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More mortgage industry consolidation ahead, but how much remains to be seen


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More mortgage industry consolidation ahead, but how much remains to be seen

The recentwave of consolidation among mortgage REITs has caught the attention of several executivesin the sector. But it remains to be seen whether the deal-making reflected uniquesets of circumstances or a sign of things to come among REITs and other mortgage-focusedentities.

It hasbeen just more than three weeks since AnnalyCapital Management Inc. announced an agreement to acquire in a dealnot only notable for its $1.50 billion valuation but also for the fact that it wasthe second deal unveiled in three business days that involved two mortgage REITsunaffiliated in the form of sponsorship or management. Sutherland Asset Management Corp. had unveiled its for a reverse mergerwith ZAIS Financial Corpon April 7.

The twopreviously announced deals in the space to date in 2016 — Apollo Commercial Real Estate Finance Inc.'s February to purchase and ARMOUR Residential REIT Inc.'sMarch tender offerfor JAVELIN Mortgage Investment Corp.— involved sets of companies with external managers under the common control ofApollo Global Management LLCand ARMOUR Capital Management LP,respectively.

"I do think you will see more consolidation," President and CEO Michael Nierenberg said during a May 4 conference call, accordingto a transcript of hisremarks. He noted that two of the deals had involved consolidation of entities withcommon sponsors.

The REIT, which is managed by a Fortress InvestmentGroup LLC affiliate, focuses on investments in mortgage servicing-relatedassets. Nierenberg said he will consider participating in M&A to the extenta deal would be accretive.

"It has got to be something that makes sense for shareholders,quite frankly," he said.

Presidentand CEO Andrew Jacobs offered his perspective on recent M&A activity duringan April 28 call.

"Havingbeen in business as long as we've had, we've heard these types of discussions along time ago and through the years," Jacobs said about the residential mortgageREIT established in 1985. He has served in various executive capacities at Capsteadsince 1988, including as CEO since 2003.

"Ithink it's very unique situations that sit between two different companies, andit has to work for both parties," he added. "And I think that's kind ofwhat the Annaly-Hatteras deal was. It fit both of them, what they were trying toaccomplish. I think it's a bit more challenging. I don't think you're going to seea wholesale consolidation in our industry per se."
In reference to the ARMOUR/JAVELIN and Apollo Commercial and Apollo Residentialtransactions, Jacobs said the parties "were kind of affiliated in nature relativeto the managers." In an apparent reference to the Sutherland/ZAIS tie-up, hesaid, "the other one appeared to be kind of strategic, which gave a companythat hadn't had a public platform an opportunity to basically get a public platform."Those deals, he continued, "are kind of, I think, very unique."

Withrespect to prospective consolidation involving nonbank mortgage lenders, Nierenbergdid not disagree with the conclusions reached by Bloomberg News in a May 4 articleentitled, "Mortgage M&A Looms as Soaring Costs Pinch Nonbank Lenders."That piece suggested that heightened mortgage origination costs in a time of expandingindustry regulation could lead smaller nonbank mortgage lenders to sell.

"I think rates are going to dictate a lot for some of thesmaller mortgage bankers," Nierenberg said in response to an analyst's questionabout the article. "You know, if rates stay where [they] are or rally a littlebit, I think you could see some fairly decent mortgage origination. If rates backup a bunch, I think it is going to be much, much harder for some of these smallerfolks to be able to compete."

UsingHome Mortgage Disclosure Act data, S&P Global Market Intelligence in October 2015 that nonbankoriginations accounted for nearly 45.1% of single-family and multifamily mortgagesfunded in 2014, with Quicken LoansInc., LLCand Stearns Lending LLCranking among the nation's top 10 producers.

In thecommercial and multifamily space, Walker& Dunlop Inc. said May 4 that it remains on the lookout for opportunitiesto be a consolidator, several years after it closed acquisitions of former CreditSuisse subsidiary Column Guaranteedand former Fortress Investment Group company CWCapital LLC.

Companyofficials said during a May 4 call that Walker & Dunlop ended the first quarterwith nearly $100 million of cash that it could allocate to a variety of uses, includingpotential M&A.

"Asour history shows, we have been very successful at … acquiring companies, integratingcompanies and creating value from acquiring companies ever since we acquired Columnfrom Credit Suisse back in 2009," Chairman and CEO William Walker said, accordingto a transcript of hisremarks. "We have an extremely talented business development group, and weare constantly out looking for opportunities to grow our platform and bring in talentedprofessionals."

Impac MortgageHoldings Inc., a provider of various mortgage and real estate services,is more than one year removed from the completion of its acquisition of certain assets of the residentialmortgage business of CashCall a deal that could eventually be worth as much as $140.7 million, including $124.6million in contingent consideration. Chairman and CEO Joseph Tomkinson said duringan April 29 call that he remains on the lookout for opportunities.

"Irecall a couple of years ago, I had mentioned … in one of the calls that I had acouple of tricks up my sleeve, and then we purchased CashCall, which was a veryfortuitous purchase," he said, according to a transcript of his remarks. "So I'll just repeat it again:I have a couple of tricks up my sleeve, and I'm looking at some very good opportunities."