Mortgage meltdown sparks profit plunge for Vestin

Vestin Realty Mortgage I and II, two mortgage real estate investment trusts managed by Mike Shustek, reported Wednesday that net income plummeted, as the company dealt with the real estate market decline and the cost of defense attorneys for a class action lawsuit.

Vestin II, the bigger of the two REITs, reported that net income fell 74.6 percent to $1.5 million from $5.9 million in the third quarter last year. Earnings per share dropped to 4 cents from 15 cents a year ago.

But revenue increased 37.5 percent to $7.7 million from $5.6 million.

"We haven't had a cash loss yet (on nonperforming loans)," Chairman and CEO Mike Shustek said.

Shustek said he hopes to recover money partly from personal guarantees that borrowers sign on loans from Vestin REITs.

The real estate downturn, Vestin II reported, could cause an increase in defaults on loans and require the company to set aside additional reserves for potential loan losses. "The problems experienced by some lenders in the subprime (residential) market may have a material adverse impact upon our markets," the company said.

"It's a tough market out there (for hard-money lenders)," Shustek said.

Competitors who make loans for developments only in Nevada may incur more severe financial problems, he said. Vestin loans are diversified geographically with real estate collateral in Southern California, Arizona and Texas, as well as Nevada.

The Vestin REITs continue to make profits while many mortgage REITs are losing money, said James Townsend, chief operating officer of the Vestin Group.

Nonperforming loans at Vestin II account for 14.5 percent or $49.5 million of total assets as of Sept. 30, down from 16.4 percent or $49.6 million of total assets at year-end 2006.

Professional fees increased $1.5 million during the quarter, mainly because of $1.2 million in legal fees in connection with a class action lawsuit filed against Vestin for converting the Vestin II into a REIT. REITs pay out most of their income to shareholders.

"We feel we are going to win (the lawsuit)," Shustek said.

Meanwhile, shareholders "are suing themselves" because they are paying fees to attorneys suing Vestin and also indirectly are paying legal defense fees as owners of the REITs, he said.

Also, Vestin II wrote down its share of collateral for a performing Glendale, Ariz., land loan by $1.3 million.

Some of the same factors affected Vestin I, the smaller of two REITs, with $36.9 million in assets. Vestin II has $341.5 million in assets.

Vestin I reported third-quarter net income of $105,000, or 2 cents per share, down from $985,000, or 14 cents per share, a year earlier.

Shares in Vestin I slipped 2 cents, or 0.21 percent, to $5.24 Wednesday on the Nasdaq National Market. Vestin II shares fell 26 cents, or 5.63 percent, to close at $4.44, also on the Nasdaq.

Contact reporter John G. Edwards at jedwards@reviewjournal.com or (702) 383-0420.