Annaly Capital Management, Inc. (NLY), American Capital Mortgage Investment Crp (MTGE) – Agency mREITs: Is a Bottom in Sight?

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Largest mREIT

The largest mREIT, Annaly Capital Management, Inc. (NYSE:NLY), is widely expected to benefit from a reduced compensation expense, which resulted from the externalization of its management structure. Besides, the presence of real estate loans in its investment portfolio and its CreXus Investments acquisition will provide some cushion to Annaly Capital Management, Inc. (NYSE:NLY)’s book value and bottom line, respectively. However, Annaly Capital Management, Inc. (NYSE:NLY) is still heavily invested in the 30-year fixed rate Agency security, which is highly sensitive to changes in the interest rates.

The future approach

I believe the future for mREITs would be to go into shorter duration securities and lower leverage. However, this would likely place significant downward pressure on the current dividend rates. Probably, that’s the reason why mREITs’ investors don’t give credit to Hatteras Financial Corp. (NYSE:HTS) and Capstead Mortgage Corporation (NYSE:CMO). They own shorter duration adjustable rate securities. However, they trade with discounts similar to those mREITs with pure fixed rate securities in their portfolios.

Therefore, an alternative is that Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), and American Capital Mortgage Investment Crp (NASDAQ:MTGE) should rely on capital raising as the rates inch back up. Selling assets at losses leads to a permanent erosion of the book value while producing taxable losses that could hurt dividends. So, it makes more sense to stay aggressive and keep the long duration positions going. So, management at Annaly Capital Management, Inc. (NYSE:NLY), American Capital Mortgage, and American Capital Agency Corp. (NASDAQ:AGNC) are expected to stay aggressive which would result in a rebound in the stocks.

Conclusion

Annaly Capital Management presents the best option under the given situation, while American Capital Mortgage Investment Crp (NASDAQ:MTGE) offers upside if the Treasuries reverse course. The given situation demands mREITs to stay aggressive and keep the long duration positions going.


Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Agency mREITs: Is a Bottom in Sight? originally appeared on Fool.com is written by Adnan Khan.

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