American Capital Mortgage Investment Crp (MTGE), ARMOUR Residential REIT, Inc. (ARR): Expect the Smallest Book Value Decline from This mREIT

ARMOUR Residential REIT, Inc. (NYSE:ARR) is another mREIT that invests exclusively in Agency fixed-rate residential mortgage backed securities. The company reported worse-than-expected book value at the end of the second quarter. Its book value plunged 19% during the second quarter, which was 8% more than forecasted by Credit Suisse analysts. Much of the decline in the book value was associated to lower-than-expected swap gains. Also, during the quarter, ARMOUR reduced the size of its assets portfolio by 7%. However, the relative proportions of fixed-rate to adjustable-rate mortgage remained the same at 94% to 6%, respectively. The company benefitted from lower prepayments, which resulted in higher asset yields and the resultant 4 basis points higher spread.

Compared to the prior quarter, the interest rate sensitivity of ARMOUR Residential REIT, Inc. (NYSE:ARR)’s book value has decreased. Now, the company’s book value will plunge 2.56% and 1.26% if rates go up 100 and 50 basis points. This is compared to 2.42% and 1.27% declines at the end of the first quarter if the rates went up 100 and 50 basis points, respectively.

Conclusion

Given continued uncertainty surrounding the unwinding of quantitative easing, I believe American Capital Mortgage is one of the mortgage REITs that will report least book value decline during the third quarter. The managements’ strategy has made it possible during the second quarter, and the reduced interest rate sensitively will make it possible the next time as well. Because of this, I am bullish on the stock.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Expect the Smallest Book Value Decline from This mREIT originally appeared on Fool.com and is written by Adnan Khan.

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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