Besides, since mREITs’ hedging is limited due to the IRS rules, Ellington can benefit from increased hedging. mREITs are not allowed to include income from their derivatives and other hedging transactions as part of their REIT taxable income. Therefore, mREITs are not encouraged to employ major hedging.
Therefore, I believe Ellington Financial LLC (NYSE:EFC) is the best bet among the companies that invest in mortgage backed securities.
Ellington competes with other specialty finance companies and mREITs for buy MBS. Among other mREITs, ARMOUR Residential REIT, Inc. (NYSE:ARR)’s investors should be more worried about their company’s book value.
The company employs a very high level of leverage of 9.2 times, which makes the book value more interest rate sensitive and magnifies the adverse results.
Further, its recent MBS acquisitions don’t perform well under a rising interest rates environment, which means a decline in the asset yield cannot be ruled out.
In short, the ARMOUR’s book value and its spread are under pressure.
Annaly Capital Management, Inc. (NYSE:NLY) happens to be the largest mREIT and also happens to employ a relatively low leverage of 6.7 times.
This low leverage will act as a cushion to the company’s book value. Besides, the company’s investments in commercial real estate debt make the book value further insensitive to changes in the interest rates.
Less compensation expense as a result of the change in the management structure will further support the coming quarter’s book value. Therefore, Annaly Capital has a better shot, compared to ARMOUR Residential under the prevailing scenario.
While Annaly Capital’s low leverage might be able to provide some cushion to its book value, I believe Ellington Financial LLC (NYSE:EFC) is best positioned to excel under the given situation. ARMOUR, however, remains my least favored mREIT amid speculations that Fed might exit the Agency MBS markets soon.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Is Your Company’s Book Value Safe? originally appeared on Fool.com.
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