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A resurgence of mortgage REIT capital raising

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A resurgence of mortgage REIT capital raising

Mortgage REITs raised more than $2 billion in common and preferred equity during July, putting the third quarter on pace to rank as the most active period for underwritten offerings for the sector in more than four years.

Although common and preferred stock issuances by Annaly Capital Management Inc. accounted for nearly three-quarters of the month's activity, as tabulated by S&P Global Market Intelligence, a wide range of mortgage REITs have raised equity in recent months to facilitate investments in targeted asset classes.

The sector's year-to-date total of approximately $5.5 billion in gross proceeds exceeds the gross amount raised by mortgage REITs in transactions of the kind on a combined basis from the third quarter of 2014 through the fourth quarter of 2016. It includes announced exercises of overallotment options and the initial public offerings of KKR Real Estate Finance Trust, Granite Point Mortgage Trust and TPG RE Finance Trust Inc, but excludes secondary offerings and at-the-market offerings.

Mortgage REITs raised aggregate gross proceeds of approximately $1.7 billion in underwritten offerings of common stock, excluding secondary offerings, during the second quarter and more than $2.7 billion for the first half of the year. The second quarter's result represented the highest achieved by the sector since the second quarter of 2013, when mortgage REITs combined to raise nearly $2.4 billion in common equity through underwritten offerings, excluding secondary offerings.

Relative valuations across the sector are materially higher than a year ago, helping to facilitate the activity. Among the 38 publicly traded entities with market capitalization of $100 million or more under S&P Global Market Intelligence coverage as mortgage REITs, 20 closed Aug. 1 at a premium to their most recently reported book value per share. Fewer than a third of the mortgage REITs of similar size under coverage at the end of August 2016 sold for premiums to book.

Annaly said it closed July 18 on an offering of 69 million common shares in a follow-on deal priced at $11.83 by way of an overnight block trade. The deal represented the largest block offering by a mortgage REIT since April 2013 and the fourth-largest U.S. block offering across all industries to date in 2017, the company said. A week later, Annaly closed its public sale of 28 million shares of 6.95% series F fixed- to floating-rate cumulative redeemable preferred stock in a transaction it characterized as the largest-ever U.S. nonrated preferred equity offering and the second-largest preferred equity offering across all industries to date in 2017.

Proceeds from the Annaly common stock offering will be allocated to acquire targeted assets. The preferred stock offering's proceeds will be used in part to redeem series A preferred shares with $185 million in aggregate liquidation value and to acquire targeted assets.

Annaly President and CEO Kevin Keyes characterized the offerings in his company's Aug. 2 earnings release as being opportunistic in nature. He said they are accretive to shareholder value and serve to reduce Annaly's cost of capital, boost its liquidity position and further enable the mortgage REIT to capitalize on its "numerous" opportunities for growth.

A handful of the mortgage REITs that raised equity during the second quarter said their deals had similar effects and historical significance.

Apollo Commercial Real Estate Finance Inc. President and CEO Stuart Rothstein said during an Aug. 2 conference call that his company's second-quarter common equity raise represented its largest such deal to date, and it had been priced at "north of 1.1x" book value per share.

AGNC Investment Corp. executives said during a July call that the mortgage REIT primarily invested proceeds from a May offering valued by S&P Global Market Intelligence at $503 million in the to-be-announced agency MBS market. The deal ranked as the sector's largest for the second quarter and was accretive to AGNC's tangible book value.

Ellington Residential Mortgage REIT conducted a dilutive common equity offering in May in its first-ever follow-on deal, but executives said during an Aug. 2 call that they expect the long-term earnings accretion from the deal to "more than compensate" for the "modest" dilution to book. The mortgage REIT said it had fully invested proceeds from the offering during the second half of the second quarter, and executives credited the additional float credited by the transaction for facilitating its entry into the Russell 3000 Index.

It also launched a $100 million at-the-market program prior to quarter's end, which the company plans to use to raise capital in smaller increments during times of favorable market conditions.