If Frank Quattrone could start over, he would be a REIT banker. REITs staged a huge rally this quarter, almost $15 billion in new equity has been raised through 45 public offerings this year, and even the Italians are descending upon New York to list new deals. With REIT stocks now being served up like Cannolis on Columbus Day, and consumed almost as fast by shell-shocked but somehow still hungry investors, you may have one question: What is Going On?

One reason is that REITs cram down desperately need the money, and while not all are teetering on the brink insolvency, most will do almost anything for fresh cash. This includes diluting their long-suffering shareholders bang zoom! to the moon, and cutting dividends prego! to the newly annointed.

How is this happening? Some intellectual honesty is called for here: REITs were simply oversold. Furthermore, no portfolio manager that I know of was willing to scale the ramparts for General Growth, no matter how many bankers GGP put to work pounding the phones, or how much they were being paid. Still, when there's an abundance of supply, demand needs to be stoked, and that's exactly what's being done. Almost all of these REIT equity offerings are being sold in "over-the-wall deals", much like tech stocks were in the late 1990s.

"Over-the-wall" deals are pre-arranged sales with leading investors at discounted prices, executed overnight. The news hits the tape the following morning, and the stock jumps. Basically, if you're not "over-the-wall" you're trapped beneath it, especially if you're short. Indeed, one goal of the strategy - to scare the pants off of short sellers - is surely working. Nobody wants to be short a company whose balance sheet can be de-levered overnight, and that (re-equitization) is the other goal.

Unlike GGP, investors are flocking to these deals like moths to a porchlight. At a securities conference several weeks ago it's just not true, there is a free lunch Mortgage REIT management presentations were standing room only. One of them, Chimera (CIM), had just used an $850 million offering to transform itself from a smoking heap of 2007 trade confirmations into a potential Microsoft of Mortgage REITs. Another, Redwood Trust (RWT) executed not one but two new issues, the latter just days after the conference, raising almost $500 million in equity.

REIT new issues have included such varied names as Alexandria Real Estate Equities (ARE), AMB Property (AMB), Pro-Logis (PLD), SL Green (SLG), Ventas (VTR) and Vornado (VNO). The AMB deal is a good example of how the REIT equity syndicate pot is being stirred. AMB's $575 deal combined pre-launch "over-the-wall" meetings with the chosen ones, followed by overnight execution. The deal was 80% sold before it was even offered to the public - and then upsized 24% for good measure. It was sold at a discount of 8% to previous close, which isn't bad considering that it represented almost 50% of the current shares outstanding, and that the stock traded up 16.5% the next day, resulting in an instant 25% gain for the new shareholders.

Who's next? Everybody wants to know. Significantly, IPOs in registration are dominated by Mortgage REITs. These include Cypress Sharpridge (agency RMBS), Invesco (agency & non agency RMBS; CMBS; TALF loans) Penny Mac (non-agency RMBS), Sutherland (agency & non-agency RMBS) and Starwood Property Trust (CMBS/RMBS). These initial public offerings will list under the symbols CYS, IVR, PMT, SPT and SLD, respectively.

Others in registration are Brookdale Senior Living (BKD) and Investors Real Estate Trust (Nasdaq: IRET). Recent shelf offerings include Northstar Realty Finance (NRF), with JMP Securities (a large investor in New York Mortgage Trust (NYMT) and manager of its mortgage assets) as sole manager.

Even crippled Anthracite (AHR) may be getting into the act. Miraculously, the company was able to restructure its secured and unsecured debt last month, and a round of fresh equity is undoubtedly next on the list. Anthracite's cozy relationship with Blackrock, which backstopped AHR with a line of credit in its darkest days, gives it an almost unparalleled window on the Fed's growing portfolio of "toxic" mortgage assets. In this latest game of "if you're not inside, you're outside" being played with REIT equity, that may be all AHR needs to push it over the finish line.



Disclosures: Long NRF at the time of this writing.

commercial real estate
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"I'll gladly pay you Tuesday for a hamburger today." Wimpy, character from the cartoon series Popeye

As many of you may remember, Wimpy was not only a character from the Popeye cartoon series, he was also a glutton for hamburgers, and he would consume them at a ferocious rate. Of course, "Tuesday" would never come, and Wimpy constantly secured himself a free lunch.

These days, REITs are increasingly turning to a Wimpy-esque self-preservation strategy, "borrowing" cash from shareholders without any real intention of ever paying it back. How are they doing this? Simple. because they have to Instead of paying dividends in cash, they are electing to pay out dividends in stock [Please click here for an updated list of REITs paying dividends in stock].

Presumably these new shares will someday tuesday? pay out cash dividends, but for some struggling REITs that day may never come. Adding insult to injury, shareholders will need to raise cash to pay income tax on the dubious value of the stock they receive.

2009: The Year of the Stock Dividend

However, numerous REITs really have no choice but to turn to this dilutive dividend strategy to recapitalize their balance sheets and conserve cash, and many more REITs will be forced to make this declaration in 2009. Indeed, two more REITs made it official last week.

On Wednesday, Vornado Realty Trust (VNO) joined the list, declaring a $.95 dividend for the quarter, but only 40% will be paid in cash. The rest will be paid in the form of more common stock, as if shareholders didn't already have enough of the stuff. And there's no need to push the "buy" button here folks, it's practically automatic. talk about a DRIP

Not surprisingly, VNO's already underwater shareholders quickly signaled their lack of enthusiasm for this financial version of Chinese water torture, selling the stock off by $2.28, or 4.5%, after the news was announced. The stock is down significantly from its 52 week high of $108.15.



Meanwhile, Sunstone Hotel (SHO) announced that its dividend will consist of approximately $7.3 million in cash and about 5 million shares of the company's common stock. This amounts to about 80% of the dividend.

The IRS Says Do Not Pass Go; Do Not Collect $200

All this monkey business has been sanctioned by the IRS, which recently issued Revenue Procedure 2008-68. Rev Proc 2008-68 clarifies the circumstances under which REITs may issue stock dividends and still maintain their REIT status, and it provides a clear safe harbor for those REITs that are considering this IOU tactic. Click here for the full text of Revenue Procedure 2008-68.

