Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC) & American Capital Mortgage Investment Crp (MTGE): Has This Mortgage REIT Wunderkind Lost His Touch?

Several mortgage REITs reported first-quarter results last week, among them Annaly Capital Management, Inc. (NYSE:NLY), American Capital Agency Corp. (NASDAQ:AGNC), and American Capital Mortgage Investment Crp (NASDAQ:MTGE), the hybrid cousin of AGNC. Annaly Capital Management, Inc. (NYSE:NLY)’s report wasn’t full of surprises and presented ho-hum earnings in addition to its continually contracting net interest spread.

What no doubt did surprise everyone who keeps an eye on the mREIT sector were the subsequent earnings announcements of the other two companies, both of which lost money — and share a CIO in the well-respected Gary Kain.

What the heck happened?
Both of Kain’s trusts are heavy hitters in the sector, with yields of 16.30% for American Capital Agency Corp. (NASDAQ:AGNC) and 14.29% for its hybrid sidekick, compared to Annaly Capital Management, Inc. (NYSE:NLY)’s not-too-shabby 11.90%. Dividends have been robust, too. The agency-only American Capital Agency Corp. (NASDAQ:AGNC) has been paying a hefty $1.25 per share for quite a while now, and American Capital Mortgage Investment Crp (NASDAQ:MTGE) has been paying $0.90. Compared with Annaly’s dwindling payout, these trusts seemed to be a gold mine.

Then, came the first quarter of 2013. American Capital Agency Corp. (NASDAQ:AGNC) lost $1.57 per share, and the smaller hybrid mREIT lost $0.56 per share. Why did the agency paper perform so poorly?

According to Kain, the main culprits in the first-quarter earnings/book value massacre were: 1) the drop in values of mortgage-backed securities, with a commensurate uptick in interest rates, due to rumors that QE3 might end early on signs of economic strength; and 2) the secondary offering, which did not foresee the aforementioned changes during the first quarter of the year.