Annaly Capital Management, Inc. (NLY): How Will the Upcoming Fed Meeting Impact REITs?

The second half of 2012 has resulted in the flattening of the yield curve as a result of the initiatives of the Fed. However, average fixed mortgage rates have edged higher recently. The 30-year rate averaged 3.4%, the highest in eight weeks, and above the previous average of 3.34%. The 15-year rate averaged 2.66%, up 2 basis points from its previous average of 2.64%.

Mortgage application activity also showed an increase of 11.7%, while refinancing applications increased 12%.  This indicates that we may well see a steepening of the yield curve in 2013.  This can only benefit companies like Annaly, which could see improved interest spreads.

American Capital Agency Corp. (NASDAQ:AGNC) owns a majority of fixed rate securities, and approximately 63% of the company’s MBS portfolio consists of 30-year fixed rate securities, while 32% is 15-year fixed rate.  20-year fixed MBS is 3% of the entire MBS portfolio of the company at the end of the third quarter of 2012. The average maturity was 4.3 years, while the CPR rate was 9%. However, the prepayment protected portfolio enabled American Capital to continue its quarterly dividend of $1.25 per common share.

ARMOUR Residential REIT, Inc. (NYSE:ARR) invests exclusively in Agency mortgage REITs, 90% of which are fixed rate securities, and 10% are ARMs and Hybrid ARMs. The company is largely invested in 15 and 20-year MBS, with low coupons and loan balances, making them prepayment protected. Armour reported 13% CPR at the end of the third quarter.

Two Harbors Investment Corp (NYSE:TWO) has recently spun off its single-family home portfolio into a new REIT named Silver Bay Realty Trust Corp (NYSE:SBY). The housing bust, which has had a detrimental effect on mortgages and interest, has turned into a major business opportunity for entities like Silver Bay. Private investors have snapped up distressed single-family homes cheaply and the glut of foreclosures has resulted in a new industry in which single-family rentals are becoming the new norm.

Annaly is currently available at an attractive valuation at a discount of around 11% to its book value, and you must remember that the book value is established by marking the portfolio to market so that the value is realistic.  It is a most attractive income investment with a dividend yield of a little over 12%, and you can expect the dividend to continue to be attractive at least until the end of 2014.  In the current environment of rock-bottom interest rates, mortgage REITs are among the best income investments, and Annaly is the largest and arguably best managed REIT.  If you are looking for income, I recommend taking a closer look at Annaly.

The article How Will the Upcoming Fed Meeting Impact REITs? originally appeared on Fool.com and is written by Jordo Bivona.

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