Patrick Harden

Mortgage REIT Magic

I didn't mean to imply that debt buyback was a scam. In fact, it is a very attractive investment for mortgage REITs who believe their CDOs are trading below the present value of their expected future cash flows. Shouldn't the manager of the CDO be in the best position to judge the CDO's future performance? Many of these asset-backed bonds are "money-good" but currently are priced to reflect a severe liquidity discount. It just makes sense to buy back the debt, delever your balance sheet, and offset your taxable losses with taxable gains.

Mortgage REIT Magic

REITs are required to distribute as dividends at least 90% of their ordinary taxable income. This is the metric that drives the dividend for most mortgage REITs. Because Gramercy Capital's sponsor is a large equity REIT, however, Gramercy follows SL Green's practice of disclosing funds from operations instead of taxable income. Generally speaking, FFO and taxable income should be roughly similar; however, this is not always the case for mortgage REITs. Gramercy's practices are not the norm for the mortgage REIT sector and I believe they should disclose taxable income as well as FFO. Given the merger with AFR, however, it may well be a moot point now.