Javelin Mortgage Investment Corp (JMI), ARMOUR Residential REIT, Inc. (ARR): One Hybrid mREIT I Would Avoid

American Capital Agency Corp. (NASDAQ:AGNC) is another large-cap Agency-only mREIT that invests exclusively in fixed rate Agency MBS. Before, the company had a large chunk of the troubled 30-year MBS, but during the second quarter, the company’s management decided to get rid of some of this exposure. Also, during the quarter, the company tilted its portfolio towards the 15-year fixed-rate MBS as the 15-year MBS became nearly 42% of the portfolio, compared to 31% at the end of the first quarter. As a result, American Capital was able to cap its book value decline at 11.8%, while the net interest rate spread was off 12 basis points over the prior quarter.

Going forward, the company’s duration gap will increase by only 0.1 years if rates go up by either 100 basis points or 200 basis points. This is compared to 1.6 year and 2.2 year duration gap extensions at the end of the first quarter. Remember, a higher duration gap exposes the book value to changes in interest rates. So, I believe the management will be able to further cap book value erosion in the third quarter.

Conclusion

You have seen that despite being classified as a hybrid mREIT, Javelin Mortgage Investment Corp (NYSE:JMI) reported a significant book value decline, even higher than American Capital Agency Corp. (NASDAQ:AGNC)’s book value decline. Javelin’s poor book value protection can be attributed to the nature and design of its investment portfolio. Future book value protection is also not a guaranteed at Javelin. So, I recommend investors stay away from Javelin as the immediate risk of book value erosion overshadows the long-term benefit of higher earnings potential.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

The article One Hybrid mREIT I Would Avoid originally appeared on Fool.com.

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