No 3rd Quarter Dividend from Thornburg Mortgage

Thursday October 18, 2007

Thornburg Mortgage (TMA: 0.1825 -0.0175 -8.75%) had their 3rd quarter conference call yesterday and it was not pretty. Readers of this blog know I have been a proponent of TMA and thought the stock would have a nice positive bounce with the announcement of a nice 3rd quarter dividend. Well, no dividend this quarter! Stock is down to around $10. Here are some of my notes and impressions of the conference call:

In the month of August the company was forced to sell $16 billion of their mortgage securities because of the mortgage securities market “dislocation”. TMA had a significant portion of their portfolio financed by reverse repo funding that they were unable to roll over or had margin calls. An additional $5.5 billion in securities were taken or kept by 3rd parties with no recourse to Thornburg. The company used the proceeds from the sale of assets to meet all of their margin requirements. The loss on the $22 billion of disposed assets came in at $1.1 billion or almost $9 per share.

Repo borrowings were reduced from $35 billion to $12 billion.

The company was unable to fund new loan originations until late September. Thornburg did fund a total of $1.3 billion in mortgages in the 3rd quarter, mostly before the market meltdown. Mortgages in the pipeline now total only $128 million vs. the $830 million in the pipeline at the end of the 2nd quarter.

The board of directors elected not to pay a dividend for the 3rd quarter to hang on to the cash in case of further credit disruptions. Larry Goldstone, Pres. & COO commented a couple of times about their worries concerning securities held in structured investment vehicles that if dumped could cause additional marked disruption.

So what does this mean for Thornburg Mortgage:

The company’s assets have been reduced by about 40%. A few years ago their primary business was buying mortgage securities and making money on the spread. TMA then started their own mortgage origination business and now the in house originations make up about 1/2 ($17 billion) of the portfolio.

The goal of $400 million of new originations per month will fuel new asset growth. The relationship with Thornburg’s lending partners is still intact, but the company has a lot of fence mending to do with said partners to start filling the pipeline again. I think this is the company’s biggest challenge: generating significant mortgage originations in a tough housing and mortgage market.

Larry Goldstone stated he believes the company can generate a 14-17% ROE. When/if dividends resume in the 4th quarter he indicated a rate of 25-35 cents per quarter. They had liquidity to pay a 20 cent dividend for the 3rd quarter if they had elected to do so.

Thornburg has funding sources available to continue growing their assets. On going emphasis will be more permanent financing of their mortgage securities, i.e. no margin calls or monthly roll overs. Currently $21.6 billion of the portfolio is financed this way.

So what do I think this means for TMA?

The company will survive as noted by Business Week. The business has shrunk by 40% due to forced sale of assets. They are in one way starting with a new, smaller business with more of an emphasis on loan origination vs. the old company which primarily invested in mortgage securities with a smaller part of originations.

The dividend starting in 2008 will be about $1.00 per year, giving a yield on the current price of about 10%. I was expecting them to be able to pay $1.50 to $2.00 so the prospect for a near term significant price increase have all but disappeared.

If the company can still be a significant mortgage originator at better margins than the recent past, the company should be able to grow the assets and dividend. An investor really needs to look at where the company is right now and decide if they can accomplish their goals. CEO Garrett Thornburg and Larry Goldstone are big shareholders. Mr. Goldstone stated they both have purchased additional shares before and after August and believe in the future of the company.

As stated above, my belief the stock price would have a significant near term gain was mistaken. However, I plan on retaining the shares I own with a change of goals towards a longer term prospect of growing dividends and share price. I have long believed the Thornburg management had the ability to learn from changing market conditions and will again this time.

If I did not already own stock in TMA I would probably wait until the dividend was actually re-established. If the dividend comes back at the indicated rate, the share price will probably stay near its current level. I may sell call options to generate some income in the next couple of months.

Filed Under 20 Stocks, Fear, Income

Comments

2 Responses to “No 3rd Quarter Dividend from Thornburg Mortgage”

robanddanny on October 18th, 2007 9:51 am

Tim, I wrote you about a week ago suggesting that you change your opinion on TMA.

I am afraid to say that your confidence in mgmt is misplaced. They made major mistakes and shareholders have paid a horrible price for their miscalculations.

They blame everyone and everything but themselves. This is a bad character trait. I could go on, but I won’t because you have to make a fundamental decision to ‘let go’.

As you know, allowing oneself to be ‘married’ to a stock is not wise.

Good Luck
Tim on October 18th, 2007 4:34 pm

I appreciate the comment and time will tell. I am waiting to see what the next couple of quarters bring. The management has a chance to show from here what they can do, but better start getting it done. I do not think the events of August could have been foreseen, so I am willing to see how it goes in the near future.

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