American Capital Agency Corp. (AGNC), Annaly Capital Management, Inc. (NLY): Mortgage REITs, A Long-Term Bet

So, a combination of a positive outlook and the current cheap valuations make American Capital Agency Corp. (NASDAQ:AGNC), Annaly Capital Management, Inc. (NYSE:NLY), and ARMOUR Residential REIT, Inc. (NYSE:ARR) attractively valued. Now, let’s look at what’s going on at these companies.

The largest mREIT

Annaly Capital Management, Inc. (NYSE:NLY) is the largest mREIT in the U.S. with a variety of bullish factors. The company externalized its management structure, just like American Capital. This has resulted in reduced compensation costs for Annaly Capital Management, Inc. (NYSE:NLY), which will provide some support to the bottom line.

Besides, it has some commercial real estate loans (CRE) in its portfolio. These provide higher returns and cushion book value against further erosion. The company also employs relatively less debt, which will provide another cushion against fluctuations in results.

Re-balancing exercise

American Capital Agency Corp. (NASDAQ:AGNC) is one of the most well-managed mREITs. It recently conducted a re-balancing exercise under which it got rid of some of the longer duration (30-year) fixed rate security. This security is considered most sensitive to changes in interest rates, largely due to a higher duration. These efforts would result in protecting the company’s book value, while active management of assets and hedges will create higher returns.

Hammered the most

Among the Agency-only players, ARMOUR Residential REIT, Inc. (NYSE:ARR) has been hammered the most since the beginning of the current year. ARMOUR’s investors could see a better future for their company if it sells its assets to reduce leverage and add additional swaps.

Conclusion

While American Capital Agency Corp. (NASDAQ:AGNC), Annaly Capital Management, and ARMOUR Residential REIT, Inc. (NYSE:ARR) are facing tremendous pressure on their book values, I believe this is short-term. For a long-term investor, this is an ideal entry point as the stocks are both undervalued and are positioned to appreciate over the coming quarters.

The article Mortgage REITs: A Long-Term Bet 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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