The Real Deal New York

Mortgage real estate investment trusts vulnerable amid Federal Reserve policy changes

January 16, 2014 06:15PM

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Real estate investment trusts that buy mortgage debt are finding themselves increasingly vulnerable to bulldog investors as they struggle to navigate shifting Federal Reserve policies.

Mortgage REITs, relying on leverage to grow and borrowing six-to-eight times their capital on average, ballooned since 2009. They hit a peak last year with $400 billion in assets. But they plunged as speculation about the Fed’s planned tapering of its bond buying program began, and mortgage rates leapt to 4.46 percent at the end of June from a near-record low of 3.35 percent at the beginning of May.

Such companies, with their sensitivity to rising interest rates, will have to diversify their investments, according to analyst Merrill Ross, with the Baltimore-based Wunderlich Securities — or risk the push of investors like activist hedge fund manager Phil Goldstein, who successfully campaigned for changes at Casey’s General Stores, Firsthand Technology Value Fund and Javelin Mortgage Investment Corp. — all of which delivered higher returns following his intervention.

At Javelin, Goldstein announced plans to nominate new board members and even threw out the possibility of liquidating the company, until executives eventually capitulated and bought back 9 percent of the company’s shares — a move that since produced 33-percent returns.

“There are some vulnerable companies that better be looking at what happened with Javelin,” Steven DeLaney, an analyst in Atlanta at JMP Securities, told Crain’s. “Management doesn’t have a lot to stand on if the REIT’s stock is trading at 80 percent of its book value,” he said in reference to what assets would be worth if liquidated. [Crain's]Julie Strickland

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