September 20, 1999
Dow Jones Newswires
Thornburg Mtge Sees Fortunes Rising With
Interest Rates
By RICK JURGENS
SANTA FE, N.M. -- Investors are penalizing Thornburg Mortgage Asset
Corp. (TMA) unfairly by linking its value too closely to short-term
performance.
At least, that's the view of Larry Goldstone, the company's president and
chief operating officer. "The stock market is supposed to be forward looking,"
Goldstone told Dow Jones Newswires during an interview in his office along a
gallery-studded street in Santa Fe, N.M. "They're not supposed to be that
worried about what happens in the next couple of quarters."
Bolstered by rising interest rates, Thornburg, a real estate investment trust
with a $4.6 billion portfolio of adjustable-rate mortgages and
mortgage-backed securities, should do well in the long run, according to
Goldstone.
Still, those who focus on the company's next announcement are likely to be
disappointed. Analysts surveyed by First Call/Thomson Financial see
Thornburg posting net income of 27 cents a share for the quarter which runs
through September, up from 14 cents a year ago. "We're going to be under
27 by a little bit," Goldstone said. Quarterly earnings will be above 23 cents,
enough to cover the company's regular quarterly dividend, he added.
Higher interest rates are responsible for that expected earnings miss,
according to Goldstone. Rate increases in the past four months have boosted
Thornburg's cost of financing and put pressure on the margin between that
cost and the yield Thornburg earns on its portfolio, he said.
But higher rates are also a harbinger of better times to come, because
moderate interest rate increases should eventually boost Thornburg's margin
by increasing its portfolio yield more than its borrowing costs, he added.
Higher rates also tend to boost demand for adjustable rate mortgages and
damp borrowers' interest in refinancing, he said. Refinancing hurts
Thornburg's operating results by shortening the period in which some costs of
making loans are written off.
For the full year, the analysts' consensus is 93 cents. Goldstone expects
Thornburg to be "very close" to that estimate and is comfortable with the
2000 estimate of $1.21 a share.
Taking On Banks, S&L's In $600 Billion Market
The $600 billion adjustable rate mortgage market is dominated by banks and
savings & loans, which can finance mortgages using depositors' money,
Goldstone said.
Thornburg Mortgage was formed in 1992 after founder Garrett Thornburg, a
mutual fund manager, noticed that thrift institutions were under pressure to sell
mortgages to increase their capital levels. The company raised $85 million in a
June 1993 initial public offering and began building a portfolio of
adjustable-rate-mortgage-backed securities.
Thornburg can compete in the adjustable-rate market because it isn't
burdened by many rules that restrict banks and thrifts, and has a much lower
cost structure, Goldstone said. Currently, Thornburg's annual annual operating
costs equal 0.12 % of assets, compared to the 2% typical of thrifts and the
3.5% common for banks, he said.
Thornburg's other advantage is its real estate investment trust status, which
exempts its earnings from U.S. taxes. "We think we have a better mousetrap
here," Goldstone said. "We just have a few bugs to work out to make it a
better performing investment for shareholders."
The company caught some mice in 1997, when it posted net income of $1.94
a share and the average spread between its asset yield and fund costs was
0.8%. But the trap got stuck in 1998, as net income fell to 75 cents a share
and the average spread fell to 0.18%. With the second quarter of 1998, the
company began a string of four straight reports of earnings below analysts'
estimates. The stock, which had traded as high as 24 9/16 in 1997, fell to 5
5/8 last October.
The stock rebounded to a 52-week high of 11 3/8 in June and closed Friday
at 8 15/16.
Thornburg wants to solidify its earnings performance and stabilize its stock
price, Goldstone said. To do that, the company is seeking new ways to
maintain and grow its portfolio while reducing its dependence on the
mortgage-backed securities market.
In mid-1997 Thornburg began buying packages of loans and securitizing
them, or selling securities backed by those loans. This year 12 correspondent
mortgage lenders began originating adjustable rate mortgages for Thornburg,
using lending criteria set by the company.
Thornburg is currently looking at ways to begin issuing mortgages directly
through telemarketing and the Internet. But the company won't try to boost
the yield from its portfolio by making riskier loans, Goldstone said. That
means the company will have to be nimble to grow its earnings, since such
high quality loans are "the part of the business that's the hardest to make
money on," he said. "You have to get it right. You have to be efficient."
-By Rick Jurgens; 602-258-2003; richard.jurgens@cor.dowjones.com |
