Mortgage REIT Insider: FBR's Feet Held to the Fire
Friedman, Billings, Ramsey Group (FBR) provided a disappointing debut for the third-quarter earnings season. FBR reported a GAAP net loss of $1.12/share and posted a cash operating loss of $1.5 million for the third quarter. Results were weighed down primarily by non-cash marks to the existing MBS portfolio, which swamped the $4.1 million gain realized on the repurchase of outstanding trust preferred. FBR announced that it continued selling more MBS during the fourth quarter, as well, dumping another $1.1 billion of its existing portfolio to shrink the balance sheet and generate cash to repurchase more of its own debt. Most shockingly, the company that was probably the biggest backer of the mortgage REIT concept during the early 2000s conceded that it was evaluating all its strategic alternatives, including a sale or liquidation of the company. It was a hard sell for the FBR, who failed to stir the faith of remaining shareholders. FBR shares fell another 13 percent for the day, miring the stock well below the $1/share level. Shares fell even further in early trading Friday morning, and were at just $.39/share when this story was published. Capstead Chooses Caution The situation wasn’t quite as dire for the second mREIT out of the gate: Capstead Mortgage (CMO) reported GAAP earnings of $0.52/share, nearly keeping pace with the $0.55/share dividend. The company’s results were hampered by the violent widening of LIBOR spreads at quarter-end, which caused CMO’s cost of funds to tick up several basis points higher than expected. Meanwhile, portfolio yields fell as the run off from higher-coupon assets was replaced by lower-yielding MBS. Capstead management, citing the high degree of uncertainty in the market, plans to “curtail replacing portfolio runoff in the coming months.” The resultant reduction in the ARM portfolio will continue to depress CMO’s earnings in the near-term and likely demand another cut in the dividend, as well. Nevertheless, Capstead’s cautious approach to this volatile market may be the only way to keep the company around for the long-term. Impac Stays Afloat While Capstead is thinking long-term, Impac Mortgage Holdings (IMH) is just trying to make it to next week. The company does, perhaps somewhat surprisingly, have a fighting chance of short-term survival after announcing progress in its strategic initiatives earlier this week. Impac is close to finalizing a modification of 79 percent of its outstanding TruPS (trust preferred shares), and received shareholder approval for a common stock issuance intended to be swapped for the company’s outstanding preferred share issuances. Finally, Impac managed to sublease 90,000 square feet of its commercial office space in Irvine -- not exactly the hottest market in commercial real estate right now. It remains to be seen if Impac can complete the acquisition of a special servicing unit and successfully launch its new REO resolution business, which may be key to its longer-term prospects. Chimera Called on the Carpet Perhaps the only bit of humor in another miserable week in the mortgage REIT sector came from a 13-D filing from ValueAct Capital, which holds a 11.6 percent stake in Chimera Investment Corporation (CIM). ValueAct seemed a bit perturbed by Chimera’s latest plan to float a massive 250 million share offering and decided to share its concern by way of a public filing. In a decidedly acidic 13-D filing, the hedge fund roundly dismissed the dilutive offering as “misguided” and a “complete disregard for current Chimera shareholders.” ValueAct went on to characterize the share issuance as “one of laziness and conflicts of interest, considering the initial prospectus was filed on June 3, 2008 when Chimera's stock was roughly $13 while now the company is prepared to print a hugely upsized deal at $3 to $4 per share.” Perhaps Chimera’s Board of Directors heeded the hedge fund’s directive to re-think the timing and magnitude of the offering, as the offering failed to price on Thursday as expected. Meanwhile, Chimera shares continued their crash, falling below $3/share amidst the chaos. Shares were at $2.21, off more than 18 percent, in early trading on Friday. 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 few 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 any of the stocks mentioned when this story was published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.