One of the most common comparisons for income purposes is between American Capital Agency Corp. (NASDAQ:AGNC) and Annaly Capital Management, Inc. (NYSE:NLY) with dividend yields of 16.6% and 12%, respectively. The high yield of American Capital may appear lucrative, but its payout ratio of 202% is worrisome. Adding to those worries, American Capital Agency Corp. (NASDAQ:AGNC)’s disappointing results are expected to strain its payouts even further.
For the recent quarter, American Capital Agency Corp. (NASDAQ:AGNC) reported a comprehensive loss of $1.57 per share which was down by nearly 9%, compared to the previous quarter. These numbers may look bad, but the company actually gained $0.64 per share, which was eroded away by mark-to-market losses of $2.21 per share.
These losses are mostly unrealized and were booked for tax purposes. If the market fluctuates and regains its lost value, these losses would turn into equivalent gains. Thus, investors should stick to metering its realized earnings/losses for dividend purposes. But on a quarterly basis, American Capital Agency Corp. (NASDAQ:AGNC) realized losses of $0.55 per share, which were far worse than the Street’s expectations, which was followed by a spurt of sell orders.
Moreover, its conditional prepayment rate stood at 10%, which was constant on a sequential basis. If just having an extremely high yield is not the priority, I believe that there are better opportunities available in REITs.
Bullish Case for Apollo Mortgage
For the recent quarter, Apollo Residential Mortgage Inc (NYSE:AMTG) reported an impressively low conditional prepayment rate of 7%. The hybrid mortgage REIT has been enjoying low CPRs for quite some time now, which is one of the reasons behind its exceptionally high ROEs with relatively lower leverage. As a result of solid financial performance, shares of Apollo Residential Mortgage Inc (NYSE:AMTG) have risen by around 27% over the last year.
According to the latest press release, Apollo Residential Mortgage Inc (NYSE:AMTG) has raised around $172 million from the sale of its 7.82 million shares. Besides that, the REIT also offloaded some of its non-agency backed RMBS or Residential Mortgage Backed Securities, which raised around $589 million. With a total portfolio size of $4.9 billion and over $760 million in liquidity, it would be interesting to know where the cash would flow.
Its management stated that its long term goals include portfolio allocation 30% non-agency RMBS. However, non-agency RMBS currently account to 21% of its overall portfolio, which suggests that the REIT would be looking to increase its non-agency RMBS holdings with the cash generated from its recent sales.
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.
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 Fool.com 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.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.