Luminent Mortgage Capital, Inc. tumbles on downgrade
Shares of Luminent Mortgage Capital, Inc. (NYSE: LUM) are tumbling today after J.P. Morgan downgraded the real estate investment trust to a rating of “underweight” from “neutral.”
J.P. Morgan analyst Andrew Wessel said he downgraded Luminent on two major factors, including the entity’s exposure to the residential mortgage market and the firm’s poorly timed decision to begin taking on credit risk by entering the collateralized debt obligation (CDO) asset management business.
General credit and liquidity headwinds are taking their toll on this small-cap REIT. Wessel told clients he advises against holding exposure to the residential mortgage industry until the market for loan sales regains liquidity and the securitization market reopens.
Additionally, according to Wessel, Luminent Mortgage’s decision to enter an asset backed security business (ABS) could not be more poorly timed given tightening credit conditions that appear to be mopping up liquidity and causing the broader market to swoon.
“Given all the negative headlines surrounding the space, we believe investors may steer clear of most deals in those markets backed by residential mortgage credit until national housing prices stabilize and the poorly underwritten 2006 vintage loans achieve more seasoning,” Wessel wrote in a research note. “…We therefore recommend that investors step to the sidelines on LUM.”
In a press release on July 30, Luminent Mortgage affirmed its liquidity position and reiterated that it will pay its $0.32 second quarter dividend. While Luminent Mortgage insists that liquidity is not a concern for the company, Wessel states that liquidity could become an issue as the mortgage market changes dramatically from day to day. Luminent Mortgage conducts the majority of its business in the collateralized mortgage obligation and CDO markets.
On the assumption that Luminent Mortgage will not be able to finance the purchase of residential loans or agency-assets through 2008, Wessel is lowering his estimates for the full 2007 and 2008 fiscal years.
For fiscal year 2007, Wessel is lowering his EPS estimate to $1.28, from $1.30. For fiscal year 2008, Wessel now forecasts earnings of $0.67 per share, compared with originally projected earnings of $1.33 per share.
Wessel also warned investors about moving into small cap residential mortgage companies in general given current broad credit and liquidity trends.
“We believe investors should take caution when investing in smaller capitalized residential mortgage companies, which are most sensitive to liquidity squeezes,” Wessel wrote in the research note.
Shares of Luminent fell 30.81%, or $1.95, to $4.38 in mid-day trading Monday.
