I am writing this piece to add a few mortgage REITs that I had failed to include in this series and to add some recommendations based on recent developments and further research.
I believe I have included virtually all of the large mortgage REITs in previous articles. I have discovered some small mortgage REITs that are probably not on many investors' radar screens and may be too risky and problematic for retail investors. In a couple of cases, the deep discount to book value may suggest that private equity or even wealthy individual investors might consider (only after thorough due diligence) a "capital injection" deal (buying newly issued stock at a discount to recapitalize the company and assuming some degree of control). In many cases, these REITs are not putting out current financial statements. In addition, at a very small size, administrative expenses begin to swamp income and it becomes very hard to be cash flow positive.
One of the reasons it is worth taking a quick look at some of these is that they highlight some of the risks associated with the sector and some of the carnage that has taken place in the last 3 or 4 years. In many cases, these stocks are trading at less than 10 percent of their prices of a few years ago. In virtually all of the cases, the big problem was defaults and write downs of assets - in some instances, combined with leverage.
- Eastern Light Capital (ELC) - This non-agency residential mortgage REIT closed Friday at $3.05 and is trading at a little more than half book value. It only has $5.4 million in assets and appears to be losing money.
- Vestin Realty Mortgage II (VRTB) - This REIT which appears to make a variety of short term loans secured by real estate closed Friday at $1.50 and is trading at less than 40% of book value. It has over $100 in assets so it is not necessarily so small that losses are inevitable. There was some insider buying last summer.
- Vestin Realty Mortgage I (VRTA) - This REIT closed Friday at $1.23 and seems to be a much smaller version of VRTB.
- Bimini Capital (OTC:BMNM) - This residential non-agency mortgage REIT closed Friday at 82 cents. The on line information is confusing but it appears that at one time it traded at a split adjusted price of over $100 a share. Its chart looks a little like the trajectory of an air-to-surface missile.
There are a few others (RTYFZ.PK; ECRO.PK) but now we are really getting into the flotsam and jetsam of a major shipwreck. Some of these stocks illustrate that the "investor revulsion" phenomenon I described in my recent Value Investing piece may still be creating bargains in the mortgage REIT space. A perusal of the Yahoo message boards for these stocks reveals how angry investors can become and how frustrating it is to be locked into a stock that is in a downward spiral. Examining these and looking at their histories helps give investors a more complete picture of the sector. Needless to say, I DO NOT ADVISE ANY RETAIL INVESTOR TO SINK ANY MONEY INTO THESE STOCKS.
Now for some recommendations. I feel more comfortable with and have gone long in RAIT Financial (RAS) and Gramercy Capital (GKK). In both cases, most of the debt is non-recourse and there are considerable assets left even if all of the assets associated with the non-recourse debt are wiped out (which seems very unlikely). GKK may have some bad news on the way depending on negotiations with the lenders whose loans are secured by GKK's real estate portfolio and I would review the situation and likely consider buying into dips created by such developments. The stock had quite a run last week and so it may be better to wait for a dip but an investor can never be completely sure that such an opportunity will open up. I sense that both of these stocks will be roller coaster rides so if you get involved, fasten your seat belt, take some anti-nausea medication, put on your helmet and hang on tight.
A month or so ago everyone was worried about higher interest rates and how they would affect the sector. It does appear that agency mortgage REITs would face real challenges if interest rates were to increase and their performance during the Fed's most recent episode of tightening (2004-06) was pretty dismal. There has been a rather sudden shift in thinking on these issues and it appears more and more likely that rates will stay low for a very "extended" period of time. For this reason, I am more positive on the agency mortgage REITS - I generally recommend Annaly (NLY) as the safest of the group although I also recommend that an investor diversify within the group.
PMC Commercial Trust (PCC) concluded favorable terms with its lender last week and continues to trade at a large discount to book value. I would be comfortable sticking a toe in this water and continuing to monitor developments.
None of these recommendations imply that earlier recommendations in this series are withdrawn.