IPO Preview: Apollo Residential Mortgage

Jul.18.11 | About: Apollo Residential (AMTG)

Based in New York, NY, Apollo Residential Mortgage (proposed symbol AMTG) scheduled a $200 million IPO with a market capitalization of $205 million at the price range mid-point of $20 for Friday, July 22, 2011. The full IPO calendar for the week of July 18th includes seven IPOs.

ASSET CLASS -- REITS in AMTG’s asset class invest in and manage Agency MBS (mortgage backed securities), non-Agency MBS, residential mortgage loans and other residential mortgage assets in the United States.

The companies earn their money on the spread between low-interest short-term borrowing and purchasing higher-interest long-term securities. If short-term interest rates were to increase relative to longer-term interest rates, earnings would decline for AMTG’s asset class.

CONCLUSION -- In March, AMTG filed for a $300 million IPO, an amount 50% higher than the currently scheduled IPO for AMTG. The reduced size means current investor demand is less than anticipated in March.

Investors who want to invest in the asset class should consider, instead of AMTG, already public companies with existing track records, such as Annaly Capital (NYSE:NLY), Chimera Inv (NYSE:CIM), American Cap Agency (NASDAQ:AGNC), Hatteras Financial (NYSE:HTS), and Invesco Mortgage (NYSE:IVR), which pay in the range of 12-13%.

AMTG will be externally managed and advised by ARM Manager, LLC, a recently formed indirect subsidiary of Apollo Global Management, LLC.

RECENT SECTOR HISTORY -- In the February-March 2011, time frame five REITS filed for IPOs (including AMTG), to raise $1.55 bb. AG Mortgage Investment Trust (NYSE:MITT) also filed for a $300 million IPO, and finally IPO’d June 30 at a reduced amount, half of which was a concurrent private placement presumably with clients. See our analysis of AG Mortgage here. The other three haven’t yet IPO’d.

A number of public companies in the sector so far this year have done secondaries to raise significant amounts of money. The sector companies all pay relatively high rates and have established success patterns.

COMPENSATION -- AMTG will have no employees itself. A .1.5% per annum fee on stockholders’ equity will be paid to the AMTG's manager. AMTG expects the management fee to be paid to be $3 million per year. AMTG expects the expense reimbursement to be paid in the first full fiscal year to be approximately $750,000 to $1.5 million.

The termination fee is equal to three times the average annual management fee earned by managers during the prior 24-month period prior to such termination.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.