Annaly Capital Management, Inc. (NLY), American Capital Agency Corp. (AGNC): Further Rebalancing to Help These mREITs

The addition of adjustable-rate Agency securities in the company’s portfolio could result in higher earnings and further decrease the book value volatility. Let me explain how.

Interest payments on the adjustable-rates securities adjust to the more current prevailing rates on the next reset date. So, the book value volatility, if any is experienced only between two reset dates. Further, since the interest payments adjust to more current rates, the company can gain an advantage from the current higher interest rates.

Adjustable-rate Agency-only

Capstead Mortgage Corporation (NYSE:CMO) is one such Agency-only mREIT that invests in adjustable-rate Agency paper only. According to the company financial disclosures, Capstead’s investment strategy is to mitigate the risk by focusing on investments that are considered to have little credit risk and are collateralized by adjustable-rate mortgage loans with interest rates that reset on the next reset date to more current levels. These characteristics led Capstead to report considerably less vulnerability to significant price declines caused by changes in interest rates.

That is exactly why it has not seen a significant decline in its stock price. The design and nature of the company’s investment portfolio led it to report a dividend for the second quarter, which was in line with the prior quarter’s distribution. In contrast, both American Capital Agency Corp. (NASDAQ:AGNC) and Annaly Capital Management, Inc. (NYSE:NLY) reported declines in their second quarter shareholder distributions.

Conclusion

While the mortgage REITs sector experiences considerable weakness due to the speculations about the Fed’s exit from the Agency MBS markets, I am bullish on the Agency mREITs. The aforementioned mREITs have made some rebalancing efforts, which make me more bullish on the stocks. I also believe that the proposed rebalancing efforts would result in further enhancing the returns.

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.

The article Further Rebalancing to Help These mREITs originally appeared on Fool.com and is written by Adnan Khan.

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