JKirk

'SuperREIT' CapitalSource Swoops Up Fremont's Branches

CSE's competitive advantage is its focus on credit underwriting in niche businesses and with borrowers that others aren't qualified or interested in underwriting. The credits it underwrites are mostly commercial loans, M&A/bridge loans, and then some sale-leaseback transactions in the healthcare business. CSE gets premium pricing (and premium covenants, usually) for providing liquidity to people that need money fast or have complex financing situations.

It's the healthcare business that drove them to REIT status- as they can now achieve higher NPV on their healthcare loans because they have the same cost structure as the healthcare REITS they were competing against. Similarly, they've pursued deposit based funding as a diversification strategy for their own source of funds- pretty Nostradamus-like in the sense that they've been talking about this for about 2 years and we're just now seeing what happens when securitization-depende... lenders can't sell their ABS to the market.

Anyone that calls CSE a mortgage REIT doesn't understand the CSE business very well. They hold super-prime agency and high FICO Wells Fargo non-agency MBS in order to satisfy the 75% of assets REIT requirement. As their healthcare REIT grows, the need for the MBS will decrease. I think other commercial loans collaterallized by RE count too- so as those grow the need for the MBS also decreases. CSE bought ultraprime MBS, term-financed the non-agency MBS and also used hedges to reduce interest rate risk on these assets. They've done everything they could to make these assets totally unexciting- they're just there to maintain the REIT status.

If/when they secure the deposit based funding their liquidity position should be amongst the strongest in the industry. The next drop of the hat will be when inevitably they're impressively low NPAs and charge-offs mean-revert to "normal" levels. That's the next thing for CSE to focus on (they've been quite capable of protecting capital in the past) and the next barrage of criticism to follow.