With the new IRS guidance, REITs now have a green light from the IRS to pay out up to 90% of their dividends in stock. I first wrote about this IRS-sanctioned funding strategy in the post Dilutive Divends: Coming Soon to a REIT Near You! For background on requirement for REITS to pay out 90% of their taxable income to shareholders, see the post REIT Definition. Expect the list to grow longer, but for now REITs paying out dividends in stock include the following:

List of REITs Paying Dividends In Stock
REIT NAME	SECTOR	Current Yield (as of 4/2009)	QUOTE
AIMCO	Apartment REIT	22.8% (75% Stock)	AIV
Anthracite Capital	Mortgage REIT	60% (90% Stock)**	AHR
RAIT Financial	Mortgage REIT	100% (90% Stock)**	RAS
Developer's Diversified Realty	Retail REIT	23% (90% Stock)**	DDR
Diamond Rock Hospitality	Hotel REIT	22% (60-90% Stock)**	DRH
JER Investors Trust	Mortgage REIT	22% (90% Stock)	JERT.OB
Lexington Realty Trust	Diversified REIT	19.40% (90% Stock)**	LXP
Northstar Realty Finance	Mortgage REIT	26 (60% Stock)	NRF
One Liberty Properties	Diversified REIT (NNN)	23.60% (90% Stock)**	OLP
Simon Property Group	Retail REIT	8% (80% Stock)	SPG
Sunstone Hotels	Hotel REIT	8% (90% Stock)	SHO
UDR	Apartment REIT	11% (75% Stock)	UDR
Vornado Realty Trust	Office & Retail REIT	7% (60% stock)	VNO

** Anthracite has signaled its intention to pay 90% of its dividends in stock (assuming they are able to reach a settlement with their secured lenders), but has not yet declared such a dividend. Diamond Rock and RAIT Financial have done the same, but the splits remain unclear.

With these stock dividends, Real Esate Investment Trusts are able to preserve prolong the agony REIT status and cash by issuing I.O.Us just like Wimpy. In the meantime, they are hoping that the capital markets will become viable funding sources again and that making REIT investments will no longer be considered financial hari-kari.



For now, being fed a stock dividend may be even worse than an IOU, because all it represents in the short term is a tax liability with no cash. Unfortunately, I can't imagine any capital-starved REIT not electing to take advantage of this revenue ruling (at least to some extent). Undoubtedly, this will further erode confidence in the sector and prolong the recovery in REITs.

Disclosures: None at the time of publication
apartment reits, hotel reits, office reits, mortgage reits
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Moody's went more negative on commercial real estate yesterday, and as a result they went even more negative on below-investment grade CMBS. I have written about the bullseye that is on Anthracite's (AHR) controlling class chest before, and while AHR is well-managed and still enjoys tangible, substantive support from parent Blackrock, if you're new to the stock you should read more about Anthracite here before betting the ranch.

Anthracite certainly wasn't singled out; Moody's put $109 billion of CRE CDOs on review. But Moody's did say yet again that CRE CDO deals with collateral concentrations in below-investment-grade CMBS certificates will likely be among the first transactions to be affected by credit issues that are getting worse by the day, and that the additional leverage inherent in those deals creates the potential for higher losses. This is Anthracite's bread and butter, so any further deterioration in commercial real estate fundamentals will almost certainly translate into a reduced dividend

Not surprisingly, Moody's also repeated that 2006 through 2008 vintages of CMBS, both fixed and floating rate, will experience even more stress than earlier vintages. These were the go-go years of inflated appraisals, rosy pro-formas that assumed the good times would roll forever and investors who were indifferent to risk. Unfortunately, Anthracite was also ramping up its controlling class purchases at the same time. But why not? They were also issuing CDOs as fast as they could, and they needed a place to stash all that cash.

Specifically, Moody's put the following Anthracite deals on watch:

Anthracite 2005-HY2 Ltd. Commercial Mortgage-Related Securities, Series 2005-HY2
Anthracite CDO I Ltd.
Anthracite CDO II Ltd.
Anthracite CDO III Collateralized Debt Obligations
Anthracite CRE CDO 2006-HY3, Ltd.

Moody's expects to complete their review by February of 2009, but there's no need to wait that long for the results of their analysis: these deals will be downgraded.

Nevermind the fact that 2006-2008 CMBS deals were done with-pie-in-the sky underwriting, even rational, well-underwritten loans will come under stress in this rapidly weakening economy. Any borrower unlucky enough to face loan maturities in 2009 will have a very interesting year. Sitting at the bottom of this heap is Anthracite, and its optimistic/adventurous shareholders need to believe the Company can live up to its name and survive under the pressure.

Click here for a Mortgage REIT list, including current yields


Disclosure: None at the time of publication

mortgage reits, reit,reit

Securitization is the process of taking groups of loans and splitting them into different classes of securities, and then selling the different classes of securities to third party investors. The brief video below does a great job of explaining how it all works. Many Mortgage REITs buy Commercial Mortgage Backed Securities (CMBS), which are commercial mortgage loans that have been securitized. Other mortgage REITs buy mainly "whole" loans, which are loans that have not been securitized.

Before the credit crisis, residential and commercial mortgages were widely securitized, but securitizations have also been done for a wide range of cash-flow producing assets, such as residential mortgages, commercial mortgages, credit card receivables and college tuition loans. Securitization confers a huge advantage to lenders in that it allows the lender to transfer all of the risks around making loans to third party investors.



However, FASB has proposed changes to FAS 140, including the elimination of the QSPE rules which previously allowed for a "true sale" and the complete transfer of risk the lender to the investors (for more on that, see the REIT wrecks post on changes to FAS 140). As the video mentions, the securities were usually "tranched" into different classes, which enhances the credit rating of the resulting securities beyond that of the underlying assets. This is known as Credit Enhancement.

Essentially, issuers take the loans and split them into "tranches" which have different levels of risk (referred to as "subordination"). So, if the entire group of securities would have a credit rating of BBB, and you cut it into several tranches, the highest tranche with no subordination, could have a credit rating of AAA, because it gets paid first, and the only way it would not get paid would be if a huge group of the underlying loans were unpaid (i.e. the highest tranche has the lowest risk). Issuers can also "over-collateralize" the pool.

Tranching is important because different Mortgage REITs invest in different classes, or tranches, of the CMBS pool. Anthracite Capital, for example, invests mainly in the "controlling class" (so-called because AHR can take "control" of the defaulted assets) portion of CMBS deals. This is also known generally as the "B Piece". Aside from the equity, which is unrated, the "B piece" is the highest risk and lowest rated portion of the securitization. If large numbers of mortgages default in a CMBS issuance, the controlling class has the most subordination and is the first to take a loss. Therefore, if a Mortgage REIT like Anthracite owns the controlling class securities of a securitization with extremely high rates of default, the REIT's entire investment in that CMBS issuance can be wiped out. If you want to learn more about tranching and over-collateralization, see the REIT wrecks post on CDOs.

