Time to Buy Annaly Capital Management, Inc. (NLY)

American Capital Agency Corp. (NASDAQ:AGNC) is currently leveraged at 6.5 times, below the 2Q12 7.5 times. This means both American Capital and Annaly Capital have the same level of leverage in their capital structures but, unlike Annaly Capital, American Capital Agency will face adverse effects on its net interest rate spread if the long-term mortgage rates keep climbing up. At the end of the first quarter, American Capital Agency Corp. (NASDAQ:AGNC) reported a spread of 1.52%, down 1.62% at the end of the linked quarter. If the spread drops below 1.3%, it would be marked as a multi-year low.

The 30-year fixed mortgage rate has climbed 54 bps since the start of the first quarter, and American Capital Agency estimates at least a 4.3% contraction in its projected net interest spread in such a scenario. ARMOUR Residential REIT, Inc. (NYSE:ARR) estimates a similar 4% contraction in its net interest income for the current quarter. Besides, the new production MBS, which ARMOUR purchased, perform worse when the rates go up. Therefore, for ARMOUR Residential REIT, Inc. (NYSE:ARR) higher mortgage rates mean a definite strain on its bottom line.

Foolish Takeaways

I believe out of the three aforementioned pure-play mREITs, Annaly Capital is best positioned to take advantage of the prevailing situation. The company’s low leverage, coupled with the higher returns available from its recent acquisition will provide some cushion to its book value. And, more CRE debt opportunities will make the book value less sensitive to changes in interest rates. The coming quarter’s bottom line will also be supported with low compensation expense.

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 Time to Buy Annaly Capital Management originally appeared on Fool.com is written by Adnan Khan.

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