While the portfolio rebalancing efforts and the active management of both assets and hedges are moving in the right direction, investors must understand that the volatile markets have already inflicted a lot of damage on American Capital Agency Corp. (NASDAQ:AGNC), which is why its book value is already down 9% since the start of this quarter.
In comparison, Annaly Capital Management, Inc. (NYSE:NLY) was already prepared for the volatility in the markets, which is why the damages it will face will be less severe compared to American Capital Agency. Annaly already has a portfolio that will produce higher net interest income if rates increased. Besides, its exposure into commercial MBS through the CreXus acquisition would provide the company with addition returns. Further, Annaly had some exposure in commercial real estate (CRE) loans, which act to provide a cushion to book value in times when the interest rates are on the rise. Last but not least, the company’s bottom line will be supported with less compensation expense as it shifts to its external manager.
In contrast to Annaly Capital, ARMOUR Residential REIT, Inc. (NYSE:ARR) was not prepared for a QE unwinding, and amid speculations of unwinding, its stock price has depreciated 29% since the beginning of the year, leading the decline in the pure-play mREITs. ARMOUR’s portfolio was constructed to generate higher income when rates decline. However, rates did not decrease as expected by the company’s management. Further, the company purchased new production MBS, which perform worse when rates increase. So, in short, I expect ARMOUR Residential to report a decline in its book value that will be magnified by its over 9 times leverage ratio.
As the volatility in the mortgage markets increase, American Capital Agency Corp. (NASDAQ:AGNC) attempts to rebalance its portfolio and attempts to actively manage it. However, still Annaly Capital Management, Inc. (NYSE:NLY) is better positioned for the prevailing macroeconomic environment, while ARMOUR Residential REIT, Inc. (NYSE:ARR) remains my least preferred Agency mREIT.
The article American Capital’s Approach for the Future originally appeared on Fool.com and is written by Adnan Khan.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan 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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