Interest-rate spread boosts RAC Mortgage


RAC Mortgage Investment Corp.'s shares are up more than 70 percent this year as the Columbia-based company has benefited from the large spread between short- and long-term interest rates, Charles A. Mills, an analyst with Anderson & Strudwick Inc., said yesterday.

The real estate investment trust, which buys and secures residential mortgage loans and invests in mortgage-related securities, earns the difference between its short-term borrowing costs and the mortgage interest rates it receives on loans.

Short-term rates fell faster than long-term rates in 1991 and the PTC gap between the two has stayed wide in 1992. As a result, RAC Mortgage has been able to post record earnings, enabling it to increase its dividend payout and, in turn, help boost its shares to a high of $17.50 June 3.

RAC Mortgage increased its monthly dividend in June to 20

cents a share from the 15 cents it paid in the previous four months.

Including dividends, RAC Mortgage's total return was about 73 percent, the highest among real estate investment trusts followed by Bloomberg.

The trust's shares hit a 1992 low of 9 3/8 Jan. 8 after a Barron's magazine story said companies that invest in the excess cash flows of collateralized mortgage obligations could have to cut their dividends.

The article said declining interest rates were spurring a pick-up in mortgage prepayments.

RAC Mortgage said that isn't necessarily the case with its portfolio.

If the spread between short- and long-term interest rates narrows, the trust's share price and dividend level could be in jeopardy, Mr. Mills said. The current spread between the yields of three-month Treasury bills and 30-year government bonds is 412 basis points. A basis point is 0.01 percentage points.

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