Following last week’s announced deal between Apollo Commercial Real Est. Finance Inc ARI and Apollo Residential Mortgage Inc AMTG, FBR & Co analyst Daniel Atscher released a new report discussing the potential for further consolidation within the mortgage REIT space. According to Atscher, investors can expect more large deals in coming months.
“Between mergers and the eventual Fed pullback from reinvesting repayments into new MBS purchases, we believe the mortgage REIT space could begin to experience a more ‘normal’ marketplace with fewer ‘unnatural’ buyers, which would, in turn, provide more stability to prices and clearer pictures of underlying value,” he explained.
FBR sees Annaly Capital Management, Inc. NLY as a likely consolidator because of its size and its recent transition from a pure-play agency mortgage REIT to a more diversified business.
Atscher believes that consolidation is the most efficient way to eliminate the widespread undervaluation in the mortgage REIT space. Most mortgage REITs are currently only trading at 70–75 percent of book value, and Atscher blames too many names with too much capital. He sees the 28 mREITs with market caps under $1 billion as the primary targets for consolidation.
FBR has an Outperform rating on Annaly Capital Management.
Disclosure: The author holds no position in the stocks mentioned.
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