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

Disclosure: None at the time of this writing

"The Taliban used to hang the victim's body in public for four days. We will only hang the body for a short time, say 15 minutes. Adulterers will still be stoned to death, but we will use only small stones." Afghan judge Ahamat Ullha Zarif on a kindler, gentler Afghanistan

....And a taxable loss, dear believers, is still a taxable loss.


First, some housekeeping: This is a follow up post to the reader comments I republished in "Anthracite Post Generates Some Heat!" Those comments were originally written in response to the article entitled "High Risk, High Yield Strategy Keeps Anthracite Under Pressure", or something like that. This post is also rather lengthy (but informative, I believe), so come back later if you're almost empty.

The purpose of this post is to address those reader comments in more detail, first because their very premise is incorrect (that the REITwrecks article is inaccurate and must be "subjected to a high degree of scrutiny" due to the characterization of Controlling Class CMBS as BB-rated). And second, despite the forest-obscuring discussion of proprietary loss severity models and the not-to-be-trifled-with Math PhDs in the comments, the primary article's main thesis remains the same and is fully intact: This weakening credit environment is simply no time to go out on a limb at the bottom end of the credit spectrum.

Having said that, the comments were greatly appreciated and I think a lot of people learned from them. So I do not wish to discredit the writer. I would simply like to set the record straight.

First, there are four investment-grade tranches (disregarding, for the moment, the various plus and minus flavors) in a mortgage securitization, they are the tranches rated AAA, AA, A and BBB. The tranches below these four are non-investment grade. These non-investment grade bonds are rated BB, B and CCC, the latter known among some as the dreaded "triple hook". Last but not least are the bonds that are completely unrated. In the CMBS industry jargon, the below investment grade bonds (anything below BBB) are collectively known as the "B-piece". The mix of these bonds and their individual rights are generally the same but vary specifically deal by deal.

It is the "B-piece" to which I was generally referring in the original article, and it was my glib refence to these bonds as BB-rated that gave the comments credibility. The B piece, frankly, gets all the attention because it is the hardest bit to sell. The reason is that the B piece investors are first in line for any losses, thereby insulating the more senior, investment grade tranches from all but the biggest of disasters.

Avoiding losses in respect of CMBS (or any structured debt) is completely analagous to homesteading on the beach for the afternoon. The higher the ground you occupy, the less likely you are to ruin your new Gucci's when the tide comes up.

Why bother to go through all the trouble of carving the loans up in the first place? In theory, the borrowers get a better interest rate because the loan is split into various pieces which are then tailored to fit different investor constituencies, and that optimizes the price.

With respect to whether Controlling Class CMBS is rated or unrated, it was suggested that I take some remedial time to read the company's reports so I could learn again? how these securities work. So I did, and naturally it didn't take long to find the following: (edited for clarity) the things I do for you

Now, with respect to loss estimates, AHR clearly does purchase these securities at a discount to par, but they do not assume 100% loss of invested principle. In fact, "As part of its underwriting process hey joe, would you take a look? , the Company assumes a certain amount of loans will incur losses over time. In performing continuing credit reviews on the 39 Controlling Class trusts, the Company estimates that specific losses totaling $851,920 related to principal of the underlying loans will not be recoverable, of which $399,403 is expected to occur over the next five years. The total loss estimate of $851,920 represents 1.46% of the total underlying loan pools."

Continuing credit reviews are important, because historically low CMBS default levels in the years before the boom convinced many investors that CMBS structures were "over-enhanced". These investors believed that recovery levels for junior note holders would remain higher than forecast, just as they had for subprime. Naturally, competition in the B piece world increased as a result, and buyers had to bid up the bonds in order to be successful.

The "B" piece buyers had always been a limiting factor in overall CMBS issuance. Not only were there not that many of them, but they also had veto power over any individual loan that could decrease their chances of getting fully paid out. As more yield-hungy investors clamored for more "B" notes, they began to exercise their veto rights less often. Underwiters and issuers, who were only in it for the fees and cared not about repayment, were then able to stuff more and more junk into the pipeline, and CMBS issuance ballooned. (please read "How Could My Big Beautiful Loan Go So Bad, So Quickly", including the comments)

This volume increase resulted from a combination of huge demand and a commensurate decrease in underwriting standards, including (among other things), a relaxing of traditional loan-to-value criteria. Moody's estimated that the gap between the Moodys LTV and underwritten LTVs reached record in the first quarter of 2007 (nearly 45%). The Moody's estimate of actual LTV also reached a record of 106.5%. Who needs equity when lenders will give you more money than the property is worth?

Moody's warned that "Junior classes have become exceedingly thin, exposing them to the risk that if one of the larger conduit loans defaults, several classes at a time may be entirely wiped out." It was in this environment that AHR was stepping up its purchases of Controlling Class "B" piece CMBS:

Now, some investors may take comfort in the fact that AHR alone gets access to the "top-secret" loan-level files. Presumably this gets combined with their own "top-secret" proprietary models, and they are thus able to divine the future by virtue of their uber geek Math PhDs who needs smack dealers, anyway? But having originated, structured and sold hybrid debt and equity (via conduits and securitizations, among other structures), and having bid on the wreckage as a principal after reality hits, I can tell you that it's just not that easy.

If you've ever called the guy (or gal) who owns the controlling class and is in charge of the "work out", you'll discover that they often want to talk. This is because they know very little, and they need to know what you know. In one phone call, when I discussed the details of an obviously flawed underwriting on a mortgage behind a set of B notes, I was met with an incredulous "you're kidding??" They then asked how I could possibly know about such micro-level minutiae, and I had but one very simple, honest answer: all I did was read the prospectus.

Disclosure: None at the time of this writing

You know, it takes a bit of grip to host this pig. Even though the code sits on some server quietly doing its thing somewhere in American Samoa, they hit my credit card every month for at least a topped-off tank of California gas. And I only get about a mile per million clicks, if you know what I mean just push that index finger once, it won't hurt.

Trust me, anonymously spitting up some new interesting REIT story on an almost daily basis while the stock market (and my own net worth) spirals into nothing less than an investment migraine in a closet of full of credit vertigo must be about as bad as making a spot the Chinese midget tag team wrestling squad but still better than being a vegan.

