Secondly, ARM securities are less sensitive to price changes as compared to fixed-rate MBS. Thus as interest rates rise, Capstead Mortgage’s book value per share would not suffer a steep drop. The same cannot be said about American Capital Agency Corp. (NASDAQ:AGNC) and ARMOUR Residential REIT, Inc. (NYSE:ARR) that invest mostly in fixed-rate long duration 30-year MBS.
What happened in the first-quarter?
In its first-quarter earnings results, Capstead Mortgage reported that its interest margin increased by 2 basis points from the previous quarter to 1.15%. Moreover, Capstead Mortgage was one of the few mREITs that reported a stable book value per share which increased by $0.02 to $13.60.
On the other hand, American Capital Agency Corp. (NASDAQ:AGNC) reported that its net interest margin decline 11 basis points sequentially to 1.52% in the first-quarter. At the same time, the mREIT felt the full force of a spike in interest rates as its book value per share dropped by 8.5% to $28.93. This is because American Capital Agency Corp. (NASDAQ:AGNC) was heavily exposed to long duration fixed-rate 30% MBS. Furthermore, American Capital Agency Corp. (NASDAQ:AGNC) had invested in MBS with low prepayment risk, and prices of these securities suffer the most as interest rates rise.
ARMOUR Residential REIT, Inc. (NYSE:ARR) also suffered a similar fate as American Capital Agency Corp. (NASDAQ:AGNC). In its first-quarter results, ARMOUR Residential REIT, Inc. (NYSE:ARR) reported that its net interest margin dropped 20 basis points from the previous quarter to 1.35%. At the same time, its book value per share dropped to $6.69 from $7.29 in the previous quarter, a decline of 8.2%.
As you can see, comparing Capstead Mortgages’ first-quarter results to those of its competitors supports my thesis that this mREIT is the right choice in an uncertain and rising interest rate environment that we are in at this time.
Foolish bottom line
A lot of the mREITS look very attractive right now based on their historical dividend yields. However, it is important to understand the risks when investing in mREITs that have invested in long duration fixed rate securities in a rising interest rate environment. With a dividend yield of 10%, I believe that the conservatively positioned Capstead Mortgage is the safest mREIT to be in right now for dividend investing as well as capital preservation due to its strategy of investing almost exclusively in ARM securities and operating at a moderate leverage level.
The article This Is The Safest mREIT To Invest In Right Now originally appeared on Fool.com.
Zain Zafar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Zain 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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