American Capital Agency Corp. (AGNC) Versus Annaly Capital Management, Inc. (NLY)

It’s no secret that mREITs such as American Capital Agency Corp. (NASDAQ:AGNC), Annaly Capital Management, Inc. (NYSE:NLY), and CYS Investments have gone through a very turbulent trading period, with all major players losing a sizable share of market value.

Mortgage REITs seem to be moving in an elastic inverse correlation to 10-year Treasury yields, and that’s perfectly understandable. These leveraged investments are also reacting strongly to shorter-term developments such as the announcement that CYS CEO Kevin Grant purchased 34,000 shares of stock. This led to spectacular gains for mREITs — CYS led the rally, shooting up a hefty 7.1%, American Capital Agency Corp. (NASDAQ:AGNC) rose 4.1%, and Annaly Capital Management, Inc. (NYSE:NLY) gained 3.2% after this news last month.

American Capital Agency Corp. (NASDAQ:AGNC)Prior to the announcement, CYS stock had lost close to 47% since March, and the gains must have come as welcome news for shareholders. The firm is one of the highest dividend-paying mREITs in the market with a 17.5% dividend yield.

Investors are now wondering which mREIT offers better investment value between the two behemoths of the space: American Capital Agency Corp. (NASDAQ:AGNC) or Annaly Capital Management, Inc. (NYSE:NLY). Many mREIT investors not only need high income paying stocks but also those that offer a certain level of protection against loss of capital. To compare them, investors can use the following criteria:


Interest rates spread


Book value

Annaly’s second-quarter results looked fairly impressive, comparatively. The firm earned net income of $1.6 billion, equivalent to $1.71 per share. Annaly Capital Management, Inc. (NYSE:NLY)’s second-quarter numbers look even more impressive when you compare them to last year’s second-quarter results, when the firm booked a $91 million loss, or $0.10 loss per share.

In sharp contrast, American Capital Agency Corp. (NASDAQ:AGNC)’s second-quarter results looked pretty ugly. The firm booked a nasty overall loss of $936 million, or $2.37 per share.

Interest rates spread
Interest rates fluctuated wildly in the second quarter, thus improving the interest rate spread for many mREITs. The cost of borrowing rose at a slower pace compared to the pace at which yields from investments rose. Annaly reported a 0.98% net interest spread, an improvement over 0.91% in the first quarter. The interest rates spread was, however, considerably lower than last year’s second-quarter spread, which came in at 1.54%. The firm’s asset yield for its interest-earning portfolio stood at 2.51%. Its average cost of funds shot up seven basis points to 1.53%.

American Capital Agency Corp. (NASDAQ:AGNC)’s interest rate spread for the second quarter came in at 1.86%; a marginal drop compared to 1.87% in the first quarter. If we exclude the firm’s TBA dollar roll income, the net spread falls to just 1.49%, a slight drop from the first quarter’s 1.51%. American Capital Agency’s asset yield stood at 2.71% while its average cost of funds shot up 15 basis points to 1.43%.

The average yield on assets rose by a higher absolute amount than the cost to borrow, leading to improved interest rates spread for both mREITs. Although the spread for both firms was OK, American Capital Agency beats Annaly Capital Management, Inc. (NYSE:NLY) hands-down for a much larger spread. Annaly Capital Management, however, beats American Capital Agency Corp. (NASDAQ:AGNC) to the tape when we consider interest rate spread growth. Growth in interest rates spread is more important for capital appreciation than larger, but stagnant, absolute spreads. Annaly Capital Management, Inc. (NYSE:NLY) takes this category.