So when I get comments on this turgid, loss-ridden subject matter, it's a bit of a triumph when you only have a hammer, everything looks like a nail, or something like that. The comments help me to be an even better real estate sleuth, and hopefully all of us to become better investors. So when I saw this particular comment (below) appear on the August 10th Anthracite post, I decided I had to re-post it on its own page. I have been looking into ways to make this a more open site, with the ability to post available to more than just me, so what better way to start than with this, which definitely took some time and effort to write. Thanks for the comment 42. (Comment follows)

============================================
Not to take exception with some of your other points later in the piece, but when you start out your blog by quite incorrectly identifying the controlling class as BB rated, I must then only deduce that the content which will follow must be subjected to a high degree of scrutiny. (Update: REITwrecks responds). Typical of the CMBS market (RIP) the BB bonds are publicly offered, the B bonds are privately offered and the NR piece (aka first loss or Controlling Class Certificates) are also privately offered. Why? Because these two classifications (B and NR) of risk are so high, the investors require analytical access to non-public loan files in order to create cash flow models used to predict returns and therefore to price bonds.

First of all, the controlling class certificates (CCC) (otherwise known as the first loss piece) are UNRATED. That is clearly NOT to be confused with any bond that IS rated (including C, B, BB etc.). The CCC/first loss piece of a structured transaction are essentially the “Equity” piece with absolutely no financially secure guarantee of the return of any of the face amount of principal on the certificates themselves.

Therefore, because there is quite literally almost no hope of principal return, these assets trade at deep, deep discounts to the par face amount. Typically these ‘bonds’ trade in the new issue market (i.e. when the deal is initially structured and sold to investors) at prices nearing 17-25% of par. This practice of pricing is essentially driven by a Timing-And-Severity-Of-Losses Model to calculate a projected yield.

AHR assumes ON THE DAY THEY BUY THESE that $0.00 of principal will be recouped from these assets. So who cares about loss rates of 50% when the assumption from day one is 100% losses on principal?

Why would any ‘bond’ investor ever buy a bond and then immediately write the principal down to $0.00? Seems like financial suicide, right? Here’s why: The loans will pay the stated interest on the 100% face amount of the loans for some period of time prior to experiencing any credit deterioration. The Art & Science of the investment process in these CCC/first loss pieces is accurately estimating how long the loan will pay the full interest before it begins delinquency as well as the depth of the deterioration of the credit in that time frame.

Because the CCC investor is paying 17-25% of par and receiving the ‘bond’ coupon (interest) on the full 100% of the par (face) amount, the income from the bond will eventually return a fat profit….as long as it keeps paying. There is a breakeven point in time at which the initial investment (17-25% of par) is surpassed by the interest payments on the full par amount of the bond and it becomes a profitable investment.

So the key to a successful analysis and therefore a successful investment in these assets is BOTH a TIMING OF LOSSES and LOSS SEVERITY prediction (model). Professionals in the structured markets will recognize this as the SDA (Standard Default Assumption). This is a mechanical-standardized-time-ramp model, which describes the historically experienced credit default curve of loans of similar ilk. This model is coupled by investors with a loss severity model which incorporates various timing of workout/recovery amount/period assumptions in order to present a cash flow projection of a given loan/deal/structure.

Combining these models with the cash flow calculator of a specific loan file (which by the way is ONLY MADE AVAILABLE TO THE FIRST LOSS AND B INVESTORS) in order to predict the cash flow, while accurately adjusting the percentages of these models (up or down) to reflect market conditions is where the Math PhDs make their money.

If losses occur earlier than predicted but are of a mild severity, the investment can workout fine. If the losses occur earlier than anticipated and are of a severity equal to or greater than anticipated, the interest stream will obviously be cut off by the losses (losses take the bond face amount down toward $0 by the amount of the realized loss) and the investment can incur a negative yield.

Remember that AHR ASSUMES THAT ALL PRINCIPAL IS LOST ON DAY ONE AND THAT ONLY THE INTEREST CASH FLOW STREAM FROM THE BONDS WILL CONTRIBUTE TO THE YIELD. The TIMING of the losses IS THE KEY and earlier is clearly worse.

The ‘controlling’ classes are so named because they provide to the investor in the most disadvantageous position with respect to losses (caused by poor performing loans) with the authority to direct the actions of the special servicer. The special servicer is essentially a loss mitigation function provider, which is activated at the command of and for the benefit of the controlling class investor upon the recognition of a loan performance snag.

The CCC holder has the right to control the special servicer to take action on their behalf to mitigate losses. They get to dictate the actions of the special servicer as their agent and for their economic benefit. Thus the class is tagged “Controlling Class”. This bondholder gets to call the shots; they are IN CONTROL. And they are in control because they are taking the most risk…AND THAT IS WHY THESE BONDS ARE NOT RATED. They are typically not registered (i.e. Private securities) and are refered to as NR (non-rated) classes in the prospectus.

The annual and the quarterly reports both take a few paragraphs to explain the loss assumptions on the controlling class interests. I suggest that you take some time and read the explanation of these securities, how they work, what factors affect the return and how they are booked on the balance sheet.

The scenarios you shared could be destructive or they could be irrelevant. You have not provided the depth of analysis necessary to provide much other than speculation. Your points might be accurate and have absolutely no effect OR they might have a big effect. Your post fails in its lack of depth of analysis or even an understanding of what these bonds are that you are primarily discussing. What it seems may have become a little obscure to you is that the return of principal is IRRELEVANT.

The Fitch report could be right and losses could mount to 50% over the life a of a deal AND IT COULD PROVE TO BE A COMPLETELY IRRELEVANT ASPECT OF THE RETURN CALCULATIONS FOR THESE BONDS DEPENDING ON THE TIME FRAME FOR THE LOSSES TO BE REALIZED. It is the timing and severity of losses, which are all important.

Your work is widely read and you are to be commended for the valuable service you provide to the market at large. No offense intended because I do respect your work…but, you are just a little out of your league with your last post. It is therefore likely that the net result is that your readers, whom I dare say have not been exposed to the specific nature of these arcane classes within the structured securities realm, will be frightened not enlightened.

42
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Disclosure: I assume 42 is long AHR

Anthracite reported mixed results on Friday, well shy of the Company's .31/share dividend, noting that it was still receiving margin calls on the 18% portion of its portfolio that was not match funded. The Company's cash levels are low ($38.6MM unrestricted) relative to an amortization payment of $31MM required on September 30th under its newly amended Bank of America credit facility, one of two primary credit facilities.

