* Mortgage REITs to be a driving sector for IPOs -banker
* Six IPOs in pipeline; none at this time last year
* REITs laying groundwork for mortgage industry overhaul
* Pimco, Apollo, TCW among those planning REIT IPOs
By Alina Selyukh and Al Yoon
NEW YORK, April 8 A raft of U.S. mortgage real
estate investment trusts from big asset managers like Pimco and
TCW are expected to hit the market in the coming months, as
investors look to profit from a recovery in the mortgage bond
Buying mortgage bonds now is tricky: The housing market is
still healing from the worst downturn since the Great
Depression. But real estate investment trusts, which pay out
almost all of their net income as dividends, are attractive to
investors because of those high dividends, particularly when
returns in so many other markets are so low, bankers said.
A mortgage REIT usually raises money from investors and
uses the proceeds to buy mortgage bonds. The current weakness
in mortgage bond prices only further improves potential returns
"The market that we're in today is conducive to seeing
mortgage REITS (go public)," said Frank Maturo, co-head of
equity capital markets at Bank of America Merrill Lynch.
Speaking at the Reuters Global Mergers and Acquisitions
Summit in New York this week, he added mortgage REITs will be
one of the sectors driving U.S. IPO activity this year.
Not every mortgage REIT that has filed to go public will
successfully tap the markets -- investors are picky now,
But big asset managers are also eager to compete in the
$10.6 trillion U.S. mortgage finance industry as it weans
itself from government support, which could create huge profits
for investors that position themselves properly.
PREPARING FOR CHANGES
The industry is facing a profound overhaul as the Obama
administration and Congress plan to dismantle Fannie Mae and
Freddie Mac, mortgage finance companies the government took
over when they came to the brink of failure in mid-2008.
While the task is seen taking five years or more, the means
for private companies must be in place for the transition to
begin, industry analysts said.
"There needs to be a critical amount of capital (raised) to
make the mortgage market able to function without the amount of
government support it has today," said Richard King, chief
executive officer of Invesco Mortgage Capital Inc (IVR.N), a
mortgage REIT that went public in 2009.
The reform may wind down federal guarantees, which support
90 percent of all new lending, opening the door to private
investors. Until then, REITs can capitalize on "agency"
mortgage-backed securities produced under the government-backed
models of Fannie Mae, Freddie Mac and the Federal Housing
Administration, which essentially have no credit risk.
REITs are also salivating over the more than $1 trillion in
mortgage-backed securities expected to be sold by the Federal
Reserve, a massive raft of supply for a market where government
agencies are no longer key buyers, said Merrill Ross, equity
analyst at Wunderlich Securities.
"(Mortgage REITs) are all trying to rise to the occasion,"
said Ross, who follows 11 publicly traded mortgage REITs.
"They're trying to rush in to fill the gap, and it's
economically feasible now because there's a great desire to
stabilize the mortgage industry."
PAVING THE WAY
Of the 11 REITs now in the IPO pipeline, six plan on
investing in mortgage assets -- and all submitted paperwork to
go public in the past few weeks, according to Ipreo, which
provides capital markets data and analytic services.
At this time last year, only one of the 12 REITs planning
to go public was a mortgage REIT, according to Ipreo.
The mortgage REITs on file to go public include those
launched by Apollo Global Management (APO.N), TCW and Angelo
Gordon. Pimco, the largest bond fund manager in the world and
the latest to jump on the bandwagon, filed for an IPO of up to
$600 million this week. [ID:nN05165147]
Some of these attempts may fail, however, given the costs
of raising capital and skeptical IPO investors.
Apollo in its filing boasted it has the knack of seeing
turns in the mortgage industry. As an example, it said a fund
it managed purchased subprime mortgage lender WMC Mortgage Corp
in 1997 and sold in 2004 ahead of the housing bust, generating
a 28.3 percent gross internal rate of return.
"There are definite barriers to entry," said Invesco's
King, adding the "best of the breed" will get done.
The firms have each underscored the expectation of a major
shift for the housing finance industry. Until that unfolds,
they plan to invest in the common and relatively cheap agency
residential MBS, products of Fannie Mae, Freddie Mac and the
government entity Ginnie Mae.
"You have to get the capital, get it deployed, and be at
right place at the right time," King said.
(Reporting by Alina Selyukh and Al Yoon; Editing by Gary