No. of Recommendations: 3
Please see the rather upbeat 3rd Q report from Thornburg Mortgage. Below is just the CEO's introduction. Unlike Annaly, TMA does not expect to lower its dividend for now. With a dividend above 9%, one seems to be well rewarded even with no capital gains.


Our performance during the quarter remained strong despite
the current challenges confronting the mortgage industry. Yearover-
year total assets increased by 50%; earnings per share grew
1% and book value increased 11%. Our portfolio margin declined
modestly during the quarter from 1.05% to 1.03% due to our
increased interest rate risk management efforts and issuance of
collateralized debt obligations (CDOs) and unsecured debt over
the past nine months. The offset to the reduced portfolio margin
has been our ability to grow our balance sheet relative to our
existing capital base and increase net interest income. As a result,
our net interest income on a per share basis improved to $0.90
per share in the third quarter versus $0.85 in the prior quarter.
Net income for the quarter ended September 30, 2005, was
$74.0 million, or $0.70 per common share, as compared to $58.0
million, or $0.69 per common share, for the quarter ended
September 30, 2004.

Our business model protects our profitability during periods of
rising interest rates or flattening yield curves by requiring that we
fund our hybrid adjustable-rate mortgage (ARM) portfolio with
fixed-rate borrowings of comparable maturity. Furthermore, even
as prepayment activity has temporarily increased in response to the
decline in longer-term interest rates and the flattening of the yield
curve, our quarterly premium amortization expense has remained
manageable because the unamortized cost basis of our ARM
portfolio is very low – 100.9% of par at September 30, 2005. These
on-going risk management initiatives have allowed us to achieve
relative earnings stability in a relatively unstable interest rate
environment and give us confidence in our future earnings prospects.
The quarterly dividend was maintained at $0.68 per common
share, and is payable on November 16, 2005 to shareholders of
record on November 4, 2005. Our current internal projections
suggest that future earnings should cover the dividend even if the
Federal Reserve were to raise the Fed Funds rate to 5% by the
end of 2006. Further, we have undistributed taxable income of
$0.33 per share, after the payment of the third quarter dividend,
to support the dividend even if our earnings dip temporarily
below the current dividend level.

We have also employed other strategies designed to help us maintain
our earnings in this environment. The issuance of $63.1 million of
preferred stock and the completion of a $1.6 billion CDO in the
second quarter, as well as using some of our excess liquidity to
modestly increase the size of our balance sheet during the third
quarter all contributed positively to our third quarter results. By
pursuing these diverse strategies, our income for the quarter was
derived solely from ongoing operations and not from asset sales.
These various strategies contributed to ARM portfolio growth of
13% in the third quarter, and 47% year-over-year. During the quarter,
we acquired or originated $8.0 billion of new mortgage assets and
generated $4.5 billion of net portfolio growth, ending the quarter
with $38.4 billion of ARM assets. This larger asset base should serve
to enhance earnings in future periods. Additionally, we maintained
strong credit quality and ended the quarter with 98.1% of our ARM
assets rated either AA or AAA, 32.8% of which consisted of “A
quality” loans that we have securitized. Furthermore, our delinquent
loan ratio was only 0.08%, unchanged from the previous quarter.
We also completed two transactions in the third quarter that
should benefit future earnings. Late in the quarter we issued
$140.0 million of 30-year unsecured subordinated notes from
which we received net proceeds of $135.9 million. The notes bear
interest at a fixed rate of 7.40% per annum for the first ten years
and thereafter at a variable rate equal to LIBOR plus 2.65% per
annum, and are callable by the company in five years. The effective
cost of this transaction was 7.62%. In late September we also
permanently financed $2.7 billion of ARM loans through the
issuance of CDOs. Because of the reduced capital requirement
of CDO financings, we estimate that we can utilize $185.4 million
of freed-up capital. Through these two transactions, we believe
we can acquire $3.7 billion in additional ARM assets, which should
contribute positively to earnings in the fourth quarter.
Third quarter loan originations totaled $1.3 billion, increasing
10% over the year-ago period and 18% over the second quarter.
Year-to-date we have closed $3.6 billion in loans, up 11% from
this time last year. Additionally, our loan pipeline and daily lock
volume remain robust, and at September 30, 2005, the pipeline
totaled $890.5 million, up 31% from the second quarter. Despite
the decline in the percentage of ARM loans being originated in
this environment, and our expectation that competition among
lenders will remain acute, we anticipate that we will exceed our
$4.2 billion origination target for the year.

Our strategy to maintain a strong balance sheet and better utilize
our existing capital base is proving successful. Accordingly, we
anticipate 2005 earnings per share will fall within the range of
analyst estimates as polled by First Call, or between $2.72 and
$2.80 per share. Moreover, despite the current uncertainty
concerning interest rate increases, we are confident in our ability
to maintain the current dividend into the foreseeable future.

Larry A. Goldstone
President and Chief Operating Officer
November 2005

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Good post, Brucedoe. Since I hold TMA shares, the report is very encourging to me. I sold NLY many months ago and I can't say I'm too unhappy about that decision.

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FWIW Here's TMA's 5 year chart:

Looks as though the stock touched $24 sometime during this year. But, what I'd like to know is: Has TMA cut or reduced their quarterly
dividends at anytime this year? Capt
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The answer is no: They haven't had a dividend cut since 1998, when they went from $.50 to $.375 to $.30 to $.23.
The last 10 qtrly dividends for TMA are:


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No, TMA has not cut its dividend at anytime this year; however, they did stop increasing the dividend.

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Thanks for the info.

In the continual quest for reliable and growing dividends going forward, TMA is looking good. S&P & Thompson's First Call seem to closely reflect Goldstone's assessment. NAREIT's historical distributions show the dividend's to be 'clean' (no return of capital, which is usually a bad sign for a MREIT). Dividend history saw the dividend get whacked in 1997, but has shown only upward movement since then. So like all MREITs, the dividend risk of growing non-performing mortgages (defauits) and short rates rising faster than expectations, are certainly there, but these issues seem well addressed by Goldstone's summary.

So although TMA may show a flat dividend for the next few quarters, at a 10.5% dividend, this seems like a good bet for the income oriented investor.

Having said that, the issue now is buy-in price. Scanning the past few months, it would seem the best buy-in would have been early Oct, as the price has been steadily climbing since. Any crystal balls showing the prices over the next couple of months?

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No crystal ball around price. I would suggest you do some analysis of the financials, I've got a liquidion value of the loan portfolio that comes out to around $24 per share if they shut the doors and just unwound the loans. At those prices the dividend and growth is free, TMA is pretty tight on their underwritting and has a great loss record so the chances of them driving the truck off the road isn't to high.

I estimated that 5 time the dividend (given it's ability to grow) is a fair value to pay for the stock. I would say that the fair value of TMA in my mind is around $33 a share. I expect that the street is going to paint TMA as just another REIT for a while longer, so I don't expect to see fair value for a while. However, a $28ish price after the next quarters results is where I expect them to be.

I backed the truck and bought a lot of 25 and 30 2008 leap options (I've got over 1/4 of the open position in both). 2008 $25 calls for around $1 were VERY cheap
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