Anthracite recently established a third credit facility with its parent Blackrock. The support from Blackrock is encouraging, and AHR appears to be using that facility to meet its margin calls. AHR drew down $52.5MM when market conditions worsened around the time of the Bear Stearns failure, then paid it back down to zero in April as the market improved. AHR drew on this facility again on July 28th in the amount of $30MM.

It's worth noting that the Markit Group's analagous BBB CMBX index shot through the roof (up is down) in June and July, at the same time that AHR drew on the Blackrock facility, and a graphical illustration of that index helps put Chris Milner's market commentary in context:

"After a period of relative stability in April and May, the markets suffered another major setback in June and July as continuing economic weakness combined with the challenges faced by the residential mortgage market put significant pressure on financial stocks and credit spreads."

Investors in Anthracite need to continually reconsider the the damage that is being inflicted by this index. The reason is that this damage is divided into two categories: permanent capital losses, which until now have been largely confined to the subprime mortgage sector and related structured products; and temporary mark-to-market losses, which are hitting all credit products, including the securities in which Anthracite invests.

REITwrecks readers say that six times fast know that these mark-to-market losses on CMBS have had little or nothing to do with the underlying performance of the collateral, which with very few exceptions continue to exhibit strong financial performance.

However, more and more observers are questioning whether these paper losses will not soon become permanent capital losses. Obviously, with Anthracite's portfolio concentrated on the lowest rung in the CMBS food chain (BB rated "Controlling Class" CMBS), pressure on the stock has been consistent.

AHR has a fairly well diversified BB CMBS portfolio by geography, but the portfolio summary in the earnings release shows that AHR could be in some trouble with respect to the more recent vintages (2005, 2006 and 2007). These three years comprise almost 75% of the portfolio. Those three vintages also comprise about 49% of the outstanding CMBS market, so it's not surprising that AHR would have a concentration there. In those three vintages, AHR currently estimates that its portfolio will experience collateral losses of almost 50%.

As everyone knows, these particular years were also the height of the bubble, and Fitch recently reported that it believes defaults on CMBS issued in those years could quadruple from their current levels, under a worst-case scenario for the U.S. economy.

According to the Fitch estimates, borrowers would default on an average of 17.2% of securitized commercial mortgages over 10 years if the US economy dips into a recession with 0.2 per cent contraction in growth (compared with current default rates of 4 per cent), which is a rise of 330 per cent. Fitch's London office produced similar dour commentary on the European CMBS market a few days earlier.

Such a scenario corresponds “to the negative predictions currently offered by commercial real estate experts”, analysts at Fitch wrote. This would happen if the economy suffered a similar downturn to 1991, and assumes that the value of properties covered by the deals falls by 25 per cent, and cash flow from rents by 15 per cent.

Under a more mild recession, which Fitch thinks is more likely (0.8 per cent economic growth), the default rate would still rise to 13.7%, roughly double the norm.

"Controlling" Class CMBS: controlling what?

AHR says it likes the controlling class CMBS because it is given control over the collateral in order to effect workouts. But what if there is nothing left to work out? Fitch says the more severe scenario would cause non-investment grade bonds – B and BB rated CMBS – to suffer loss rates of 100% and 95.9%, respectively. Meanwhile, only 30.6% of the lowest-rated investment grade bonds – BBB rated – would experience losses, while loss severities would rise to 37.9% from an historical average of 33.5% (but still a far cry from being completely wiped out).

Clearly, the report suggests that recently issued CMBS were the subject of inflated underlying property values and weaker underwriting standards experienced at the height of the boom in 2006 and 2007. The report's survey covered all Fitch-rated bonds issued during those two years, which were comprised of 74 deals worth $217.3billion. That was about 60% of all CMBS issued during the period.

Is AHR misunderestimating?

Most reasonable people agree that conditions are worsening. Not surprisingly, the Company also reported that it increased the loss assumptions on its controlling class (across all vintages) CMBS from 1.31% of outstanding collateral at December 31, 2007 to 1.44% at March 31, 2008.

However, the Fitch report suggests that losses in the controlling class losses could be much more severe. Indeed, the report notes that under the 1991 scenario, 3.6 per cent of all 2006 and 2007 bonds (not just BB) will suffer losses. Given that 75% of AHR's outstanding BB CMBS collateral consists of deeply subordinated 2005, 2006 and 2007 bonds, AHR's loss estimates could be light.

Nevertheless, even this pessimistic Fitch scenario flies in the face of the losses implied by the CMBX index. That index continues to suggest that losses on some CMBS will exceed the worst levels experienced in the 1990s.

Indeed, Bloomberg reported on Friday that "yields on commercial real estate securities relative to benchmark rates rose to the highest since March on concern that retailers won’t be able to repay debt as consumers cut spending. Spreads on AAA rated commercial mortgage-backed bonds widened 10 bps during the week… to 250.5 bps more than 10-year swap rates… Demand for commercial real estate securities is waning as retailers are forced into bankruptcy during the economic slowdown."

Obviously, the question on everybody's mind is how much worse will the economy get and how long will it last? Amidst the uncertainty however, one thing is clear: as reality unfolds, whatever it may be, AHR's "controlling class" CMBS will be among the very first to receive it. Unfortunately, being a bellwether (bell-weth-er, n. 1. a castrated ram ) in this particular market is not an enviable place to be.


Disclosure: None at the time of this writing.

"If you can take advantage of a situation in some way, it's your duty as an American to do it." C. Mongtomery Burns, the oligarchical CEO in television's "The Simpsons"


Could Re-Remics break the liquidity logjam in Mortgage REITs? It's a distinct possibility, and quants all over Wall Street are dutifully burning up their computer processors with souped-up excel files in an attempt to make it happen.

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In October of 2006, the IPO for Industrial and Commercial Bank of China on the Shanghai and Hong Kong markets was so oversubscribed that the amount of money committed to the deal was said to have been half a trillion dollars. All for a dodgy bank run by a bunch of communists.

We now know that these gushers of almost indiscriminate liquidity, which the Wall Street Journal then referred to as "rapids of cash", had been stoked by financial structures which allowed the same obligations to be sold again and again and again, in slightly different forms, and distributed to the far corners of the globe. This distribution of risk was what gave comfort to the mildly concerned, and as a result even Alan Greenspan said it was "different this time".

It wasn't, and just as in past investment bubbles, opportunists have already swooped in, attempting to profit from the calamity before the dust has even settled. Now, in what amounts to a witness protection program for certain structured finance products, the same collateralized debt obligations ("CDOs") that helped fuel the bubble and eventually drove investors to record $400 billion of writedowns and credit losses are being repackaged and sold under a different name: Re-Remics.

