Dividends offset pain for investors
By COCO SALAZAR
8/29/2005

Strong business doesn't mean strong earnings for subprime real estate investment trusts, which recently have seen their share prices sink. But dividends have softened the blow for investors.

Production for nonprime REITs has been strong -- with New Century Financial Inc. reaching a quarterly record during the second quarter and NovaStar Financial Inc. recording its second best month ever.

But shares of New Century, which reportedly has the largest market share amongst publicly-traded REITs, were trading near $42 Friday, off about 31% since February.

The Irvine, Calif.-based lender paid dividends of $1.60 in the second quarter and $1.65 for the third quarter.

So, while New Century shares are down around $20 during the last six months, dividends have offset the decline by around $3.25.

New Century was one of several mortgage companies last year that embraced the REIT structure, which uses loan accounting that "smoothes out earnings and reduces volatile swings," according to the Wall Street Journal, and also protects the stock price as companies are required to pay out most of their income to investors as dividends.

But profit squeezes have ensued as the spread between the rate companies charge on home loans and the two-year rate they pay has shrunk roughly in half since mid-2004.

In the case of New Century, the reported net operating margin of 0.84% in the second quarter shrunk about one-fifth from prior quarter and more than two-thirds from a year ago.

Another company that joined the REIT structure last year was Saxon Capital Inc. The shares of the Virginia-based company are trading about 41% below their price six months ago.

Saxon declared a cash dividend of $0.55 per share of common stock in each of the year's two quarters.

With Saxon shares currently trading around $13, the $9 decline per share since February has been offset about $1.10.

NovaStar shares are currently trading at $34, about 26% below the price half a year ago.

Dividends of $2.80 have offset the roughly $12 per share decline during the past six months for Missouri-based NovaStar.

IMPAC Mortgage Holdings Inc. shares are trading about 40% below the price recorded in February.

Dividends during each of the first two quarters were $0.75 per common share, IMPAC reported, offsetting a roughly $10 decline from six months ago.

However, Impac Chairman Joseph R. Tomkinson, warned investors in the second quarter earnings announcement, "Until market conditions definitively change, we believe that it is in the best interest of our stockholders to decrease our quarterly common stock dividend to a level that current and projected future estimated taxable income can support."

Growth for REITs remains strong, however, and some players note that people with tarnished credit typically are the least sensitive to interest rate changes.

But with volume expected to decline perhaps next year, it is also speculated that defaults will rise, WSJ said. With profits seemingly decreasing, the performance of REITs in coming months will determine whether REIT stocks will be good buys and "give clues to whether the housing market as a whole can withstand rising interest rates that likely will lead to a slowdown in housing price appreciation."

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