Mortgage REIT Insider: Agency REITs on the Rebound

On the M&A front, commercial mREIT CapitalSource (CSE) snagged struggling Fremont General’s 22 Southern California bank branches, a move investors initially cheered. Nonetheless, analysts still questioned whether the new access to liquidity would trump long-standing credit quality concerns at CapitalSource. “Since CapitalSource will be inheriting $3 billion of cash and short-term investments, which can be used to pay down credit facilities, we believe this transaction greatly reduces liquidity risk over the near term,” Wachovia Capital Markets analyst Jim Shanahan wrote in a note to clients earlier this week. “However, we believe the company will face further headwinds through the balance of the year due to deteriorating credit quality and the potential for a dividend reduction.” On the rebound The agency mREITs continued their comeback, after Capstead Mortgage (CMO) raised its first quarter guidance on better-than-expected net interest margins and calmer market conditions. Competitor Anworth Mortgage (ANH) also got into the act, raising its first-quarter dividend by two-thirds to $0.20/share from its $0.12/share fourth-quarter payout. Both companies credited the timely deployment of accretive equity raises for the improvement in earnings. Analysts jumped onto the agency bandwagon this week as well, likely further bolstering share prices, with Stifel Nicolaus & Co. analyst Jerry Schluderberg concluding that “liquidity risk for the agency REITs is low, current economics are extremely strong, and that the group as a whole remains very attractive.” No week would be complete, however, without some sort of bad news. Catching litigation hell was iStar Financial (SFI), which got slapped with several class action suits alleging that it failed to disclose material credit impairments about which it should have warned potential secondary offering investors. The lawsuits didn’t appear to hurt SFI stock, for whatever that’s worth — shares rebounded strongly this week after recently dipping below $14. Finally, on the earnings front, Gramercy Capital (GKK), which just completed its merger with American Financial Realty Trust last week, kicked off the Q1 earnings season with a solid quarterly report. Although diluted earnings missed estimates by $0.02/share, funds from operations remained strong at $0.69/share, meaning the first quarter dividend represented just 91 percent of FFO. 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 week on Fridays. Disclosure: The author was long CMO and held no other positions related to firms mentioned in this story when it was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.