American Capital Agency Corp. (AGNC) vs Annaly Capital Management, Inc. (NLY): Who Wins?

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A real estate investment trust is a company that owns, and in most cases operates, income-producing real estate. By law, REITs must distribute at least 90 percent of their taxable income to shareholders annually in the form of dividends, making them a popular choice for income investors.

REITs come in a variety of flavors. There are REITs that specialize in retail space, health care facilities and even self-storage operations.

American Capital Agency Corp. (NASDAQ:AGNC)

One REIT sector that has witnessed explosive growth the last several years, and because of it has attracted increased scrutiny by regulators, is mortgage REITs. These are publicly traded companies that borrow funds to invest in real estate debt, rather than actual real estate. According to a recent Wall Street Journal report, mortgage REITs are seen by some financial regulators as a source of market vulnerability.

Many see a bubble, similar to what caused the financial crisis of 2008-2009, looming, largely because mortgage REITs have quadrupled their assets to more than $400 billion since 2009, according to WSJ.

The two largest mortgage REITs are American Capital Agency Corp. (NASDAQ:AGNC). and Annaly Capital Management, Inc. (NYSE:NLY). Combined they own $235 billion in assets. American Capital Agency Corp. (NASDAQ:AGNC) is a REIT that invests exclusively in single-family residential mortgage pass-through securities and collateralized mortgage obligations on a leveraged basis. Annaly owns, manages, and finances REITs, including mortgage pass-through certificates, and collateralized mortgage obligations.

Below is a comparison of the attributes and performance of these two industry heavyweights.

Market valuations: There is very little difference in their valuation ratios. As of May 1, Annaly Capital Management, Inc. (NYSE:NLY) traded at a price to earnings ratio of 9.3 and a price-to-book ratio of 1.01. American had a lower P/E of 8, and a slightly higher price-to-book ratio of 1.05.

Recent stock performance: American Capital Agency Corp. (NASDAQ:AGNC)’s 52-week high was set in September 2012 when it traded at $36.77. Since then, it has fallen to a low of $28.08 in January and has rebounded to its current level of about $33.

Annaly Capital Management, Inc. (NYSE:NLY) has followed a similar pattern. Its 52-week high also was set in September at $17.75, before it hit a bottom of $13.72 in January. It has since rebounded to its current level of just under $16.

Management effectiveness: When it comes to the ratios that measure the effectiveness of management to earn the highest returns on its assets, investments and equity, the two companies have performed nearly equally in the last 12 months. However, American has earned better average returns over the last five years.

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