Mortgage REIT Insider: Troubling Earnings Trends

A slew of troubling earnings reports dominated the mortgage REIT headlines this past week. Leading the pack of ugly ducklings was diversified REIT Resource Capital Corp. (RSO). Resource Capital posted taxable income of $0.38/share versus the second-quarter $0.41/share dividend; not surprisingly, the company guided future dividends down to $0.37 – $0.39/share for the remaining quarters of the year. From a GAAP perspective, a $15 million general loan loss provision drove the company to a net loss of $0.21/share for the quarter. Most disturbingly, however, Resource Capital’s prepayments were described by management as “virtually non-existent” during the quarter — a clear sign that the company’s borrowers are having significant difficulty selling or refinancing collateral. FBR Capital Markets (FBCM) downgraded the REIT’s shares from outperform to market perform after the disappointing results. Struggling mREIT CBRE Realty Finance (CBF) reported GAAP net income of $0.01/share, missing consensus estimates, as $66 million in markups on financial instruments was largely offset by a $59 million loss provision. The loan loss provision drove a $2.13/share loss in adjusted funds from operations — most tellingly, the company’s nonperforming assets as a percentage of total assets jumped to 6.2 percent during the quarter. That’s a lot, in case you were wondering. Anthracite Capital (AHR) also missed estimates on an operating basis, posting second-quarter operating earnings of $0.23/share — well below the $0.31/share dividend. Nonetheless, CEO Richard Shea noted that second-quarter results were “consistent with the expectations we had when determining to increase the dividend in the second quarter.” The company said it is looking to raise fresh capital on an accretive basis in order to pay down repurchase agreements and reduce the cash drain from margin calls. Capital Source (CSE) also underperformed — are you sensing a trend yet? — during a very transitional quarter for the company. The company’s GAAP income of $0.25/share was boosted by gains on securities and derivatives; adjusted earnings were just $0.12/share after backing out those gains. Core results were hampered by the double whammy of provision increases and a large jump in actual charge-offs from defaulted loans. Capital Source also noted that it had recently rolled its credit lines on unfavorable terms, which pressured spreads during the quarter; not surprisingly, the company will look to move most of its lending to its newly-opened CapitalSource Bank subsidiary to take advantage of cheaper funding. But not everyone missed; it just probably feels like it. JER Investors Trust (JRT) slightly better than some of its peers, generating adjusted funds from operations of $0.33/share, which effectively covers JRT’s second-quarter dividend of $0.30/share. The company’s GAAP income of $1.13/share, however, was mostly attributable to fair value markups on interest rate swaps and other derivatives. On the balance sheet side, JRT continues to make progress in reducing recourse funding, recently paying down its repurchase financing to just $100 million. Arbor Realty Trust (ABR) also performed slightly better than expected, as adjusted earnings per share came in at $0.58/share, slightly ahead of estimates — but just below the $0.62/share dividend. Arbor did manage to monetize a portion of its equity interests in Prime Outlets, a chain of retail outlet centers, yielding cash of $33 million on the sale of its equity kicker. Shares jumped 5 percent in early Friday morning trade on the results. The best performing of the commercial mortgage REITs, however, was clearly NorthStar Realty Finance (NRF), which generated adjusted funds from operations of $0.35/share, in-line with expectations but a penny short of the second-quarter dividend. NorthStar shares nonetheless popped higher on a positive outlook for attractively deploying excess liquidity — a rare opportunity for any of the mortgage REITs right now. NorthStar has also exited a number of its lower-yielding healthcare net lease properties. Credit losses crunch Redwood While NorthStar was the perhaps the best performer of the week, Redwood Trust (RWT) was clearly the worst. Estimated taxable earnings for this quarter were just $4 million, or $0.11 per share. These taxable earnings included $30 million, or $0.92 per share, of taxable income deductions related to credit losses, up from $14 million in the prior quarter. Redwood noted that it expects credit losses to continue at an elevated pace through 2010, as well. The company is now estimating that 2008 REIT taxable income plus undistributed REIT taxable income carried over from 2007 could fall somewhat short of full-year distributions at the regular dividend rate of $0.75/share. Although Redwood’s board reaffirmed its intention to maintain the regular quarterly dividend rate of $0.75/share for both the third and fourth quarters of 2008, the company does not expect to carry over any taxable income to 2009. Not surprisingly, news of the potential death of Redwood’s divident sent shares tumbling 14 percent on Thursday. 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 ABR 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.