Thornburg Mortgage: Still in Business

by: Tim Plaehn

Thornburg Mortgage (TMA)(13.24 -0.39 -2.86%) gave an almost two-hour conference call on Thursday in order to review the steps the company has taken to shore up its financial position following the recent mortgage meltdown, and hammering of Thornburg’s stock price. During the credit crisis the company lost access to credit markets to fund new mortgages and had margin call as the market value of their mortgage securities fell.

Thornburg management sold off $20 billion of their $56 billion mortgage portfolio, sold $500 million of convertible preferred stock, and acquired ongoing funding of an additional $1.4 billion. Below are some highlights from Thursday's call:

  • The company’s mortgage portfolio, and book value have shrunk by about 1/3 in value.
  • It now has funding sources to start originating mortgages again, and should start doing so the week of September 17.
  • Because of the REIT structure of the company the $900 million (plus or minus) capital loss is not counted against income gains. Thus, the company will be profitable going forward and pay out at least 90% of income as dividends.
  • The commercial paper market is currently not available for mortgage re-funding, and Thornburg has had to restructure its borrowing sources. Larry Goldstone indicated he was confident they enough financing sources going forward from here.
  • Spreads on jumbo mortgages are currently very good, so when it starts originating at a good pace, profitability will be very good.
  • Right now it has very little competition in the jumbo market. Many of the players have gone out of business or pulled back to conforming mortgages.
  • The strong message is the company is still in business, and expects to be profitable going forward.

    Some rough math: If the former dividend was $2.70 a share, a linear reduction would put it around $1.80. It has sold off its lowest yielding mortgage securities, so a $1.50 to $2.00 dividend seems doable to me. Anywhere in that range is a nice return, and should give a boost to the share price.

    I am adding TMA to my hypothetical 20 Stock Portfolio (the stocks are real, the portfolio only exists on this blog).

    Note: I am a shareholder in Thornburg Mortgage.