CHARLOTTESVILLE, VA-A shudder ran through the mortgage REIT community when the Securities and Exchange Commission voted to move forward with a concept release on the interpretative issues related to status under the Investment Company Act of 1940. To be sure, the SEC is in the beginning stages of its review and there are any number of paths it could take, from an interpretative release or new rulemaking, to a confirmation of the status quo. If it opts for the former, however, it could have a significant impact on the way mortgage REITs operate.
That is because the key tenets of the act prevent companies from excessively borrowing and issuing senior securities. A report from SNL finds that mortgage REITs tend to have higher debt-to-equity ratios than their investment company counterparts. The median ratio for all mortgage REITs is about 3.32x, compared with 0.37x for investment companies.
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That said, mortgage REITs have been deleveraging, in some cases significantly, even before the SEC suggested it might shake things up. “Mortgage REITs have already been reducing debt over couple of years--pretty dramatically too--and you can see that in their debt to equity ratios now,” SNL analyst Tom Mason tells GlobeSt.com. “They are significantly lower than a few years ago.”
According to SNL, debt issuances by mortgage REITs began to slow in 2007 and continue to remain tepid in 2011. As of Sept. 12, the only senior debt capital raises have been from NorthStar Realty Finance and RAIT Financial Trust, it noted. At the same time, mortgage REITs have been active issuers of common stock, boosting total capital levels.
These trends are one reason why the industry is grumbling about the SEC concept release: many believe it will hurt mortgage REITs that pose little risk, such as American Capital Agency and Annaly Capital Management. These REITs invest in low-risk agency MBS--a strategy that uses leverage solely to amplify portfolio returns. By contrast, the mortgage REITs that ran into trouble were typically the ones that originated mortgages and then securitized them.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
