Dividend Fears Hit Impac Stock

Impac Mortgage Holdings Inc. shares dropped 12% on Wednesday after the Newport Beach-based mortgage real estate investment trust said it expected to reevaluate its dividend policy, citing the effect of loan prepayments and shrinking interest margins on its portfolio.

The company’s warning followed a sharp dividend cut by another mortgage trust, Annaly Mortgage Management Inc. of New York, last week.

The dividend woes at the mortgage REITs illustrate how their portfolios can be hurt when more homeowners rush to refinance loans to get better terms.

For investors who buy mortgage REITs for their high dividend yields, any reduction in the payout is a red flag.

In a statement late Tuesday, Impac Chief Executive Joseph Tomkinson said that although the firm was benefiting from strong mortgage loan acquisitions and originations, “market conditions have resulted in industrywide unprecedented prepayments speeds and compression of our adjusted net interest margins.”

The company declared a second-quarter dividend of 75 cents a share, but said it expected taxable income for the quarter to be lower than the dividend.

“Based on current trends, the company expects to reevaluate its dividend policy during the third quarter,” Tomkinson said.

The news sent the stock down $2.61 to $18.94 in heavy trading.

Jim Fowler, co-director of research at JMP Securities in San Francisco, estimated in a note to clients that Impac would reduce its third-quarter dividend to 70 cents a share because of a “blistering” rate of loan prepayments.

Fowler said about 73% of Impac’s mortgage production consists of so-called hybrid adjustable-rate loans that carry fixed rates for three or five years before they convert to an adjustable rate.

He said borrowers were refinancing those loans into more attractive mortgages, including some with very low initial rates.

An index of refinancing activity nationwide jumped earlier this month to the highest level in more than a year, according to the Mortgage Bankers Assn.

Fowler said Impac also was suffering margin pressure because short-term interest rates were rising even as mortgage rates stay low, narrowing the difference between the firm’s borrowing costs and what it earns on its portfolio.

Last week, Annaly Mortgage cut its quarterly dividend to 36 cents a share, 20% below the first-quarter level of 45 cents. The company said it was hurt by higher interest costs and rising prepayments.

Annaly shares have tumbled 11% since the dividend cut was announced. The stock ended Wednesday at $17.80, off 5 cents for the day and down from $20 before the dividend was lowered.

A Bloomberg News index of 27 mortgage REITs has fallen 4.8% since June 17. A Bloomberg index of 148 REITs that own properties, rather than mortgages, is down 1.4% in the period.