What QE3 Means For mREIT Investors

by: Thomas C.

Today, the Federal Reserve announced a new round of economic stimulus that will have an effect on some mREIT issues.

The overall economic picture presented is that while economic activity has continued to expand at a moderate pace in recent months, growth in employment has been slow, and the unemployment rate remains elevated. The housing sector has shown some further signs of improvement, albeit from a depressed level. Longer-term inflation expectations have remained stable.

The announcement included specific action to be taken in the market for Mortgage Backed Securities (MBS) with the objective of putting downward pressure on longer-term interest rates, supporting mortgage markets, and helping to make broader financial conditions more accommodative. (For more information, see this link).

Commencing September 14, 2012, the Fed will begin purchasing additional agency MBS - approximately $23 billion during September and $40 billion per month thereafter. The Fed will continue to reinvest principal payments in agency MBS. It is expected that these actions should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Fed also extended its commitment to keep rates low, saying it expects to maintain a "highly accommodative stance" for a considerable time after the economic recovery strengthens, and extended through mid-2015 its commitment to maintain the target range for the federal funds rate at levels of 0% to 0.25%.

Today's Fed announcement which will likely have two effects on mREITs: continued pressure on yield spreads that are the original source of mREIT operating profits, and gains from the increase of the market value of existing MBS in mREIT portfolios.

Today's Fed announcement portends neither certain bonanza or doom for our favorite mREITs. It is another economic event to be considered and acted upon, a challenge and an opportunity. We expect the managers of our favorite mREITs such as American Capital Agency (NASDAQ:AGNC), Annaly Capital Management (NYSE:NLY), and Armour Residential REIT (NYSE:ARR) to structure their portfolios to take advantage of the opportunities and mitigate challenges created by the latest Fed interventions. We continue to believe that hybrid mREITs, such as Two Harbors (NYSE:TWO) and American Capital Mortgage (NASDAQ:MTGE), have more flexibility than do agency mREITs to create portfolios to take advantage of the opportunities and mitigate the challenges created by the Fed actions.

Over the past few years, many mREITs have provided investors with exceptional income and capital gains, a record without peers among alternative income investments. Nothing in today's Fed announcement means that mREITs can no longer make money, but it does mean that the investment techniques that worked well last year will likely not work as well in the future. As each investor considers whether to maintain their mREIT investment, I believe the overarching consideration is whether they have confidence that management is capable of making the right moves to preserve capital and generate rewarding income as the Fed implements its latest moves to strengthen the economy.

This article provides opinions and information for your consideration. It is not intended to provide investment advice appropriate for any specific person for any particular purpose. Each investor must do their own research. You are responsible for your own investment decisions.

Disclosure: I am long AGNC, MTGE, ARR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.