Tuesday, July 24, 2007

DFR? Am I crazy to buy more?

Deerfield is a mortgage REIT with a twist -- they still have a large portfolio of residential mortgage backed securities but they also have a growing portfolio of high yielding corporate credit such as loans, collateralized debt obligations and commercial mortgage securities. They use leverage at a 12X overall rate (not much different from most banks) to turn a 5% interest rate on mortgages into a 12% return on equity. The REIT is also buying its management company -- Deerfield Capital Management which will mean almost half of the REIT's income will be generated by asset management fees including incentive fees. DCM is a hedge fund manager.

If Deerfield's strategy works, then over the next few years the dividend could jump from the $1.68 range to more like $2.50+. I think the stock could go from $13.3 to $30 as the dividend rises.

The crazy part of my buying more is that they are effectively a lender to consumers (mortgages) and corporations and the credit cycle is peaking -- this means increased loan losses for most lenders are coming. Chances are even if Deerfield doesn't experience higher losses the market will assume they will -- hence a declining stock price.

more to follow.....

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