Agency mortgage REITs manage portfolios composed of residential mortgage backed securities that are issued and insured by federal agencies. Since government agencies underwrite the mortgages and issue the RMBSs, the securities come with an implied U.S. government backing.
In the recent and still ongoing low-interest rate environment, many investors have sought out high-yielding fixed income alternatives to supplement portfolios. While most other residential real estate investments suffered over the last several years as borrowers defaulted, agency-backed RMBSs have performed well. The government continues to fund these agencies, which are required to take over payments or buy out mortgages when borrowers default.
Though defaulting borrowers has not caused agency backed mortgages to default, the prepayment buying of mortgages essentially cashes RMBS investors out of their positions and requires them to reinvest. Refinancing, which has also been prevalent over the last several quarters, is another type of prepayment and has a similar affect upon mREITs.
This can have a volatile effect upon a mREIT's income, yield, book value and margin between its borrowing costs and investment return. Generally, in this low interest rate environment, it has often been the case that an agency mREIT is being forced into lower yielding paper when prepayments occur. Nonetheless, prepayment is considerably preferable to an actual default.
Below, I have provided recent performance rates for five reasonably liquid and high yielding Agency Mortgage REITs: American Capital Agency Corp. (AGNC), Annaly Capital Management, Inc. (NLY), Capstead Mortgage Corp (CMO), Cypress Sharpridge Investments (CYS), and Hatteras Financial Corp (HTS). I have provided one-week, one-month, 2012-to-date and 1-year equity performance rates, as well as each REIT's yield.
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The performance rates do not include dividends paid. These agency mREITs also have a present average yield of 13.88 percent, meaning they have also paid out a quarterly dividend of approximately 3.5 percent so far in 2012.
So far this year, shares in these mREITs have appreciated an average of 7.51 percent. Over the last month, they have appreciated an average of 5.32 percent, with strong performance over the last two weeks by all five of these mREITs. See a 1-month performance comparison chart, below:
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We are also currently in the middle of earnings season for this industry. On April 24, Hatteras Financial reported it earned net income of $69.3 million or $0.89 per share during Q1 of 2012, compared with $70.6 million, or $0.92 per share, during the Q4 of 2011 and $0.96 per share during Q1 of 2011. On April 25, Capstead Mortgage reported Q1 2012 net income of $45.17 million, or $0.44 per share, compared to $41.968 million, or $0.43 per share during Q4 of 2011. American Capital Agency is scheduled to report its earnings on May 2, or this Tuesday. Annaly Capital Management does not pre-announce when it intends on reporting, but released its Q1 2011 report on May 4 of last year.
Currently, U.S. debt is benefiting from European sovereign debt weakness, but many anticipate that America will not be immune to such problems. A growing concern to agency mREITs is that rising interest rates could hurt the value of the value of their assets. The yield on U.S. government debt is currently near historic lows, with yet another debt ceiling debate looming during the second half of this election year. Potential tax, regulatory and fiscal policy changes, or even the political discussion of such possibilities, could add volatility to the coming quarters, just as last year's debt ceiling debate did.
Disclaimer: This article is intended to be informative and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.
Disclosure: I am long NLY.
