Thursday, December 10, 2009

The new generation of mortgage REITs

So when I last posted, the mortgage crisis was just beginning. And I thinking it was a good time to get into the banks. Because they were looking pretty cheap, relative to their performance over the past 8 years or so at the time. Pretty much all the old line players in commercial mortgage REIT space were wiped out, or never fully recovered. (CT, AHR, CRZ, JRT, GKK, CBF, NCT).

Which is not to say that commercial mortgage lending is a bad idea, especially now that the main competitors in this space are on the ropes (banks, and to a lesser extent insurco's).

That has inspired a new generation of MREITs to sort out through the carnage, and enjoy the tax arbitrage of being a REIT rather than a C-Corp. So far around $1.7 Billion has been raised for these new MREITs, and that has been hard going except for Starwood Property (STWD) which raised $800M despite having a high fee structure and being associated with Barry Sternlicht. Most everyone else (except Colony/Pennymac) had to make some concessions on management fees.

  • Residential Credit oriented

    1. Pennymac (PMT) -- Started up by ex-countrywide people (who created a good chunk of this mess to begin with). They have incentive fee's.
    2. Two Harbors (TWO) -- SPAC that became an MREIT targeting credit/interest rate sensitive residential assets, externally managed by ex-Cargill folk.

  • Commercial Credit oriented.

    1. Starwood Property (STWD) -- Barry Sternlicht's venture. The last one he sponsored (with BFF Jay Sugarman) iStar (SFI) didn't do so well.
    2. Crexus (CXS) -- Commercial focused MREIT started by friends of NLY. Run by ex-TIAA-CREF (insurance company) folks, but with a highly outsourced business model. So far the market seems to think that a externally managed REIT that outsources its core operations is questionable. Also the history of dilutive capital raises at Chimera (CIM) isn't helpful.
    3. Apollo Commercial Real Estate Finance (ARI) -- A low cost venture set up by Apollo to managed commercial assets for 1.5% with no incentive fee's. Unfortunately the management agreement lacks real exclusivity in favor of ARI and it is very likely that the more interesting opportunities will steered towards private Apollo funds with the more traditional 2/20 fee scheme. Depending on your outlook, that could be a good thing.
    4. Colony Capital (CLNY) -- Thom Barrack's new venture. High fee's 1.5% + (20% incentive fee on a 8% hurdle). Most importantly they have a co-investment right with other Colony capital funds.

  • Generalist Investors

    1. Invesco Mortgage Capital (IVR) -- Invesco made huge concessions to get this to be the first 2009 externally managed MREIT IPO. Low fee's (without the overhang of recouping underwriters discounts etc). So far mostly invested in agency RMBS, while very slowly gathering more credit sensitive assets.

What I'm really waiting for is new BDC's, but till then I'm holding onto a few shares of CLNY and IVR for old times sake.

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