Mortgage REIT Insider: Commercial mREITs Take 1-2 Punch

Commercial mREITs bought loans to a strip mall, Commercial mREITs took a big fall; All the Fed’s bailouts and all the Congressmen Couldn’t put commercial mREITs together again. October has not been kind to anyone long equities, including the already beleaguered mortgage REIT sector. iStar Financial (SFI) was the first to take a sucker punch, with Moody’s Investors Service this week cutting iStar’s debt rating to junk status; many analysts thought iStar’s maintenance of an investment-grade debt rating was crucial to accessing additional unsecured financing. Although an iStar spokesman reiterated that the company had no need for additional debt or equity in the near-term, the liquidity crunch was hard to deny when iStar canceled its third-quarter dividend two days later, despite guiding to a $0.30 – $0.40/share payout on its second-quarter conference call. The company plans to pay the balance of its 2008 taxable income as a fourth-quarter dividend. Also impacting the commercial group was the growing concern that shopping mall giant and equity REIT General Growth Properties (GGP) will be unable to refinance its remaining 2008 debt maturities. Although GGP has suspended its dividend and accelerated sales of certain assets, the painfully obvious cracks in the commercial real estate sector slammed into holders of controlling-class CMBS holders like Anthracite Capital (AHR) and JRT Investors Trust (JRT). The entire sector suffered mightily, with most of the stocks in the sector trading at 52-week and possibly all-time lows. Only one stock was able to stagger back up off the mat. NorthStar Realty Finance (NRF) announced late Wednesday that it would maintain its $0.36/share quarterly dividend and instituted a 10 million share buyback. The REIT said it had in excess of $250 million in excess cash liquidity as of September 30; NorthStar’s common stock was one of the few gainers on the NYSE in Thursday’s trading. Hanover Capital to Have Another Day Long left for dead, Hanover Capital Mortgage (HCM) surprised the market by announcing an agreement to merge with the financial subsidiary of Walter Industries, Inc. (WLT), a producer and exporter of U.S. metallurgical coal for the global steel industry. Walter plans to spin off 100 percent of its financing business into a separate company, JMW Holding Company, LLC; that company would then merge with Hanover, with Hanover continuing as the surviving corporation. The merger will occur immediately following the spin-off and is structured such that the combined company will continue to operate as a REIT and be renamed Walter Investment Management Corporation. The merged company plans to seek listing on the American Stock Exchange. In addition to the merger, Hanover will also repurchase its existing trust preferred securities from Taberna Preferred Funding, a subsidiary of RAIT Financial Trust (RAS). Taberna will receive $2.25 million in cash for the TruPS. Unfortunately for existing Hanover shareholders, they will only own 1.5 percent of the merged company, but it is a better outcome for HCM shareholders than bankruptcy. Annaly Enters New Avenue Annaly Capital (NLY) announced a new strategic initiative this week in the form of a newly-formed subsidiary, Ranger Capital Corp., which is in the final stages of the application process to operate as a broker-dealer. Ranger’s business objectives include operating as a sales agent for investment products managed by Annaly’s subsidiaries, engaging in securities lending, facilitating matched book operations and providing market data products. Ranger will be organized as a TRS of Annaly and is expected to begin operations in December 2008. The Ranger initiative is an extension of Annaly’s FIDAC subsidiary; FIDAC is a registered investment advisor. FBR Finalizes MBS Fight Friedman Billings Ramsey Group Inc.’s (FBR) public fight with Lehman Brothers Holdings Inc. over a $250 million agency-backed MBS is finally over. FBR said early Thursday that it has “resolved the status” of the agency-backed MBS in question and it expects to incur $4 million in costs as a result. No word as to the exact nature of the resolution, but shareholders bailed out of the stock anyway. FBR Group sank 35 percent in Thursday trading, pushing the stock well below the $1/share listing threshold. Expect FBR to slink towards reverse splitsville soon. Thornburg: Fourth Quarter Means Fourth-and-Long After failing to come to an agreement with its reverse repurchase counterparties over the terms of its Override Agreement, Thornburg Mortgage (TMA) was forced to try something else in the playbook this week. Because Thornburg could not obtain the cash necessary to close its original preferred tender deal, the company was forced to seek an extension of the terms of the Principal Participation Agreement until December 31. Although TMA did manage to receive this extension, it comes at a steep price. Failure to close the original tender offer by September 30 will force Thornburg to issue warrants for 3 million shares of common stock to the holders of its senior subordinated notes. In addition, Thornburg had to amend its original preferred tender deal to eliminate the cash component; each preferred share tendered will receive just 3 shares of common stock in return. Additionally, Thornburg announced that it received the consent of the vast majority of its senior subordinated secured noteholders to accept the September 30th interest payment on the notes in the form of additional senior notes, still at the 18 percent interest rate. As consideration for their consents, consenting holders may elect to receive a consent fee of either (i) 6.5217 shares of TMA common stock per $1,000 in senior subordinated secured notes or (ii) additional senior subordinated secured notes. For Thornburg, the fourth quarter of 2008 is looking more and more like fourth down and a long way to drive down the field. 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 was long shares of RAS 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.