Mortage REIT Insider: Alescoe’s CDO Woe

Perhaps the biggest story of the week was CDO woes anew at Alesco Financial (AFN). This week’s blowup came courtesy of ailing Alt-A lender IndyMac Bancorp (IMB), which announced (in addition to a worse-than-expected quarterly loss) that it would defer the interest payment on its trust preferred securities. Alesco holds a portion of the equity interests in eight CDOs that include trust preferred securities issued by IndyMac. The disclosure sent Alesco shares reeling, and prompted the company to issue a statement quantifying the impact of the IndyMac non-payment. Alesco admitted that that IndyMac’s deferral will trigger the over-collateralization tests in five of the eight CDOs for a period of time. Failing the O/C tests will cut Alesco off from the cash flow from these CDOs, although the company will still record the interest income (as it is doing with CDOs tied to Kleros, a subsidiary of top CDO manager Cohen & Co.). Alesco claims it can maintain its current dividend stream despite the O/C test failures, but cautions that it “is reviewing a number of strategies for the company, including whether to continue to maintain its REIT qualification. Any change in strategy could impact the level of future dividend payments.” Not exactly a ringing endorsement. Alesco shares gyrated wildly during the week, as a result, recovering some of their losses in a 20 percent rise on Thursday. Earnings Central Earnings season wrapped up this week with reports from JER Investors Trust (JRT), Newcastle Investment (NCT), Anthracite Capital (AHR) and Crystal River Capital (CRZ). JER surprised the market with adjusted funds from operations (AFFO) of $0.41/share, well above the first-quarter dividend of $0.30/share. Shares popped higher as a result, though the REIT cautioned that AFFO may decline in the future as a result of asset sales and realized losses on its CMBS investments. Newcastle also reported better than expected first-quarter results, turning in AFFO of $0.56/share and slashing $1 billion in repurchase agreement debt; its results far surpassed the $0.25/share first-quarter dividend. The company commented on its earnings call that it is looking to buy back pieces of its CDO debt, and take advantage of other attractive opportunities in subordinate MBS now that its liquidity profile has improved. Anthracite posted solid beats on both the top and bottom lines, with a 16 percent rise in first-quarter operating earnings to $0.37/share. The bottom line number beat market estimates by $0.07/share. The company also upped its dividend by a penny to $0.31/share. The market liked what Anthracite had to say, with shares jumping 5 percent on Thursday as a result. On the flip side, Crystal River Capital released first-quarter earnings after the bell Monday, and the news was worse than expected. Despite posting better-than-expected net investment income of $0.99/share and operating earnings of $0.81/share, Crystal River disclosed that it had sold its agency MBS portfolio during March and April — and that the agency portfolio had been contributing half of Crystal River’s REIT taxable income. The company warned that it “expects its future distributions to be less than previous distributions,” as a result. Shares tumbled over 20 percent on Tuesday on the expected dividend cut and a dismal forecast, only to fall again on Wednesday on the heels of a Wachovia downgrade. Separately, Crystal River also announced that its Board of Directors had appointed William Powell as its president and CEO. Powell joins Crystal River from his former position as co-head of Brookfield Asset Management’s Real Estate Finance Funds Group, a possible sign that Brookfield may simply fold Crystal River back into its portfolio — much like Hypo AG did with Quadra Realty several months ago. Show Me the Money Annaly Capital (NLY) is asking investors to put up the cash, as it launched a $969 million secondary offering for 60 million shares. The move surprised Stifel Nicolaus analyst Michael Widner, who told Forbes magazine this week that he suspected that Annaly’s offering is an attempt to crowd out competition from some of the new agency IPOs, such as Hatteras Financial (HTS) and American Capital Agency (AGNC). Speaking of American Capital, the company’s shares had an unimpressive debut on the NASDAQ Thursday, dropping 3 percent from the IPO price of $20/share. Next week, we’ll give you an update on how American Capital is faring –- and how the competition for agency-backed securities is heating up. 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 held no positions in any publicly-traded companies mentioned herein when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.