Why Shareholders of One Mortgage REIT Are Crying Foul - TheStreet

Why Shareholders of One Mortgage REIT Are Crying Foul

The merger of Impac and Amresco has Apex and others fuming.
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Normally, you wouldn't read about mortgage real-estate investment trusts in this column. Too darn arcane. But, then again, normally you don't see stories like the one involving the bizarre battle over

Impac Commercial Holdings

(ICH)

.

The bizarreness started last May when New York-based

Fortress Partners

bought a controlling interest in Newport Beach, Calif.-based Impac, a mortgage REIT. Then, in August, Fortress engineered a deal for Impac to merge with another REIT,

Amresco Capital Trust

(AMCT)

.

The following month

Apex Mortgage Capital

(AXM)

-- yep, another REIT -- filed that it owned more than 5% of ICH and offered to buy ICH in a stock swap valued at a hefty 22% premium to what Amresco was offering at the time. Since then, the premium offered by Apex has swelled a bit to 25%, or $7.65 per share for the Apex offer, and $6.11 for the Amresco offer.

That set off a series of events that culminated Monday with the kind of letter you almost

never

see from one company to another. (Talk about airing dirty laundry in public!) This letter, in an amended 13-D filing by Apex, discussed Apex's displeasure in the way it was rebuffed by ICH without ICH so much as creating a special committee to review its offer. "We are concerned that the ICH Board of Directors has not considered our offer in good faith," wrote Apex's execs, in a letter to ICH Chairman Wesley Edens.

If that sounds like sour grapes, it's perhaps the mildest commentary in Apex's five-page ranting that questioned, among other things, why ICH issued Fortress shares of preferred convertible stock at a conversion price of 7.13 -- $5 below book value. The deal diluted existing ICH holders, Apex charged, and didn't include a fairness opinion from

Banc of America Securities

, which was paid $500,000 in connection with the transaction. However, Banc of America was also retained as an adviser to ICH's board in the Amresco merger, where it

did

issue a fairness opinion. What perplexes Apex is how Banc of America could issue a fairness opinion when (as was disclosed in the proxy) it's an investor and lender to Fortress. "How can Banc of America Securities effectively represent ICH shareholders when they hold an interest in Fortress?" Apex asked.

Banc of America Securities declined to comment for this story.

That pretty much set the tone of the letter, which included questions of conflict of interest and other detailed questions on how the company conducts its biz.

But that's not all that's amiss: Something that wasn't included by Apex, but was picked up by a numbers-crunching ICH shareholder who also is one of this column's valued sources, was a sudden reduction by ICH in the value of its securities portfolio. The very same portfolio had a value, net of related debt, of around $65 million on June 30, in a 10-Q that was signed off by an ICH exec that also works for Fortress. But get this: After the merger, the value apparently will be reduced by around 60% to $25 million, according to a preliminary ICH/Amresco proxy filed in September. (Folks, don't try finding this writedown at home, unless you're a

forensic accountant.)

Can a company just arbitrarily write down its portfolio? Better yet,

why

did they do it? Did the value of the securities in that kind of portfolio fall by

that

much in such a short period of time? Not according to this column's source, who makes a living trafficking in the arcane.

A Fortress spokeswoman declined comment, saying that the company was in registration and therefore couldn't talk.

All this must sound pretty complicated, but maybe this explains it: According to the ICH/Amresco proxy, Fortress stands to pocket as much as 25% of any profits that might be realized from selling ICH/Amresco's portfolio at some point in the future. Not a bad deal, which leads one miffed shareholder to say, "I'm astonished and appalled someone can come in, bless the financial statements, and when it's in their interest say, oops, we were wrong and we were wrong by 60%."

(Maybe it's complicated for a reason.)

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.