Patrick Harden

Thornburg Is a Great Buy on This Dip

Look at SEC filings? Sir, I write SEC filings for a living. I am acutely aware of Thornburg's balance sheet situation and I am very aware of their reliance on repo agreements and commercial paper to fund their portfolio. Everyone in mortgage finance is facing margin calls on non-agency backed MBS. Thornburg lends long and borrows short, just like every other mortgage REIT. Their assets are not held for sale - they are held for investment, as Thornburg is an originator of and investor in the residential loan sector. Thornburg believes they have adequate liquidity to meet additional margin calls, as they stated in their 10-K. Thornburg's risk of bankruptcy is extremely remote, as they have assets well in excess of their liabilities.

Will Thornburg Mortgage Cut Its Quarterly Dividend?

You make a very good point, particularly since Thornburg is waiting two weeks after its Q3 earnings / dividend announcement to declare the Series F dividend. Of course, they can't know what will happen with the stock price and therefore they have to estimate where the yield will be. It's quite an interesting dilemma - I guess we'll both have to wait and see.

Will Thornburg Mortgage Cut Its Quarterly Dividend?

I do believe Thornburg will cut the dividend significantly. The company sold $20.5 million in assets during the third quarter, or about 35% of its existing mortgage portfolio. The reduction in assets will reduce future interest income (and consequently REIT taxable income) going forward. Thornburg only had $0.05/share of undistributed taxable income remaining at 6/30/07.

In addition, Thornburg's Series F Preferred pays a dividend at the higher of 10% or the going rate on the common shares. At the current annual rate of $2.72/share, that's a yield over 23%. To limit its obligations and preserve cash, I believe Thornburg will cut the common dividend to bring the yield down to 10%, which would be a rate of $1.16. As the share price recovers, Thornburg may raise the dividend accordingly, but may keep it around a yield of 10% due to the provisions on the Series F Preferred.