In April I posted Bloomberg's report that had PIMCO more than doubled the mortgage holdings in its flagship Total Return Fund from 23% of assets in March of last year to almost 50% of assets in March of 2008.

Now the FT is reporting that PIMCO has continued to build its position. Bill Gross, the manager of the world's biggest bond fund, has now almost tripled his mortgage debt holdings to more than 60% of the fund.

According to the FT, the Total Return Fund fund pulled sharply ahead of rivals in the past year after Gross predicted a housing downturn and sold out of housing-related securities and corporate bonds. The fund has returned 12.6% over 12 months, beating 99% of its peers, according to fund tracker Morningstar.

Mr Gross said his decision to raise exposure to mortgage debt in recent months was based on the US government's implicit guarantee of Freddie Mac and Fannie Mae, the government-sponsored mortgage agencies. "Government policy is moving to sanctify the status of the government-sponsored agencies . . . it became a question of which institutions would be sheltered by the government umbrella," he said.

So far, the bet appears to be paying off. In the first four months of this year, the fund returned 3.8%, twice the return of its benchmark index and its best start to the year in at least eight years. Mr Gross said Pimco was buying primarily mortgage agency debt and "not the subprime garbage". The Total Return fund is now invested about 61% in mortgage debt. Such debt comprises only 43% of one of the fund's benchmarks, the Lehman Aggregate bond index.

Mr Gross, who is also Pimco's co-chief investment officer, is known for his macro-economic style of investing, which has seen him take big bets on bond classes depending on where he thinks financial markets might be moving. Mr Gross was heavily overweight US Treasury bonds in the early 2000s but is now scornful of them and the fund is using derivatives to gain from any downturn in Treasuries.

He called Treasuries "the most overvalued asset". "If there was a bubble, the popping has produced a counter-bubble in quality securities. The safe haven has been way overdone. Treasuries are yielding 2 to 3%, there is no real return on that at all," he said. "This is an asset class that is held by sovereign wealth funds and central banks . . . but that is not any reason to follow them."

There may be no reason to follow the herd into Treasuries, but apparently there is still plenty of reason to take a closer look at the disconnect between price and value in Mortgage REITs. Click here for an updated list of Mortgage REITS", including current yields.

SFI To Use Net Proceeds of $960 Million Financing to Repay Existing Debt

Costar reported today that GE Real Estate's New York regional office completed a $960million interest-only first mortgage financing with iStar Financial Inc., secured by 34 single-tenant office, R&D and industrial properties in 12 states.

According to Costar, this financing for iStar represents the largest debt deal of 2008 for GE Real Estate. It is also the largest loan originated by the company in the past several years. Funding of approximately $810 million occurred at the initial closing of the financing. The balance of the funds is expected to be provided before the end of the second quarter of 2008, subject to the finalization of additional loan documentation. The three-year financing is pre-payable in 20 months.

The Boston and New York offices of HFF (Holliday Fenoglio Fowler LP) arranged the loan on behalf of iStar and which closed in less than 45 days.

"While sizeable, this is a relatively conservative transaction, well-margined and secured by a geographically-diverse portfolio of single-tenant properties. Almost half the tenants are rated investment grade," said Alec Burger, president of GE Real Estate's North America Lending division. "We've known the management of iStar for several years and are confident they will use this financing to build a strong platform for the future. We see this as the first of many deals together."

HFF directors Janet Krolman and Greg LaBine and executive managing director John Fowler (New York) worked exclusively on behalf to secure the adjustable-rate, interest only, cross-collateralized and cross-defaulted loan.

"Historically, iStar would have obtained financing on an unsecured basis by utilizing the company's BBB, investment grade credit rating. However, the current market conditions are such that it was more efficient and cost effective to finance a subset of their existing single tenant portfolio on a secured basis," said Krolman.

"There were a number of ways to accomplish this including putting together a club deal to finance the portfolio, splitting the portfolio into smaller sub-portfolios or financing the whole portfolio with one source," LaBine added. "iStar concluded that a one-stop-shop alternative with GE was the best fit for their needs, as it was a simpler, cost-effective alternative that was accomplished in a very short time frame," Fowler said.

The portfolio of properties totals nearly 12 million square feet and is currently 99.6% occupied with an average lease term of 9.2 years. Nearly half of the approximately 21.9 million-square-foot portfolio is leased to tenants that are rated investment grade.

Costar reported that iStar will use the net proceeds of the three-year floating rate, cross-collateralized and cross-defaulted loan to retire existing debt, which presumably means the $1.3 billion Fremont acquisition loan due June 30.

With this new deal, SFI takes a significant step forward in the serpentine process of swallowing Fremont's commercial loan business. It's just one more fascinating story playing out in the REITwrecks world.

Is the Credit Crunch Over? Maybe, But Opportunities Still Abound in the REIT Wrecks World.

REITwrecks is back! And with good news. Not only is the Indian Ocean still a great place to recreate, but according to indications in the CMBS and CMBX markets, and recent reports by all three of the major ratings agencies, there are increasing signs that the commercial real estate debt markets are stabilizing. As REITwrecks reported earlier, the CMBX and CMBS cash markets were just completely divorced from the fundamentals in commercial real estate (and several astute readers posted comments consistent with this price vs. value disconnect).

Back then, seemingly a hundred years ago, there was no need for a ticket to Vegas: if you were an investor in this sector, all the adrenaline your heart desired could be had sitting right in front of your computer.