This is intriguing for a number of reasons, and it may at least partially explain the $750 million shelf offering filed by RAIT Financial Trust (RAS) on July 18th, and an earlier $500 million shelf filed by Anthracite Capital (AHR).

But first, a bit of background: the commercial mortgage bonds we lovingly refer to as "CMBS", are actually more formally known as Real Estate Mortgage Investment Conduits, or REMICs. This legal distinction allows the bonds to achieve tax-free status at the trustee level, such that taxable income and losses flow through to the actual investors, much like a partnership.

When tranches of existing REMIC-issued securities (e.g., residential mortgage-backed securities, commercial mortgage-backed securities) are combined and used to collateralize new securities, the new instruments that result from this securitization exercise are called Re-Remics (short for “resecuritization of Remics”).

While the old CDOs were backed by more than a hundred bonds, these Re-Remics typically combine fewer than a dozen, allowing holders to more easily analyze the debt. They also hold only the highest rated debt; no broken single-B rated credit default swaps may apply.

Holders of mortgage bonds are now using Re-Remics to separate better quality A-rated debt from riskier A-rated debt. If that all sounds familiar, it is. Except that Re-Remics can take advantage of hindsight: they can be applied to bonds with valuations that are more clearly known as a result of months or even years of seasoning. Indeed, as Warren Buffet once said "in the business world, the rearview mirror is always clearer than the windshield."

Looking through the rearview mirror eliminates most of the guesswork, and this allows a Re-Remic to increase the total value of a depressed CMBS or RMBS mortgage pool. Re-Remics do this by splitting anew an existing "scratch and dent" bond trading at say, 60 cents on the dollar into two brand new and even shinier pieces: one highly-rated, low-yielding piece now worth 80 cents and another piece worth only 20 cents but carrying a much higher yield.

And investors, believe it or not, are buying into this sequel. According to a June 27 report by JPMorgan, the riskier Re-Remic mortgage tranches are a "natural fit" for hedge funds. The debt offers higher potential yields at a time when it's difficult to borrow to boost returns, the report noted.

While hedge funds are buying the higher-yielding "B" pieces, the more highly rated A tranches are being sold to insurers and pension funds, such as Transamerica Life Insurance Co., a unit of Netherlands-based Aegon NV. Transamerica is among holders of Re-Remics created this year by Lehman Brothers, according to Bloomberg. Reliance Standard Life, a unit of Delphi Financial Group, owns a Re-Remic created by Countrywide Financial (CFC).

One huge advantage of Re-Remics is that they can allow existing bond holders to more easily dump portfolios of RMBS and CMBS, thus freeing up the additional debt capacity. This will be critical to avoiding a wider meltdown in 2009. A case in point: according to the Federal Deposit Insurance Corp., commercial banks and savings and loan institutions held more than $370 billion of non-agency mortgage bonds at the end of March.

These are the very institutions that have been stepping up to refinance existing CMBS debt (see "Is Commercial Real Estate Really Dead?"). However, these instituitiosn must also turn over their portfolios fairly regularly in order to keep lending. Nevertheless, in the current environment much of their portfolios have turned to frozen molasses and can can only be sold at fire-sale prices, if they can be sold at all. Re-Remics could help these banks get liquidity and keep lending, and by retaining the more highly-rated tranches, their capital adequacy ratios can also be strengthened.

All Mortage REITs should benefit indirectly from the increased liquidity Re-Remics will provide, but some will undoubtedly benefit even more directly by adapting their business model to participate in the growing Re-Remic market. On the one hand REITs like Northstar (NRF) that have cash to deploy could find attractive new investment opportunities in the "B" pieces. However, since the Northstars of the world are the rarity, the most obvious benefit of Re-Remic structures would be to replace CDOs as the primary source of funding for Mortgage REITs.

For the right issuer, Re-Remics have the potential to make two plus two add up to five. REITs like AHR and RAS, which have both cash and borrowing capacity, could use their warehouse lines to buy distressed CMBS trading at a discount. They could then (1) slice this CMBS into more senior and junior pieces, (2) sell the senior piece and (3) retain the junior piece, almost exactly like a CDO. The resulting bond, enhanced with this additional structuring, would be worth more than the original purchase price. Mortgage REITs would capture the difference via increased yield on the retained "B" piece.

Re-securitizations of REMICs are not completely new. Indeed, re-securitizations of agency mortgage bonds were first executed under First Boston's Laurence Fink in the mid-1980s. Fink is now chief executive officer of BlackRock, which would seem to position Anthracite as one of the first-mover beneficiaries of Re-Remics. Among other obvious candidates candidates is Petra, run by Salomon alum Andrew Stone. In addition to these commercial mortgage REIT players, strong residential mortgage REITs such as Redwood Trust (RWT) and newfangled American Capital (AGNC) will also be looking at the structure.

If this asset structuring were to be combined with the re-engineering of existing financial liabilities such as that recently highlighted in the Mortgage REIT Journal, the result would be total transformation and much longer term viability for many (but not all) Mortgage REITs. Not only would it permanently put to bed the ridiculously academic arguments surrounding FAS 159, but it would also fill the significant business plan void created by the demise of the CDO market.

In the Darwinistic world of Wall Street capitalism, only the strong would survive. REITs like AFN and CRZ would still have a hard time overcoming their disastrous rush to deploy assets at the height of the bubble in 2006.

Putting aside these true REITwrecks for just a moment, it is also important to recognize that those best equipped to restart the Re-Remic market also have much to gain from it. According to Bloomberg, both Goldman Sachs and Lehman had about $15 billion of residential-mortgage securities, respectively, on their books as of May 31. Meanhwhile, JPMorgan had $12.8 billion of prime and Alt-A securities as of March 31. In the current market, all of these bonds are more or less illiquid.

Not surpringly then, Bloomberg has also reported that Goldman Sachs, JPMorgan and at least six other firms are now repackaging unwanted mortgage bonds into Re-Remics. As a result, more than $9.3 billion of Re-Remics were created in the first five months of 2008, almost triple a year ago, according to Inside MBS & ABS. That volume represented 47 percent of mortgage bonds issued in the period, excluding those guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

When these investment banks finish wiping their arses with their own Re-Remics, look for them to resume their never-ending quest for fee income by applying the technology to other big bond holders: the Mortgage REITs. This time however, they may actually create some value along the way rather than destroy it.

