WMC - Western Asset Mortgage Capital agrees to merge with Terra Property Trust

2023-06-28 12:50:08 ET

Mortgage REIT Western Asset Mortgage Capital ( NYSE: WMC ) and Terra Property Trust (TPT), a REIT that invests in mortgages and assets backed by commercial real estate, agreed on Wednesday, to merge in an all-stock transaction that's expected to form a mortgage REIT with ~$1.2B in assets and $436M of adjusted book value.

Under the terms of the agreement, Western Asset Mortgage ( WMC ) will issue to TPT stockholders newly designated shares of WMC class B common stock as the merger consideration. The number of shares they'll receive will be based on an exchange ratio to be determined by dividing TPT's adjusted book value per share by WMC's adjusted book value per share.

As an example, as of March 31, 2023, WMC's adjusted book value would have been $17.30 per share and TPT's $13.58 (before transaction expenses), with every TPT share being exchanged on a pro forma basis for 0.785 WMC shares.

The newly issued WMC class B shares will have dividend, distribution, and other rights identical to WMC's class A common shares, except they won't be listed on the NYSE. The new class B shares will automatically convert into an equal number of WMC class A common stock in one-third tranches on the six-, 12-, and 18-month anniversaries of the merger closing.

Western Asset Mortgage ( WMC ) shareholders will keep their existing shares, which will be reclassified as class A common stock at the merger closing and will continue to be listed on the NYSE under a new name. Upon the completion of the deal, TPT stockholders are expected to own  ~76% of the combined company's outstanding common stock, while WMC stockholders are expected to own ~24%.

A subsidiary of Mavik Capital Management, the external manager of TPT, has committed to use "reasonable best efforts" to purchase or find a third party to purchase shares of WMC class A common stock with an aggregate purchase price of up to $4.0M after the closing and before the three-month anniversary of the merger completion to support the combined company's common stock trading level.

The companies said the expected benefits of the deal include:

• A diversified investment portfolio with focus on shorter-tenor, floating rate low-loan-to-value CRE loans;
• Opportunity to redeploy capital and increase exposure to CRE loan and equity investments to take advantage of an attractive pricing environment;
• Leverage reduction and reduced operating expenses; and
• Enhanced shareholder liquidity following the staggered conversion period for TPT shareholders.

The merger is expected to be completed in Q4 2023. It's subject to the approval of stockholders of TPT and WMC. Western Asset Management ( WMC ) has entered into a voting agreement with key stockholders of TPT who have committed to vote in favor of the deal.

After the deal was announced, Jones Research analyst Jason M. Stewart downgraded WMC to Hold.

WMC shares rose 0.4% in Wednesday early afternoon trading.

In May, SA analyst Daniel P. Varga rated Western Asset Mortgage ( WMC ) as Sell, citing little chance of recovery.

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