Annaly Capital Management, Inc. (NLY), Two Harbors Investment Corp (TWO): Buy These mREITs Around QE Unwinding

Page 1 of 2

The confusion around the unwinding of QE persists as the Fed again links its unwinding intentions to macroeconomic improvements. The macroeconomic indicators continue to give mixed signals, and the mortgage REITs sector continues to be the victim of this confusion. Within mortgage REITs, the ones that invest exclusively in the Agency space are being hit the hardest. However, hybrids continue to remain the top picks of most analysts. Let’s see why.

The Agency space hit hard

The Agency mortgage REITs have become the victims of the prevailing confusion related to the unwinding of QE3. The June FOMC meeting resulted in increased interest rate volatility as the Agency MBS spread increased another 8 bps to reach its 20-month high of 3.29%.

Annaly Capital Management, Inc. (NYSE:NLY)

As a result, American Capital Agency moved down 4.3% in one day, while Annaly Capital Management, Inc. (NYSE:NLY) and ARMOUR Residential REIT, Inc. (NYSE:ARR) fell 3.4% each. Both American Capital Agency and Annaly Capital Management were also forced to cut their second quarter dividends by 16% and 11%, respectively. In contrast, ARMOUR Residential announced that it will maintain its dividends for the third quarter of the current year. Both American Capital Agency and ARMOUR Residential have been downgraded by Barclays on lower earnings potential and concerns about their book values.

So, the Agency space is under tremendous pressure. Even the largest and the most well managed mREITs are feeling the heat. Looking at this, Barclays has downgraded most of the mREITs with significant exposure to Agency MBS.

Hybrids still preferred

Given the volatility in the Agency space, mortgage REITs that invest in both Agency and non-Agency MBS are the most preferred. Better known as hybrid mortgage REITs, these offer better risk-return opportunities. Within hybrid mREITs, Two Harbors Investment Corp (NYSE:TWO) remains the top pick of Credit Suisse, Barclays and Deutsche Bank. Let’s see what makes this hybrid mREIT the favorite.

In a recent presentation, Two Harbors Investment Corp (NYSE:TWO)’ management disclosed that its book value essentially remained unchanged from the March 31, 2013 level. That’s a very positive sign for the company’s investors, particularly when none of the mREITs has been able to secure its book value. Going forward, the company is expected to benefit from its new investments, which include the newly acquired rights of mortgage servicing (MSRs) and the increase in credit sensitive loans.

The increased presence of credit sensitive loans was the primary reason why Two Harbors Investment Corp (NYSE:TWO) was able to maintain its book value during the current quarter. These loans and the other non-Agency assets that Two Harbors holds are less sensitive to changes in interest rates. Typically, credit sensitive assets increase in price due to lower default risk, which in turn is driven by a stronger economy. Given the rise in rates and the anticipated strength in the economy, credit sensitive assets tend to perform well.

On the other hand, MSRs create a two-fold benefits for Two Harbors Investment Corp (NYSE:TWO). First, they act as an interest rate hedge, which protects the book value. Second, they provide the company with the much-desired additional return. And that’s not all: The presence of significant barriers into the MSR market further creates a competitive advantage for Two Harbors in the market.

Western Asset Mortgage Capital Corp (NYSE:WMC) is another hybrid mREIT that invests in Agency and non-Agency MBS. It has other investments in commercial MBS that provide the company with elevated asset yield and diversification. The company declared its second quarter dividend of $0.9 per share, down 5% from the prior quarter’s dividend distribution. With the new reduced dividend rate, the stock is currently yielding 20.8%, higher than most of its peers. After a careful analysis of the company’s earnings potential, Deutsche Bank rated the stock as a buy.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

On the Move: The 10 Fastest Growing Businesses in 2015

Fast Money: The 10 Highest Paying Fast Food Restaurants

Mixing It Up: The 14 Best Music Mashups of 2014

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!