In the latest M&A news in the real estate industry, mortgage real estate investment trust (mREIT) New Residential Investment (NYSE: NRZ) has agreed to acquire Caliber Home Loans, one of the largest residential mortgage originators and servicers in the U.S., for a purchase price of $1.675 billion in cash.
Here's a quick rundown of what each company does and what the acquisition will mean to New Residential's business.
New Residential and Caliber
New Residential Investment Corporation is one of the largest mREITs in the market. The company has a portfolio of about $23.5 billion in assets, which mainly include residential mortgages, mortgage-backed securities, and mortgage servicing rights (MSRs).
Unlike many other mortgage REITs, New Residential is also a major lender, with nearly $62 million in origination volume in 2020 and a servicing portfolio of nearly $300 billion in unpaid mortgage balances.
Meanwhile, Caliber Home Loans is a privately owned mortgage lender that has grown dramatically since its 2013 inception. The company originates conventional mortgage loans, as well as FHA, VA, and USDA loans, as well as loan products for real estate investors.
In 2020, Caliber originated $80 billion in mortgage loans, and it services about 630,000 mortgages, with total unpaid balances of $153 billion. And Caliber is profitable, earning pre-tax income of $891 million last year, so it should boost New Residential's bottom line as soon as the acquisition is finalized.
Why is New Residential acquiring Caliber?
It's not difficult to see why this acquisition might be a great fit for New Residential, as it has a very similar business composition to Caliber already, and the deal could improve efficiency, which often comes when scaling a business. Some of the transaction perks New Residential cited in its press release include strengthening the company's earnings profile across interest rate environments and improving customer retention with Caliber's leading platform. Caliber also brings a large retail mortgage origination platform to the mix, which New Residential could leverage with its current business.
In a nutshell, Caliber will dramatically increase New Residential's business. Based on 2020 volumes, it can be expected to more than double the company's loan originations and add about 50% to the servicing portfolio. New Residential is already a top-10 non-bank mortgage servicer, so this will move it up the list even further. And at a transaction value that's expected to be the exact tangible book value of Caliber at the time of closing, it's a good value proposition for a deal that could add efficiencies of scale to New Residential's business.
The transaction essentially combines two excellent mortgage platforms, and the talent that works for each one, into a single company. The majority of both companies' business activities are complementary to one another, which usually translates to opportunities to increase efficiency, and a profitable business like Caliber could be a great fit for a REIT structure, as it means its earnings won't be subject to corporate tax.
What does it mean to investors?
Assuming that Caliber immediately adds to New Residential's earnings like the company expects, this could be an excellent acquisition, especially since New Residential isn't paying a premium to Caliber's tangible book value. There are certainly some challenges when it comes to integrating two large, overlapping businesses, especially when it comes to maximizing efficiency, but this deal has the potential to be a major long-term win for New Residential's shareholders.