have performed better than they did in 1998 -- and better than other financial stocks.
The top 26 mortgage REIT stocks produced a total return (taking into account both price appreciation and dividends) of 5.53% through Sept. 22, after posting a return of negative 44.51% for all of last year. For the same period this year the American Banker index of bank stocks fell 10.3%, the American Banker thrift index 17.24%, and the Standard & Poor's 500 index 6.6%.
Still, REITs bear the scars of last year's liquidity crisis, and investors have shied away. Some companies said their stocks were punished unfairly simply because they shared a tax structure -- and little else -- with their peers.
From January 1998 through last month, the National Association of Real Estate Investment Trusts' mortgage REIT index declined 45.5%. In that time frame, thrifts lost only 15.27% while banks gained 14.45% and the S&P 500 climbed 34.7%.
Compared with the beginning of 1998, mortgage REITs are "still way underwater," said Craig Peckham, an analyst at Bear, Stearns & Co.
Memory of the downturn "blew up investors' confidence. We were the baby being thrown out with the bathwater," said Larry Goldstone, the president and chief operating officer of Thornburg Mortgage Asset Corp., a Santa Fe, N.M.-based company that invests in high-quality mortgages and mortgage-backed securities.
Thornburg's investments are more creditworthy and more liquid than assets held by other mortgage REITs, Mr. Goldstone said.
Mortgage REITs are a heterogeneous bunch. Some invest in residential loans, some buy mortgages on commercial properties. Some stick to high-credit-quality assets, others look for riskier assets that pay higher yields. What they all have in common is that they have to pay out 95% of their income as shareholder dividends to keep their tax-sheltered REIT status.
REITs therefore rely heavily on the capital markets as a source of funding. And the capital markets can be fickle, as these companies learned during the financial market crisis in fall 1998. Not only were their stock prices clobbered, but repo financing -- short-term money from Wall Street -- suddenly disappeared. Many REITs were forced to liquidate assets at a loss.
In October 1998 margin calls forced Criimi Mae, a Rockville, Md., REIT that invested in the riskiest, lowest-rated pieces of commercial mortgage securitizations, to file for Chapter 11 bankruptcy protection.
Even before the October liquidity crisis, the residential mortgage REITs were hurt by prepayments, as falling interest rates prompted a historic mortgage refinance boom.
This year, "rebuilding is really the common theme that all of these companies have," Bear Stearns' Mr. Peckham said. Criimi recently announced it had filed a reorganization plan with the U.S. bankruptcy court after lining up financier Leon Black's Apollo Real Estate Advisors Fund to invest $50 million.
The sector is also consolidating. Apex Mortgage Capital Inc. and Amresco Capital Trust Inc. have both made bids to buy Impac Commercial Mortgage Holdings. And Imperial Credit Commercial Mortgage Investment Corp. plans to merge with Imperial Credit Industries Inc., the company that manages it.
IndyMac Mortgage Holdings of Pasadena, Calif., said it plans to shed its REIT status altogether and convert to a depository. The company has found that despite the tax benefit, the structure does not suit a growth-oriented company, because it has to pay out most of its earnings as dividends, spokeswoman Pamela Marsh said.
"As a depository, we can retain earnings and invest it back in the company to fund our growth strategies," Ms. Marsh said.