Mortgage REIT Insider: Sell ‘em All! No, Wait, Buy ‘em All!

The mortgage REIT sector was not exempt from the financial crisis that swept Wall Street this week. Shares of nearly every mREIT tanked on Wednesday in response to fears that the investment bank meltdown could ratchet up counterparty risk and reduce vital access to liquidity. However, these losses were largely recouped on Thursday, when the market staged a dramatic turnaround in the wake of a Treasury plan to resolve the bad debt crisis in the banking system. In all, shares swung wildly throughout week, with double-digit percentage gains or losses were common across the board. (The rallies didn’t extend to every group, though.) Another angle to the meltdown was the concern that consolidation of the investment banks would lead to a glut of available commercial real estate in the New York City area. As a result, commercial mREITs with a concentration of business in NYC, like iStar Financial (SFI) and Gramercy Capital (GKK) were hit the hardest. Both companies notched new 52-week lows this week, although they regained most of their losses in early morning trading on Friday. Everybody Loves Hatteras The market may not be sure which way to head, but the analysts lined up behind Hatteras Financial (HTS) this week. Analyst Bose George at Keefe Bruyette & Woods reiterated his outperform rating on the stock, saying that Hatteras’ exposure to Lehman Brothers Holdings Inc. (LEH) was very limited and that agency mREIT fundamentals should improve as Treasury bonds rally. Doug Kass at Seabreeze Partners agreed with George, citing the explicit government backing of Fannie and Freddie paper. The explicit backstop pushed swap rates down significantly, while the yield curve continued to steepen on the rally in short-term T-bills. Kass said that he believes “Mortgage REITs are the prime beneficiary of the flight to safety in the financials sector,” and cited Hatteras as his favorite in the group. Annaly Capital (NLY) and American Capital Agency (AGNC) were two others in the agency mREIT sector who were praised by Anton Schutz, the fund manager at Burnham Financial Industries, again for the steepened yield curve and removal of the GSE overhang. Annaly was upgraded from Neutral to Overweight by JP Morgan Chase & Co. (JPM) analyst Andrew Wessel, who cited improved book value and a higher estimate for full-year earnings. Impac In Trouble Shares of Impac Mortgage Holdings (IMH) took another nose dive after releasing first half 2008 results, posting successive quarterly losses on additional fair value writedowns. Impac is planning to ask shareholders to exchange its preferred shares for common stock to eliminate the associated dividend payouts and is also seeking to modify the interest rate on its outstanding trust preferred securities. The company warned in its latest in 10-Q that if it is unable to accomplish these objectives, as well as reduce its operating expenses, “it may not be able to meet its contractual obligations for the next year.” 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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