Mortgage REIT Annaly Capital Management, Inc. (NYSE:NLY) said April 11 that it plans to buy fellow mortgage REIT Hatteras Financial Corp. (NYSE: HTS) in a cash and stock deal valued at $1.5 billion.
Annaly said Hatteras’ floating adjustable-rate mortgage (ARM) portfolio will complement its primarily fixed-rate agency portfolio.
The terms of the deal value Hatteras stock at $15.85 per share, an 11.2 percent premium on the closing price of shares of the company’s stock on April 8 and a premium of approximately 24 percent to its 60-day volume-weighted average. The transaction is expected to close by the end of the third quarter.
“With the acquisition of Hatteras, we significantly grow our diversified portfolio and broaden our investment options, further fortifying Annaly’s position as the market leading Mortgage REIT,” said Kevin Keyes, president and CEO of Annaly.
Wellington Denahan, chairman of Annaly, described Hatteras and Annaly as “seasoned veterans in the sector,” adding that “we are confident this acquisition strengthens our ability to deliver superior returns to our shareholders over the long-term.”
The pro forma market capitalization of the combined company is estimated at $10.5 billion, which represents more than 20 percent of the entire Mortgage REIT sector, according to Annaly.
Jessica Levi-Ribner, an analyst at FBR & Co., commented that the deal shows that Annaly is quickly moving towards a more “hybrid structure with a defensive asset portfolio.”
The size of the merged entity “almost ensures a continuity of funding as banks are more likely to retain relationships with those companies they have deep relationships with and shed those that are just monoline relationships,” Levi-Ribner said.
She stressed that repurchase agreement (repo) funding stability will be a “defining characteristic going forward as banks move to reallocate their capital, and we expect this to drive further rationalization of the MREITs in the coming quarters.”
Brock Vandervliet, an analyst at Nomura, pointed out that Annaly has consistently spoken of the need for consolidation in the sector.
“Consolidation has been a theme that has been long absent in the sector. We believe this has changed in part due to gaps in relative multiple that now exist across the sector,” Vandervliet said.
JMP Securities analyst Steven DeLaney said he expects the acquisition will be about 1 percent accretive to Annaly’s estimated book value of $11.51.