Thornburg Mortgage Update
Over the last couple of weeks I have written my thoughts on Thornburg Mortgage several times. Thornburg TMA is a mortgage REIT that originates and invests in high quality adjustable rate mortgages. With the sub-prime mortgage and credit markets in general virtually imploding over the last several weeks Thornburg became the object of analysts’ downgrades and heavy selling pressure. The stock price fell from around $26 to as low as $7.50 early last week, before rebounding to about $15 on Friday.
On Friday I submitted an article to Seeking Alpha outlining the case for Thornburg as an investment. It was published today.
Today Thornburg came out with a press release to announce they have sold about 35% of their mortgage portfolio to “Stabilizes Its Financing Platform and Plans to Return to Business as Usual“. It appears they sold some of their most liquid securities to significantly reduce their exposure to the repo market and margin calls on that type of financing.
Finally, this article raises doubt if the company will be able to obtain reasonable financing to continue issuing new mortgages.
Conclusion: Thornburg Mortgage is a company that in spite of a long history of profitability, an excellent business model and management team is in danger of not staying in business. I continue to own the stock and believe the company will weather this storm and be a stronger force in the mortgage market when these markets return to more “normal” times.
Other posts on Thornburg Mortgage: here, here, here, here , here, here, here, and here. From oldest to most recent.
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Comments
I think you have nailed the main question: Can they borrow at a rate to allow profitable origination of new mortgages?
I think that is the challenge of management going forward. I doubt they would have sold the large portion of the portfolio today without setting up some form of future funding.
Expenses for the company run at about 25 bp, so not much fat there. And the upper management has significant investment in the company.
The biggest problem facing TMA is to secure a consistent, reliable, and expnandable source of funds that will create a margin of 2-3% when compared with the ARMs they will be putting on the books.
We know that commercial paper is not a viable option because of the reductionn of the ratings on its commercial paper. It will either be too expensive,or unpredictable or not too expandable.
With the book value so depressed, they cannot sell more shares to the public at the moment. It would be too dilutive of their equity. They might look at selling some more preferred stock, but that would have to be priced to yield more than 12%. Not sure there is a market for the preferred at those levels, considering the risks, and the rating by S & P, et al.
So, the best strategy at the moment is to approach a big money center bank and have them be a surrogate at the discount window. They could do 6 months (the longer the better) repos, and use the mortgages written as collateral. The obvious danger here is that short term rates spike up. That would violate the traditional maxim of never borrow short to fund long term assets. It’s a ggod way to get killed. Or just remember what happened last week or so.
The best strategy is to borrow from a bank, pension fund, insurance company on a term loan basis, or adjustable rate basis with a built in spread of 2-3%. So, if they can borrow on an adjuatble basis at 6% (the bank has to make money), that means that the ARM price will be 8.5% or thereabout. Tough but doable. At least at some level of borrowing.
In reality, a combination of the foregoing is most likely to be the result. So, a little bit here, a little bit there, and maybe we can make it.
At the same time, we need to cuit costs somewhat. A haircut on the management contract, and the incentive compensation program would be a fair contribution to the process. After all the shareholders have suffered the loss of 1/2 of the equity. The incentive contract should also be adjusted until we recoup a big bunch of that. Then we can both participate in the renewed profitability.
So what would you do differently?