Annaly Capital Management, Inc. (NLY), Javelin Mortgage Investment Corp (JMI): Mortgage REITs Rallied, But Why?

For Javelin Mortgage Investment Corp (NYSE:JMI), a portfolio tilt towards the high yielding non-Agency MBS including commercial MBS will create value. The company is currently largely invested in Agency RMBS (90% of the portfolio), while the rest are non-Agency securities. I believe an increase in the non-Agency’s proportion would support the company’s net interest rate spread, while also providing protection to book value erosion. Further, reduction in the amounts of leverage that both companies have employed should reduce volatility in the coming quarter’s financial results.

Competition

Both JAVELIN and ARMOUR compete with Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC) to purchase the Agency paper. Both American Capital Agency Corp. (NASDAQ:AGNC) and Annaly Capital Management, Inc. (NYSE:NLY) are well managed, large Agency mortgage REITs.

American Capital Agency Corp. (NASDAQ:AGNC) recently announced its future approach of reducing some of the 30-year fixed rate Agency paper from its portfolio, while also renewing its resolve to manage its hedges and assets actively to produce attractive opportunities. This much awaited move would lead the company to provide some support to its book value and the net interest rate spread. Without this move, analysts at Credit Suisse were expecting a 20% decline its dividends.

Annaly Capital Management, Inc. (NYSE:NLY) was already prepared for the rising interest rates environment. The challenges in the third and fourth quarters last year led the company towards a diversification attempt. Annaly Capital Management, Inc. (NYSE:NLY) purchased CreXus Investments, a REIT that invests in commercial MBS. This is now providing the company with the much required low double-digit returns, while it’s also saving on compensation expense due to the externalization of its management. So, its fair to say that Annaly Capital Management, Inc. (NYSE:NLY)’s returns are safe. To secure its book value, the company has CRE loans and a relatively less leverage (6.7 times). These will provide some cushion to the book value erosion.

Conclusion

JAVELIN and ARMOUR’s announcements about maintaining their dividend rates for the third quarter led the recent rally in the mREITs sector. However, both need to take some corrective actions in order to perform better under the given volatile market conditions.

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 Mortgage REITs Rallied, But Why? originally appeared on Fool.com is written by Adnan Khan.

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