Mortgage REIT Insider: Rally Fades to Reality

The mortgage REITs rocketed higher on Tuesday after the Federal Reserve surprised the market by lowering the targeted Fed funds to a historically low range of 0.00 to 0.25 percent, sparking a massive rally in the REIT sector as LIBOR rates plunged in response to the Fed’s action. Led by bellwethers Annaly Capital (NLY) and Hatteras Financial (HTS), the mortgage REIT sector enjoyed a brief mid-week rally before giving up most of their gains on Thursday, as continued weakness in housing starts tempered investor enthusiasm for anything real estate. In other words, volatility continues to rule the day in the sector. Dividend winners & sinners The year-end dividend declarations continued this week, bringing holiday cheer for some stockholders but cold hard lumps of coal for others. Annaly rewarded its investors with a $0.50/share quarterly payout, as the company’s hedging strategies helped maintain a healthy interest margin. However, Annaly also cautioned that it would discontinue applying FAS 133 to its hedges for GAAP reporting, thus causing the hedge gains and losses to flow directly to the income statement — an adjustment that won’t affect taxable income. Sparking even more cheer were two commercial mREITs that declared regular and special dividends. Both PMC Commercial Trust (PCC) and JER Investors Trust (JRT) are delivering generous gifts to end 2008, though the special dividends were widely anticipated due to significant undistributed taxable income. PMC is paying out $0.225/share in regular dividends and a $0.14/share special, while JRT declared a $0.30 regular dividend and a $0.58 special. These gifts do come with strings attached — PMC warned that it is unlikely to pay another special dividend in 2009, while JRT will be making $0.79 of the $0.88/share payment in common stock instead of cash. On the flip side, two other commercial mortgage REITs are handing investors nothing but lumps of coal. Both CBRE Realty Finance and Capital Trust (CT) suspended their fourth quarter dividends, citing previous satisfaction of REIT distribution requirements and a need to preserve liquidity. With two CDOs precariously close to failing overcollateralization tests and diverting cash to senior noteholders, CBRE Realty is unlikely to recommence its payouts any time soon. Capital Trust, for its part, says it will reevaluate its dividend policy again in the first quarter of 2009, but with the overhang of a sour $50 million Macklowe deal and a defaulting $12 million Lehman Brothers/SunCal loan, CT isn’t likely to be rolling in taxable income 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 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 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.