Sold two rural rentals for a 9.3 percent mREIT. Gave back 7.5k in 22 months.

9.3 percent was the disclosure. Everything else was footnotes.

I'm asking because I want to know, not to score points. If you'd bought the equity REIT version, an owner of the same kind of buildings rather than the lender against them, how would that have gone over those 22 months? I'd guess worse, because the lender at least sits ahead of the owner's equity and gets paid first. Which makes your outcome more interesting to me, since being senior in the stack still didn't save the position.

Running your numbers. $59,947 in, $52,443 out, so negative $7,504, call it negative 12.5 percent over 22 months, roughly negative 7 percent annualized before tax. After ordinary income treatment on $9,170 of distributions at whatever your marginal rate is, the after tax gap is meaningfully wider than the headline. Say a 24 percent marginal rate and that's another $2,200, taking you closer to negative $9,700.

The cause was concentration. People will blame office in this thread and they'll be half right, but you could have held the identical thesis across six names and the office one would have been a bad quarter instead of the whole outcome. A single position funded by the entire proceeds of a property sale is the decision that turned a sector problem into a personal one.

@arbor the seniority point is real and it still didn't help, because seniority protects principal at resolution and does nothing for the dividend in the meantime. Nonaccrual stops the cash flow long before anybody finds out what the collateral is worth.

@ledger I'd push back. Six names in commercial mortgage REITs during that stretch would have given you six versions of the same office exposure, because the sector correlated hard. Diversification across names inside one narrow credit sector isn't diversification, it's the same trade with more tickers. The cause was buying an office-heavy bridge book at a point when office collateral values were already visibly moving, and no amount of spreading it out fixes that.

@hollow did you look at the collateral mix at all before buying, or only the dividend?

Slowing this down for me. Nonaccrual means the borrower stopped paying and the lender stops recording the interest as income even though the loan technically still owes it? And a risk rating of 4 or 5 is the lender's own internal opinion that the loan is in trouble, which they publish but which is their judgment rather than an outside audit? If that's right, then the number that moved from 8 to 24 percent was management grading its own homework, which is a strange thing to rely on and also apparently the most honest thing in the whole filing.

@vellum that's essentially right, and the grading is internal, which is why the migration matters more than the level. A book that sits at 8 percent for six quarters and then goes to 15 is telling you something a static number won't.

The line I'd add to @hollow's list is the financing side. In a bridge lender's supplemental there's usually a breakdown of what portion of the borrowings are mark to market and what portion aren't. Non mark to market financing means the lender's own lender can't demand more collateral just because the market price of the loans moved. That percentage is the difference between a company that gets to work its problem loans out over three years and one that gets forced into selling into a bad bid. I've seen two companies with nearly identical loan books and completely different outcomes because of it.

@hollow do you know what that split looked like on yours?

The thing that gets me is you sold at $10.90 and I'd bet book value per share at that point was well above it, which is exactly the setup I keep reading about as a buying opportunity. I bought a name once at a 25 percent discount to book, convinced I was getting a dollar for 75 cents, and the discount was right. Book came down to meet the price over the next year. The discount was the market pricing in the reserve builds that hadn't been taken yet.

What did you do on management before you bought? Not the bio page. Whether the same people ran a book through 2008 or 2020, what their realized loss history looks like on prior vintages, whether the CEO's own money is in the shares. That's a couple of hours of reading and it's the part of due diligence I've found actually separates these companies, because the loan documents are broadly similar across the sector and the workout behavior isn't.

I'm not saying it would have saved you. I'm asking because the answer tends to be nothing, and it was nothing for me too the first time.

Worth separating two things that got merged in this thread. A loan going to nonaccrual is a cash flow event for you as a shareholder. A loan taking a realized loss is a capital event. They happen at different times and often the second one is much smaller than the reserve suggested, because bridge lenders on office frequently modify, extend, take a paydown from the sponsor, and get out whole eighteen months later.

Which means @hollow may have sold into the reserve build and missed the resolution. That's not a criticism of selling, holding a name where the dividend went from $0.35 to $0.16 while you're relying on the income is a perfectly good reason to leave. But the $7,500 gap is partly a mark, and marks on loans that eventually pay off come back.

The underwriting question I'd ask about that original book is what the sponsors' equity looked like at origination. A 65 percent loan to a sponsor who put in real cash behaves completely differently from a 75 percent loan where the equity was structured. That detail doesn't show up in any table you can screen for.

Dumb question from the tools side. Bridge loan on an office building means the borrower was renovating it or repositioning it, right? So the loans that went bad were ones where the plan was to fix the building and lease it up, and then nobody leased it up. That's just my world with more zeros.

I was in the same trade and got out about eleven months before you did, and it wasn't skill. Someone on a call asked management whether distributable earnings covered the dividend and the answer took ninety seconds and never landed on yes. I sold that week. Learned since that the coverage ratio is printed in the supplemental every quarter and I could have known without listening to anybody dodge a question.

@hollow the piece I'd argue with is your framing that the yield was the market telling you the risk. Sometimes it is. Sometimes a name trades at 12 percent because it's small and nobody covers it. The yield alone doesn't tell you which, and you have to go to the loan book either way, which is the same conclusion you reached from the other direction.

Reading this is doing something to my strategy shortlist. I'd had mortgage REITs in the column marked easy income and this thread has moved them to the column marked credit analysis with a stock price attached.

@hollow if you were putting money back into the space now, would you go agency instead? My understanding is the agency names take rate and prepayment risk with a government guarantee behind the paper, so the whole risk rating table problem doesn't exist there. Different risk, but at least it's a risk I can name.

Saving this one. I understood maybe half of it, and the half I understood was expensive for you and free for me.