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


Disclosure: Long AHR, NRF at the time of this writing

Way back on June 3rd, when thoughts of Fannie Mae crashing to the ground like Icarus on a hot July weekend were not so prevalent, Anthracite filed a shelf offering with the SEC, stating that it may periodically sell up to $500 million in common and preferred stock, debt securities and warrants, with the exact price, amount and combinations of securities to be determined at the time of sale.

That Anthracite and other REITs like it would desperately like some cash to invest in this dislocated market should not have been a secret (See also "Blackrock: Back up the Truck on CMBS"). At the time however, the shelf filing offered a tantalizing morsel: was Anthracite actually contemplating some sort of debt offering that could avoid diluting existing shareholders? After all, they had just placed $90 million of equity with DLJ Capital Partners, a real estate fund run by Credit Suisse. Could the financial alchemists at Blackstone have somehow figured out a way to leverage that equity in the public or private markets?

It was at least possible to conceive of such a financial standing-backflip, even though the old standby, the CDO markets, were shells of their former selves. Global funded CDO volume had fallen to US$11.7 billion in the first quarter of 2008, down from almost $187 billion a year earlier. Similarly, cashflow and hybrid CDO volumes were down 92.4% from the same period from a year ago.

While new issuance dried up, ratings agencies turned their attention to the rearview mirrors and started downgrading deals by the dozens, but most were ABS CDOs or mortgage CDOs tied to SFR, not CRE deals. As of April 15, there had been 1,041 (US$382bn) CDO downgrades, compared to 29 (US$2.3bn) upgrades, with the majority of the downgrades linked to structured finance collateral, according to Deutsche Bank.

But at least there was SOME action on the new issue front, and there had been much less credit deterioration in assets underlying most commercial mortgage CDOs, unlike those tied single family, and traders were beginning to trade on the difference. In addition to strong fundamentals in commercial real estate, LIBOR spreads were coming down, and TED spreads were much, much narrower.

The same week that AHR filed the shelf offering, John Bucksbaum, chairman and chief executive of General Growth (GGP), which is one of the most heavily leveraged real estate investment trusts, and an operator of shopping malls no less, told the NAREIT Investor Forum in New York that the company had soft circles on $1.1 billion of a new $1.75 billion term loan, allaying default fears.

He also said they were also exploring a "private commercial mortgage-backed securities" (CMBS) bond deal. "A couple of investors called us that were in our 1997 package," Freibaum said. "These investors said, 'We're pretty sure that a dozen or so of our peers -- in the aggregate we have billions of dollars that we want to put out -- would be very interested if you wanted to create bonds again.'" His comments helped push the stock up nearly 5 percent on the day (ahhh,...the good old days, and it was only a month ago).

The bank deal was to retire all but five of Chicago-based General Growth's remaining maturities in 2008, and the "private" CMBS deal would take care of the rest. According to Freibaum, the single issuer CMBS deal could be as small as $1.5 billion and as large as $3 billion. The deal would take 90 days from start to finish and could be completed in the fourth quarter, he said. (Last week, GGP announced that it had actually closed the first stage of the loan, securing funding of $875 million. The loan bears interest at a rate of 5.64% and has a three year tenor, with two one-year extensions. There was no mention of the single issuer CMBS transaction).

At around the same time, Carlyle priced a €1.5bn low-levered arbitrage European CLO. The deal had been in the pipeline since the beginning of the year. It was one of the largest managed European CLOs to date, and there were a handful of others that were also launched at around the same time, including Jubilee IX from Alcentra, the static Euro Atlantis CLO from Citi and the Puma CLO I from Prudential.

More significantly, Lehman Brothers also closed a €2.9bn CRE CDO, dubbed Excalibur Funding 1, which was retained for use as collateral for repos. And just last week, a €4bn Student Loan CLO closed (though it was basically a structured US Treasury Bond, since the FFELP, or Federal Family Education Loan Programme, assets used as collateral are 98% guaranteed by the US Government).

Meanwhile, despite the closing of some high profile deals like General Growth's term loan and SFI's success with GE, the U.S. commercial real estate markets have remained more or less stuck. I spoke last week with a large CRE mezzanine lender who said they were "doing nothing", but it wasn't not for lack of trying. According to this person, a very wide bid-ask spread remains between many of the newly-minted distressed debt buyers and the banks and conduit lenders who are about to be fleeced by them. The former were offering the latter 65 cents on the dollar for loans that the banks refused to sell for less than 85 cents and not without full recourse (the banks want to be completely out).

Despite this valuation disparity, the whole-loan sales market is awash in offerings as banks and commercial lenders struggle to dispose of unwanted or nonperforming loans. Many mezzanine lenders have now focused most of their origination efforts at absorbing this huge supply of existing paper rather than originating entirely new loans on their own. Indeed, Commercial Real Estate Direct reported that more than $5 billion of loans - performing and nonperforming - are in various stages of being marketed on behalf of a host of sellers, from Wall Street conduit-lending shops to insurance companies and finance companies.

So, if you were the speculating type, you may conclude that if Anthracite were to make use of the shelf offering by issuing debt, it would be difficult to get anything worthwhile done in the US markets because they are still just as dysfunctional as they were in December 2007 and January 2008, particularly with all the new fears around solvency with Fannie Mae and Freddie Mac.

Since AHR is well diversified geographically and has a large European portfolio, it would be much easier, for example, to imagine DLJ's $90 million being used to buy a package of European CMBS in the secondary market and then levered up via a CDO out of London, Paris or Frankfurt. However, this may be a lower return strategy than attempting the same feat in the U.S., and therefore quite possibly just as dilutive as deploying equity in a higher yield market.

However, without access to new capital, the Company cannot grow and earn dividends for shareholders. The portfolio will simply run off, dividends will shrivel, and shareholders will be left to bet on nothing more than the amount of each quarter's earnings reductions.

Current shareholders may forget that AHR raised roughly $55.6 million in a follow-on offering almost one year ago, on June 7, 2007. Management has shown that it has the ability to invest equity proceeds accretively, since earnings and dividends have increased over the past twelve months. Nevertheless, without sufficient leverage, this may be more difficult the second time around.

So brothers and sisters, we're all in it together. Which you rather have? A dilutive equity offering, a low return European debt strategy, something in between, or nothing at all? Pick your poison, because AHR's .31/share dividend cannot be maintained very much longer without a credible capital markets strategy.

