American Home Mortgage (NASDAQ:AHMH), a retail mortgage banking company, announced yesterday that it would acquire Apex Mortgage Capital (NYSE:AXM). Interesting in itself, the all-stock deal valued at $186 million may also point to an emerging trend toward consolidation of the mortgage REIT sector. (For more background on mortgage REITs, take a look at my recent article, REITs With a Twist.)
This deal is not unlike Friedman Billings Ramsey's (NYSE:FBR) purchase of mortgage REIT FBR Asset Investment Corporation, which closed in March. (Of course, Friedman managed FBR Asset before the deal, so the companies were already fairly close.) As was the case for Friedman after its purchase, American Mortgage can now structure parts of its business as a REIT, providing tax benefits for the company and increasing its dividend payout.
Both deals are immediately accretive to earnings and both will help the acquirers diversify their revenue streams. Shareholders of the acquired companies, meanwhile, get a more diversified company, while the combined entities will be less vulnerable to interest rate fluctuations, one of the greatest risks facing pure mortgage REITs.
It also seems worth noting that Friedman's investment-banking arm has underwritten two recent share offerings for mortgage REITs. One was a $144 million private offering for Luminant Mortgage Capital and the other a $50 million offering for Anworth Mortgage (NYSE:ANH). It's not unreasonable to think that this could help foster a cozy relationship between the companies and lay the groundwork for future deals.
At the same time, assigning a fair value to these types of combined operations is a bit of a challenge. After all, this is a fairly novel combination of assets and services, and there's not a lot of history to help you determine an appropriate multiple. But I predict investors in these firms will find the exercise worth the effort.
Granted, we're only talking about two recent deals. I wouldn't call this a full-fledged trend -- yet. Nonetheless, investors interested in mortgage REITs should take notice: These deals could be harbingers of further consolidation in the sector and the creation of some exciting new investment opportunities in the REIT world.
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Mathew Emmert owns shares in Friedman Billings Ramsey.
