American Capital Agency Corp. (AGNC), Annaly Capital Management, Inc. (NLY), Apollo Residential Mortgage Inc (AMTG): Picking The Best REIT(s) Out There

According to its website, Apollo Residential Mortgage Inc (NYSE:AMTG) enjoyed a spread of 5.8% on its non-agency RMBS, while agency-backed mortgage securities had a net spread of 2.2%. Instead of leveraging its agency backed RMBS, Apollo Mortgage can increment in net profit margin by buying more of non-agency RMBS.

Bullish case for Annaly Capital

Meanwhile Annaly Capital Management, Inc. (NYSE:NLY) is diversifying its portfolio with the acquisition of Crexus Investments. It mainly invests in Commercial Mortgage Backed Securities (CMBS), which offer significantly higher interest spreads.

Although CMBS are not backed by federal agencies and carry greater risk, Annaly Capital Management, Inc. (NYSE:NLY) would be able to increase its net earnings without leveraging its existing portfolio. Crexus Investments operates with a debt/equity of just 4%, which could be comfortably leveraged further to increase its commercial holdings or hike Annaly Capital Management, Inc. (NYSE:NLY)’s dividend payouts.

Besides value addition, Annaly Capital Management, Inc. (NYSE:NLY) also posted a 100bps sequential decline in its conditional prepayment rates for the recent quarter. Although its CPRs are still high at 18%, its decline points towards improving asset quality and declining risks of prepayments.

Final words

In my opinion, both Annaly Capital Management, Inc. (NYSE:NLY) and Apollo Residential Mortgage Inc (NYSE:AMTG) offer better growth potential as compared to American Capital Agency Corp. (NASDAQ:AGNC). But if I had to pick one, it would be Apollo Mortgage for its relatively lower prepayment rate and its huge liquid positions which could be used for investment purposes.

The article Picking The Best REIT(s) Out There originally appeared on and is written by Piyush Arora.

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

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