Buy mREITs On Impeding Housing Recovery: ARMOUR Residential REIT, Inc. (ARR), Annaly Capital Management, Inc. (NLY)

All three mREITs are exclusively invested in MBS guaranteed by government agencies. However, the structures of their investment portfolios differ. While American Capital and Annaly Capital Management, Inc. (NYSE:NLY) have large chunks of the fixed rate Agency paper in their portfolio, Armour includes adjustable-rate MBS alongside fixed-rate securities in its holdings.

The leverage ratios of American, ARMOUR Residential REIT, Inc. (NYSE:ARR), and Annaly of 7 times, 8 times and 6.6 times, respectively, reflect the fact that Armour is the most leveraged among them. Therefore, it is bound to benefit the most when it magnifies the positive results. American, Annaly Capital Management, Inc. (NYSE:NLY), and Armour reported prepayment speeds of 10%, 19%, and 14% at the end of the fourth quarter of 2012. These prepayments will come down further, benefitting the companies under consideration. Therefore, investors can expect a definite spread expansion and some price appreciation and increase in dividends.

Conclusion

While the Fed’s best efforts might not be working for the US housing sector, the lender shortage will undoubtedly assist the US mortgage REITs by bringing down their prepayments, amortization costs and expanding their spreads. In particular, American Capital Agency, Annaly Capital Management, Inc. (NYSE:NLY) and ARMOUR Residential REIT, Inc. (NYSE:ARR) are my favored picks.

The article Buy mREITs On Impeding Housing Recovery originally appeared on Fool.com and is written by Adnan Khan.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.