friedman Billings Ramsey Group Inc. (FBR) didn’t produce an earnings release until after 10:00 pm on Wednesday evening, despite the conference call set for 9:00 am Thursday morning. Gramercy Capital Corp. (GKK) was also extremely late in releasing its second-quarter results; the release didn’t hit the wires until after 11:00 pm on Wednesday night. Talk about after the close! The actual results were a mixed bag. Dynex turned in GAAP net income of $0.26/share, well above the $0.15/share second quarter dividend. The company continues to accumulate agency RMBS for its portfolio, managing to earn a 1.85 percent spread on its agency investments. The company also disclosed that on July 1, it was relieved of certain mortgage servicing obligations with a recorded balance of $3.5 million at June 30. As a result, Dynex will recognize a benefit of $3.5 million in Q3’s results, adding $0.28/share to book value, which stood at $8.24/share on June 30. FBR Group had a relatively flat quarter, posting a GAAP loss of $0.17/share for the quarter. The loss was primarily driven by $5.8 million in marks on the non-prime portfolio, and the absorption of $13.0 million in losses attributed to the company’s investment in FBR Capital Markets Corporation (FBCM). Book value remained flat at $2.28 per share, while the company continues to shift resources to the agency-backed portfolio as its non-prime portfolio pays down. Gramercy’s growing pains The biggest loser this week, however, was Gramercy Capital, whose rapid deterioration in results was somewhat shocking, as the company clearly struggles to integrate its acquisition of American Financial Realty. The company posted GAAP earnings of just $0.20/share, representing the drag of depreciation from AFR’s real estate holdings. The biggest focus for investors is likely to be the significant downward revision to the annual FFO outlook. The company now sees full-year FFO of just $2.20 to $2.45 for fiscal year 2008 — despite already earning $1.32/share in the first six months of 2008 alone. The diminished outlook is clearly attributable to a spike in nonperforming loans, as Gramercy’s allowance nearly tripled after the company recorded an additional $23.2 million in expected future losses. The addition to reserves was partially offset by gains of $17.6 million arising from a repurchase of $37.8 million of BBB to A+ rated CRE CDO bonds previously issued by Gramercy’s CDOs. Another focus for investors is the planned reduction in the dividend. Gramercy stated on its conference call that it intends to reduce the dividend for the third quarter, in order to retain more of its earnings to meet capital needs given the earnings shield provided by the depreciation on real estate holdings. The depreciation charges will likely offset the taxable income generated by the debt repurchase. The disappointing guidance and planned dividend reduction pushed Gramercy shares down sharply on Thursday to another all-time low. The stock has now dropped 60 percent since early May. Gramercy shares had fallen over 5 percent in early trading Friday, to $7.34, on a downgrade from Stifel Nicholaus from “buy” to “hold.” iStar woes continue Woes at iStar Financial Inc. (SFI) continued to mount this week after last week’s ominous pre-announcement warning. Fitch Ratings joined Moody’s Investors Service in downgrading iStar’s debt ratings to BBB- and placing the company on negative ratings watch, meaning future downgrades are likely in the offing. iStar is now at the very bottom of the investment grade ranks — an investment-grade rating is critical in being able to issue unsecured debt into the marketplace. And unsecured debt is iStar’s primary form of financing, and it’s significant to the company’s overall capital management. (Are you sensing where this could be headed?) Both Fitch and Moody’s cited concerns over the company’s ratio of EBITDA to fixed charges and the increased in secured debt, despite iStar’s move to increase liquidity through asset sales. Shares of iStar plummeted further this week; the stock has shed over two-thirds of its value since mid-May. Shares in the battered REIT had rebounded in an early rally among broad financials Friday, and were at $6.81, up 6.24 percent when this story was published. 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 when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.