Is a Mortgage REIT Consolidation Wave on the Way?


If Annaly Capital's (NYS: NLY) offer to buy CreXus (NYS: CXS) is any signal, the winds of change are blowing in the mortgage-REIT sector.

In a press release earlier this week, Annaly said it's offered $12.50 per share in cash to CreXus shareholders to buy the 88% of the company it doesn't currently own. The offer price represented a 13% premium over the previous closing price.

The offer has to make investors in the sector wonder: Is it high time for some consolidation?

Think about it -- Annaly has been around since 1997 and is an elder statesman of the industry. CreXus was founded in 2008, as was American Capital Agency (NAS: AGNC) and ARMOUR Residential (NYS: ARR) . CYS Investments (NYS: CYS) was started in 2006, while Chimera (NYS: CIM) and Two Harbors (NYS: TWO) popped up in 2007. In other words, the market has been flooded with new mREITs over the past five years or so.

In most consolidation scenarios, there's a fragmented industry where some larger players start looking to grow, leverage fixed costs, and potentially enter new markets via acquisition. With the raft of new entrants to the space, the mREIT landscape certainly seems ripe for consolidation. But while we may see some more deals crop up, this doesn't look like a classic consolidation scenario.

According to Annaly, the overture to the partially owned CreXus is a way to diversify away from agency-backed paper as the Federal Reserve's quantitative easing program rapidly stomps spreads. CreXus' focus on commercial paper -- and a bit of direct real-estate investments -- would provide Annaly with a higher-yield channel that hasn't collapsed as much as its core investment focus.

With that in mind, it wouldn't surprise me at all if we saw more deals ahead. But those deals would likely be driven by agency-paper-focused mREITs diversifying their balance sheets, rather than an effort to grow and consolidate the space. And as far as who will do the buying, well, it'd probably be a good idea to keep a close eye on Annaly. The company has said that it is willing to put up to 25% of its shareholders equity into non-agency investments, and the purchase of CreXus would still leave it plenty of room for more.

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