Disclosure: Long AHR

Attempting to mix a fouler sounding alphabet stew than that being served up by Mortgage REITs these days is pretty hard work. They invest in CMBS and MBS, mostly by issuing CDOs, sprinkled generously with swaps, derivatives and repos. Add it all up, and you’ve got the ingredients that helped cook up what the New York Times has called “the worst financial calamity in decades”.

The credit crisis has claimed victims far and wide and caused wholesale capital flight from anything related to financial services. With their mix of high leverage and complex balance sheets loaded with real estate assets, the credit intensive Mortgage REIT sector has certainly not been spared in this financial firestorm.

In many cases, this capital flight is justified. As the poor quality of the portfolio cash flows have become apparent and the almost near-certainty of credit losses have diminished or eliminated the intrinsic value of the underlying investments, many Mortgage REIT equity values have plunged.

In other cases however, where the mortgage meltdown and the associated lack of liquidity have combined to discount even strong, predictable cash flows associated with high quality, income-producing collateral, the dislocation of a lifetime is occurring. As Larry Goldstone, the embattled CEO of Thornburg Mortgage (TMA), put it succinctly last month: “In this environment, the current market price of assets has become disconnected from their underlying recoverable value.”

One Mortgage REIT that is not suffering as much as TMA, but has nonetheless seen its equity value disconnect from the underlying value of its strong portfolio cash flows is Anthracite Capital (AHR). Anthracite is an externally managed Mortgage REIT that focuses solely on commercial real estate, unlike Thornburg. Although AHR invests up and down the credit spectrum, and directly originates commercial real estate loans on its own, the Company’s focus is on underwriting and acquiring below-investment grade Commercial Mortgage Backed Securities (“CMBS”).

AHR is not without risk, but if you can’t handle that I have a heavy mattress for you to lift instead. Because its investment focus is on “controlling class”, or lower rated CMBS tranches, its portfolio is squarely in the cross hairs of the current fears related to large scale CMBS defaults.

Also, while most of the portfolio is funded via long term, non-recourse match funding arrangements, 18% of its portfolio is subject to mark to market risk (i.e. margin calls). AHR has thus far been able to meet its margin requirements, but the Company is working to reduce this risk.

In a significant move that should help, AHR yesterday announced that it plans to issue $93.5 million in common and convertible preferred stock to DLJ Capital Partners. Its parent and external manager, the bond behemoth Blackrock, has also shown recent support in the form of a $60MM secured loan. Along with short-term credit facilities from Deutsche Bank and Morgan Stanley, as well as $100 million in unrestricted cash on the balance sheet at year end, the Company’s liquidity position is healthy.

From an investment perspective the most interesting aspect of AHR is also true with other Mortgage REITs: as the market spreads on its portfolio of CMBS investments have widened out to unprecedented levels, mark to market accounting requirements have forced AHR to mark down the value of these securities, even though the assets themselves continue to perform just as expected.

Therefore, despite the large GAAP declines in book value, AHR’s portfolio continues to produce strong operating earnings. Operating earnings is an accounting euphemism for cash, and cash is the stuff we like because it lands in our accounts in the form of dividends.

Consequently, the question one must ask is whether AHR’s currently strong portfolio cash flows (and yield) will be impacted by default levels that are anywhere even close to the levels that the spread widening in the CMBS and CMBX markets imply. In essence, could the market actually have it wrong? Some analysts and real estate professionals believe so.

Earlier in January, while the CMBX continued to soar (up is bad with the index, it implies higher defaults), Fitch Ratings was moved to write a research note calling the default rates implied by the most recently issued CMBX index ”extreme”. They noted the index was implying a CMBS default rate that was three times the ten-year cumulative average. Fitch said they do expect CMBS delinquencies to rise simply because they are now at historically low levels, but not to three times the historical norm.

While the financial markets declared a nuclear winter on real estate debt, and the CMBX continued to jump throughout February and the first half of March (it has since come down some), commercial real estate fundamentals have remained solid. Vacancy levels are still low because new construction in this cycle has been muted, unlike the previous boom in the 1980s when massive new supply hit the market. Thus, rental growth has remained steady.

Following the Fitch note, in a more recently issued report entitled “Debt Market Panic Overstates Risk in Commercial Real Estate Market”, an analyst at CBRE Torto Wheaton Research echoed the theme, arguing that current CMBS valuations imply "doomsday" loss rates. He said loss rates would need to jump by historic proportions this year, and then be sustained at the highest levels ever recorded for several years in order to justify current CMBS pricing.

Steve Graves, Managing Director and Chief Operating Officer of Principal Real Estate Investors, the real estate lending subsidiary of the Principal Financial Group which manages $311 billion in assets, agrees. “A lot of what you’re seeing today is really fear of what might happen rather than what is happening,” he said,

Alas, I cannot simply serve the creamy pudding without actual proof of the market’s irrationality. Thus, I must give you this: according to Fitch, the cash flows produced by commercial property are still attracting capital from commercial real estate lenders. Defaults are currently not nearly as widespread as the markets feared.

Fitch Ratings decided to look into this very issue and issued a March 25 report examining the default rate of maturing CMBS deals (they all have balloons that must be refinanced on maturity). Fitch found that ninety-nine percent of recently matured U.S. CMBS loans have been successfully refinanced.

Broken down further, a total of 3,354 U.S. CMBS fixed rate loans with a balance of $21.4 billion have been refinanced successfully since the credit crunch began in August. The lenders were mostly insurance companies and regional banks. Tangentially, I personally know of at least one major insurer that has allocated $10 billion to commercial real estate loans for 2008.

Consequently, the cogent answer to our question must be yes, the market does have it wrong. The CMBX has been relentlessly shorted by hedge funds, and the default risk implied by that market completely distorts actual commercial property fundamentals, which remain healthy. Thanks to effects of this dislocation, and the requirements of mark to market accounting, now is the buying opportunity of a lifetime in Mortgage REITs.

In addition to AHR, other match-funded Mortgage REITs to consider are Northstar Realty (NRF). RAIT Financial (RAS) is also interesting as is Newcastle (NCT), though the latter has reduced its dividend. For the full smorgasbord, and it's a real mess, see this Mortgage REIT list, which includes current, updated yields.

Use discretion though. It will be months, if not years, before any Mortgage REIT can resume strong growth again, so this is for longer-term money. However, with these yields and the power of compounding, you could be cashed out in three years anyway.

(NOTE: For an update on Anthracite, please see High Risk, High Yield Strategy Keeps Anthracite Under Pressure, including the comments.)

Click here for an updated list of Mortgage REITs, including current yields



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

mortgage reits, reits, reit