San Diego Business Journal

As the investment community has appeared to lose interest in mortgage REITs, Del Mar-based American Residential Investment Trust is poised to enter the loan-making business to enhance its profitability, a company official said.

Declining stock prices for the company have also resulted in a high dividend for recent purchasers of the shares. At the July 5 closing price of 4 3/16, the company's average 20-cent per share quarterly payout works out to around a 20 percent annual dividend.

However, one analyst who used to follow companies such as American Residential that buy mortgages for income said it was unlikely the company would continue to pay out such a rich premium.

American Residential has been using its revolving credit facility to buy house loans in bulk at a discount from mortgage bankers. The loans are made on residential properties that don't conform to underwriting guidelines for more conventional home loans or whose buyers have less-than-perfect credit.

Difficult To Accumulate Capital

Rich Eckert, an analyst at Sutro & Co. in San Francisco who used to follow the mortgage REITs, said his firm stopped covering the companies in March.

"It was something we weren't interested in and we didn't feel they represented any value to our clients," Eckert said. "There were other more promising sectors within the financial services industry that needed study."

Eckert said because of federal tax laws, the REIT industry must pay out 95 percent of its income as dividends. That makes it difficult to accumulate capital, he said.

"Usually, when you see a high dividend yield on a mortgage REIT, it is likely that dividend will be cut," Eckert said. "It's more important for American Residential to rebuild its capital after a fourth quarter 1999 write-off of some of its loan portfolio."

However, Robbins said the company intends to continue to pay dividends at the current rate, at least until January.

The vast majority of American Residential's shareholders are retired people who are looking for strong dividend income, he said.

The next largest group of investors are people in their 40s or 50s who are not retired but are looking for diversification of income beyond corporate bond premiums, so the dividend is a very desirable feature of owning the stock, he said.

Starts Mortgage Firm

In January, company officials will make a decision on the dividend, Robbins said.

American Residential has already started its own mortgage banking subsidiary. The subsidiary, Liberty Mortgage, is now hiring staff and will be headquartered in Del Mar, Robbins said. It will originate loans individually using the Internet to correspond with mortgage brokers and bankers across the country, he added.

"What was important to us was to build multiple revenue streams so that shareholders enjoy dividend income coming from a variety of mortgages," Robbins said. "We're going to accomplish diversification of the revenue stream over the next several years."

The origination of individual loans is a different strategy than the bulk acquisition of loans the company has done in the past, Robbins said.

"We have bought loan packages ranging in size from $50 million to several hundred million in the past and with our new strategy we will be buying in smaller multiples, perhaps as little as one loan at a time, but that will allow us to be more particular when we make a loan," Robbins said.