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Bid for Small Mortgage REIT Exemplifies Industry Consolidation

Angelo Gordon Affiliate Makes Competing Offer for Western Asset Mortgage Capital
Investors in single-family residential mortgages and securities are being targeted by larger mortgage real estate investment trusts. (Getty Images)
Investors in single-family residential mortgages and securities are being targeted by larger mortgage real estate investment trusts. (Getty Images)

Consolidation among mortgage investment firms has prompted a bidding war for one of the smaller players in the sector, Western Asset Mortgage Capital.

AG Mortgage Investment Trust submitted a proposal late last week to acquire Western Asset Mortgage Capital at an implied price of $9.88 per share. Pasadena, California-based Western Asset, with about $2.1 billion in residential loans and securities, put itself up for sale in the third quarter last year, citing the current challenging market environment for mortgage real estate investment trusts as a result of a rapid rise in interest rates and the increased potential for economic retrenchment.

While AG Mortgage’s offer only comes to about a $60 million acquisition price, the deal highlights recent merger and acquisition activity among mortgage REITs looking to take advantage in the current disrupted debt market. Larger firms seek to leverage deals for long-term growth through increased liquidity, operational efficiency, and diversification in their portfolios.

AG Mortgage is a publicly traded residential mortgage REIT sponsored by New York-based Angelo, Gordon & Co., a $73 billion alternative investment firm. In May, Angelo Gordon agreed to be acquired by the even larger TPG, a global alternative asset management firm with $137 billion in holdings.

Western Asset was already subject of another merger proposal with Terra Property Trust, a nontraded REIT in New York.

Those deals come as Ellington Financial has announced two mortgage REIT acquisition agreements since May. The real estate credit company has agreements pending to acquire Arlington Asset Investment Corp. and Great Ajax Corp., both mortgage REITs holding primarily debt and securitized debt on single-family residential properties.

Terra, which invests in loans and assets secured by commercial real estate, reaffirmed its commitment to its previously announced acquisition of Western Asset after AG Mortgage put in its competing offer.

Terra said it believes its deal provides a unique opportunity to establish a diversified REIT that prioritizes capital preservation and could be consummated more quickly and with certainty of execution compared to AG Mortgage’s offer.

AG Mortgage said its offer would result in a focused, residential mortgage REIT with an optimized capital structure and significant growth potential.

Western Asset did not respond to a request for comment on the competing bids.

Cash Consideration

Under AG Mortgage’s offer, Western Asset shareholders would get 98 cents per share in cash in addition to the $9.88 per share for the stock they own. Terra's offer has no cash consideration.

Matthew Erdner, a mortgage REIT equity analyst for JonesResearch, a division of JonesTrading Institutional Services, told CoStar News in an interview that AG Mortgage has the advantage.

AG Mortgage’s offer “provides more of an exit for Western Asset shareholders either to get completely out or transition into the same strategy with AG Mortgage,” Erdner said. “The cash consideration piece is also probably something that the Western Asset holders are looking for.”

However the fight for Western Asset turns out, Erdner said it likely won’t be the last merger in the mortgage REIT sector.

“There has been a lot of activity within the past month because Ellington went after Arlington and they also got Ajax,” Erdner said. “I think that we might see a little bit more in this space that kind of adds to the cycle that is playing out.”

On May 30, Ellington, based in Old Greenwich, Connecticut, announced it was entering into a definitive merger agreement with Arlington Asset, a McLean, Virginia-based mortgage REIT that invests in mortgage-related assets and residential real estate.

Then on July 3, Ellington said it agreed to acquire Great Ajax of Portland, Oregon, which acquires, invests and manages a portfolio of mortgage loans secured by single-family residences.

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