The residential mortgage real estate investment trust market continues to heat up, with four companies conducting initial public offerings in six weeks.
The REIT structure is becoming increasingly popular as mortgage lenders search for new ways to increase profit margins. REITs, which are exempt from federal income tax as long as 95% of profits are passed on to investors, provide that advantage.
And investors have been keen on the REIT structure all year. "Just having the word REIT in a prospectus is getting people's interest," said Lou Taylor, analyst with Prudential Securities, "even though a mortgage REIT is completely different from any other type of REIT out there."
As the banking and mortgage lending industry consolidates, several out- of-work lenders have found a way to continue their careers as investment trust executives.
Apex Mortgage Capital, a Los Angeles-based REIT, is the most recent to go public, with a 6.5 million-share offering Wednesday that netted about $93 million.
The REIT will buy securitized pools of Fannie Mae and Freddie Mac loans from the secondary market, explained Philip Barach, president and chief executive.
"The whole REIT format makes a tremendous amount of sense for holding mortgage-backed securities," Mr. Barach said. Savings and loans and banks can also hold the securities, he said, but they won't get the federal income tax exemption. Those institutions also need to apply capital to bricks and mortar and are subject to federal and state regulations that REITs don't need to answer to, he added.
Apex Mortgage Capital should have a $1 billion portfolio by the end of 1998's second quarter, Mr. Barach said.
Laser Mortgage Management Inc. went public on Tuesday, with a $208.4 million, 15 million-share offering. The Short Hills, N.J.-based company makes and buys securitized pools of prime mortgage loans.
Now is a good time for mortgage REITs to go public because the capital markets are receptive, said W. Lance Anderson, president of Novastar Financial Inc. Novastar went public on Oct. 30, with a 3.6 million-share offering worth $67.5 million.
In addition, REITs that specialize in subprime mortgages have an advantage over traditionally structured subprime mortgage companies, Mr. Anderson said, because their earnings are more dependable.
Subprime mortgage company stocks took a tumble in November, following a Nov. 13 writedown by Green Tree Financial Corp., a Minneapolis-based manufactured home lender. The industry's reliance on gain-on-sale accounting has spooked some investors. "If you look at companies that have gotten hit, they use gain-on-sale accounting," said Mr. Anderson. "As a REIT, we don't do that. We book the assets as they come in."
The company originates loans through a network of 600 brokers in over 30 states and is predicting $1.2 billion in originations in 1998.
Mr. Anderson previously headed Saxon Mortgage, which was sold to Dominion Resources last year. Novastar's co-founder, chief executive Scott Hartman, was manager of Resource Mortgage's securitization division.
On Oct. 28, American Residential Investors Trust went public, with a $97.5 million public offering of 6.5 million shares. The San Diego-based company purchases securitized pools of adjustable rate mortgages.
Many of its executives were formerly with American Residential Mortgage, which was acquired by Chase Manhattan in 1994. PaineWebber initiated coverage of the company with a "buy" rating on Nov. 25.