Indeed, when nobody was looking and the kids were safely tucked in bed, you could have picked up RAS at $6.75, NRF at $8 and AHR and $6.50. But as everybody knows, it was no time for the faint of heart, and REITwrecks lost a lot of donuts employing this price/value thesis on the likes of SFI and NCT.

But that was then and this is now. Despite widening in both the CMBS cash market and the CMBX last week, the market seems increasingly optimistic that the worst is behind it, and some established players are suggesting that the wild swings in volatility seen since September of 2007 are almost gone for good.

"The yet-to-be-finished de-leveraging process is still likely to exert technical pressure in the market, and volatility could persist for a while as was evident in (CMBX) widening," Citigroup researchers said in their Bond Market Roundup. "But it appears that the market should now be fairly close to fully redirecting attention to the actual and projected performance of the underlying collateral, as this performance, rather than technical forces, should determine bond value going forward."

Recent successful executions of new issue bonds by Lehman Brothers/UBS and JPMorgan/CIBC are also pointed to as examples that the market is returning to something more similar to its former self.

"People say they are comfortable with the fact that CMBS is not connected to residential subprime," one dealer said. "This hadn't been the case until recently."

Indeed, although delinquencies on residential mortgage loans continue to skyrocket, that’s not occurring among U.S. CMBS. Securities backed by commercial real estate loans have deteriorated only modestly. The Fitch Ratings’ CMBS delinquency index rose by three basis points, to 0.33%, in March, the second monthly increase in a row, but still low by historical standards.

“At this point, there is not cause for alarm,” Susan Merrick, managing director and CMBS group head, said in an interview. Although the delinquency rate is expected to rise to about 1% over the course of this year, Ms. Merrick said it will still be “just a bit above the historic average.”

Meanwhile, as the CMBS market sorts itself out and mark-to-market accounting fades from the headlines, borrowers are finding capital elsewhere. According to a new report by S&P, borrowers continue to find parties willing to refinance their CMBS loans, despite reduced liquidity for real estate funding and tighter lending standards.

"Debt financing for commercial real estate is available - albeit at a higher cost - from balance sheet lenders and other market participants, who see a window of opportunity for achieving attractive pricing even on conservatively underwritten loans," the report read.

The report noted that two of the three floating-rate loans with final maturities in the first quarter were refinanced and fully paid off. The third, the highly publized and much-worrisome Macklowe/EOP loan included in the COMM 2007 FL14 transaction did not pay off at its schedule final maturity. However, S&P suggested that the full retirement of the Macklowe COMM 2007-FL14 debt did take place on April 14. S&P said it viewed the Macklowe deal as highly positive given the transaction's size, complex debt structure and the number of parties with varying economic interests.

Fitch also noted an uptick in loans underlying the CMBS that are not refinancing precisely at their maturity date, thus putting them in non-performing status. The number of loans in this category increased to 11.6% of the Fitch delinquency index in March, compared with 2.9% a year ago.

However, Fitch noted that the majority of the fixed-rate "non-performing" matured loans have paid off in full or extended their terms within 60 days of being transferred to delinquent status, avoiding full default. For example, of the 26 fixed-rate, non-performing matured loans still outstanding at the end of January, only eight loans, comprising $26.2 million, had not refinanced by the end of March.

“Certainly there’s a lot less capital in the markets, but the loans that have matured so far have refinanced” when necessary, with capital being provided either by regional banks or insurance companies, Ms. Merrick said.

All this could be good news for the refinancing of IStar's Fremont acquisition debt, and it may be why SFI's stock has been on such a tear recently. SFI's $1.3 bridge loan is due June 30th, and the Company is now almost certainly neck deep in negotiations with the banks who led the deal (JPMorgan Chase, Citi and Bank of America). As mentioned earlier, REITwrecks had an early long position in SFI that wound up in a sea of red (I much prefer the warmth of the Indian Ocean), but now that 30 days have passed and the wash-sale rule is no longer in effect, it's time to reevaluate SFI vs. ivesting in other Mortgage REITs. As I wrote before, the Mortgage REIT madness was the perfect storm for investing in high yield Mortgage REITs, and some of the opportunities it has created are compelling for those with patient, discerning money.

As for the CMBS calendar, only two new deals are thought to be in the works, one from Merrill Lynch which may come in the next couple of weeks, and one from Banc of America which may come sometime in May or June, according to Citigroup research.

In addition to S&P, Moody's Investors Service has also been hard at work. In their just released review of US CMBS for the first quarter of 2008, Moody's says the final tally for traditional conduit issuance for the year could be less than $35 billion, but like S&P and Fitch, they expect balance-sheet-driven transactions by financial institutions to take up some of the slack. It is a vast change from last year's record US CMBS issuance of $230 billion.

Nick Levidy, Moody's Managing Director, expects the sector to take "several years to re-group". In retrospect, "perhaps US CMBS should be viewed as a $50 billion to $100 billion per year business that spiked to $200 billion during a credit bubble rather than a $200 billion business having an off year," Levidy adds.

This is probably true, given the multiplier effect that the now defunct SIVs, CDOs and commercial paper conduits had on the market, and it is yet another reminder to stick with the "seasoned" Mortgage REIT veterans.

On a related note, a number of earning reports and other interesting news came out last week. REIT Wrecks is looking forward to examining all those 10Qs, and more importantly, to writing about them. Thanks again for reading.

Click here for an updated Mortgage REIT list, including current yields


Disclosure: Long RAS, AHR and NRF at the time of publication