Anthracite Capital (AHR) – Part 1 - Introduction

Anthracite Capital (AHR), is a Real-Estate-Investment Trust (REIT) focused in the Commercial Mortgage area. The REIT structure permits companies to minimize or eliminate corporate taxes and requires them to distribute 90% of their income to shareholders as dividends. The shareholders are taxed for the amount. REIT allows shareholders a more liquid way to participate in the real-estate market, albeit with far less leverage. The invested enterprises may choose to use leverage on their investments, however risk increases as the amount of leverage increases.

REIT primer:

The REIT structure parallels closely the concept of stock mutual funds – similar to allowing investors to own a basket of securities without having to buy each one of them – REIT provides a way to own a basket of real-estate assets without having to actually purchase any real-estate.
REIT structuring varies across countries. In the US, the major requirements to qualify as an REIT are:

• Distribute at least 90% of their taxable income as dividends.
• Dividends, interests, and property rental income should form 95% of income earned.
• At least 75% of income should be derived by rents or mortgage income.
• Cannot be a financial institution or an insurance company.
• Ownership in taxable REIT subsidiaries cannot be more than 20% of assets.

There are also a number of other restrictions that regulates REIT, the primary aim being to limit abuse – without such regulations in place, one could structure personal assets as REIT and gain tax benefits, especially when pooling assets from like-minded individuals.

REIT is classified under three different types:

• Equity REIT: They have ownership interest in real-estate properties. Rents form the primary source of revenue for such REIT.
• Mortgage REIT: They have ownership interest in real-estate property mortgages. Interest earned on the mortgages owned form the primary source of revenue for such REIT.
• Hybrid REIT: They combine the characteristics of an Equity and Mortgage REIT by owning both real-estate properties and mortgages.

There are a number of sub-categories under each of these broad REIT categories. Anthracite Capital (AHR) is a specialized firm focused on investing in high-yield commercial real-estate debt and equity. The company purchases pools of mortgages in the form of Commercial Mortgage Backed Securities (CMBS) and provides strategic capital to commercial real-estate industry in the form of mezzanine loans and purchase of an equity stake. To fund these purchases and to issue mezzanine loans, the company issues equity and/or debt backed by CMBS. As with most REIT, there are a couple of other factors that affect returns of Anthracite Capital’s (AHR) investments:

1. Spread: It represents the difference between the interests paid by the company for debt issued vs the realized returns on investments.
2. Leverage: It represents the ratio of the company’s debt-to-equity.

Below is an overly simplified example of how the use of Leverage can affect total returns:

Spread	Realized Investment Return % (=No Leverage)	Projected Return at 3:1 leverage	Projected Return at 6:1 leverage
2%	6%	12%	18%
0%	6%	6%	6%
-2%	6%	0%	-6%

Related Posts:

1. Anthracite Capital (AHR) - Part 1 - Introduction.
2. Anthracite Capital (AHR) - Part 2 - Business Issues.
3. Anthracite Capital (AHR) - Part 3 - Outlook.