JRT's Silence Is Worrying

A Fed-fueled rally pushed shares of JER Investors Trust (JRT), a commercial-focused specialty finance mREIT to their September 30 book value, as shares jumped 6% to land at $8.45/share. But JRT has been strangely silent since December, when the Company announced a special $0.65/share dividend.

JRT disclosed late Monday that it would need the allowed 15-day extension for filing its 10-K, claiming that "due to recent market disruptions the Company requires additional time to complete certain matters which affect certain items and disclosures in the Company’s Form 10-K." Strangely, competitors iStar Financial (SFI), CapitalSource (CSE), and NorthStar Realty (NRF) had no trouble filing on time, even though their deadlines were two weeks earlier.

A late filing alone, however, doesn't raise the red flag. It's when I reread JRT's third-quarter 10-Q that I get the jitters. The Company's portfolio was almost completely match-funded at December 31, 2006, but as of September 30, 2007, repurchase agreements accounted for over 20% of the Company's liabilities.

At 9/30, JRT had $171.8 million outstanding under a repo agreement with Goldman Sachs (GS)...scheduled to terminate at the earlier of (a) the closing by the Company of its third collateralized debt obligation transaction or (b) January 1, 2008. The Goldman agreement did provide for a series of extension options that could extend the term through October 1, 2009, and JRT did avail itself of the option to extend until April 1, 2008.

The Company also had $87.9 million outstanding on a repo facility with Liquid Funding, an affiliate of Bear Stearns & Co. Inc (BSC), which was scheduled to terminate at the earlier of (a) the closing by the Company of its third collateralized debt obligation or (b) March 12, 2008.

Per JRT's 10-Q, each of the repurchase agreement facilities is subject to margin calls based upon fair market value determinations of the underlying collateral (largely non-investment grade CMBS). During the three months ended September 30, 2007, such margin calls totaled $30.9 million, with $23.0 million related to the Liquid Funding facility and $7.9 million related to the Goldman Sachs facility. Subsequent to September 30, 2007 and through November 6, 2007, the Company made payments of $13.9 million under its repurchase agreements related to margin calls on collateral.

Additionally, JRT sold 50% of its interest in the portfolio of our net leased real estate assets on October 30 for $39.2 million, yet no gain was recognized on the transaction. Could it be related to the $40 million in dividends the Company paid out to shareholders during the fourth quarter?

You could argue that I'm just cherry-picking the worst parts of JRT's 10-Q to produce a scary scenario. However, in this credit market, unless I hear otherwise, I'm going to assume the worst. If we can't even believe assurances from folks like Countrywide (CFC), Thornburg (TMA), and Bear Stearns (BSC), then yeah, silence is scary.