Mortgage REIT Hatteras Financial Corp. (HTS) traded modestly higher after launching its IPO Friday, indicating that investors want to capitalize on high mortgage yields as long as the companies investing in them don't hold established portfolios that could face write-downs.
The company's stock opened at $24 a share on the New York Stock Exchange, flat with its IPO price, but rose in early trading, changing hands recently at $ 24.70, up 3%. It sold 10 million shares - 2 million more than originally expected - at the low end of its $24 to $26 a share price range, which was set by underwriters Keefe Bruyette & Woods Inc. (KBW) and Bank of America Corp. (NYSE:BAC) ( BAC).
Based in Winston Salem, N.C., Hatteras was formed to invest in residential mortgage securities issued or guaranteed by U.S. government agencies like Ginnie Mae, Fannie Mae (NYSE:FNM) (FNM) or Freddie Mac (NYSE:FRE) (FRE). Structured as a real estate investment trust, it is managed by Atlantic Capital Advisors LLC, which also manages a private mortgage REIT, ACM Financial Trust.
Although residential mortgage securities have led to major write-offs at banks and the downfall of several hedge funds, they are seen as a boon for newly formed mortgage REITs. The spreads between the price of mortgage securities and the money borrowed to invest in them has widened in the wake of the U.S. mortgage meltdown last year; the wider the spread, the more profitable mortgage REITs become.
Hatteras is the first of a group of new mortgage REITs planning IPOs this year to take advantage of such spreads; although spreads have tightened recently, they are still above historical norms. Other mortgage REITs on file to complete IPOs are American Capital Agency Corp., MF Residential Investments Inc., Point Asset Management Inc., and North Sound Mortgage Investments Corp.
Meanwhile, existing mortgage REIT stocks like Annaly Capital Management Inc. (NYSE:NLY) ( NLY), MFA Mortgage Investments Inc. (NYSE:MFA) (MFA) and Anworth Mortgage Asset Corp. (NYSE:ANH) (ANH) have experienced steep declines since March, after Thornburg Mortgage Inc. (NYSE:TMA) (TMA) and an investment unit of the Carlyle Group disclosed they failed to meet margin calls on portfolios of residential mortgage-backed securities.
New mortgage REITs like Hatteras don't have large legacy investments on their books that might face write-downs, a prospect creating jitters among investors in established mortgage REITS.
Hatteras began operations with a private investment in November; it received another infusion of private cash in February. At the end of March, it already owned government agency mortgage securities with a face value of $2.99 billion. In the first quarter of 2008, the company reported net income of $8.3 million.
As a REIT, Hatteras must distribute substantially all its taxable income to investors through a dividend. In the first quarter, private investors received 34 cents a share in dividends, but the company doesn't forecast what it expects to pay out in dividends now that it is public.
-By Lynn Cowan, Dow Jones Newswires; 301-270-0323; lynn.cowan@dowjones.com
(END) Dow Jones Newswires 04-25-08 1156 Copyright (c) 2008 Dow Jones & Company, Inc.
