Can This Mortgage REIT Outmaneuver the Fed?

The behavior of the Federal Reserve has weighed heavily on the shoulders of mortagage REITs like American Capital Agency and Annaly Capital Management  as the government continues to scoop up the very same mortgage-backed securities backed by Fannie and Freddie that these companies also covet.

However, while the open-ended MBS buying spree has had a deleterious effect on the interest margin spread of both of these mREITs, Annaly's current spread of 0.95% looks meager compared to American Capital Agency's healthier 1.63%. In the earnings call released after its fourth-quarter earnings report, the company gives some details on just how it has been able to cope with the recent actions of the Fed -- and how QE3 has actually helped American Capital Agency's ability to keep that spread so wide.

New financing opportunities with QE3
The Fed's heavy involvement in the agency MBS market has opened up new avenues for financing through the TBA ("to be announced") dollar roll market, and American Capital Agency has jumped in with gusto. Management noted that terms have been much kinder to the company here than in the repurchase agreement market.


As the company notes, selling and then agreeing to buy back a comparable security at a later date provides a nice price drop for the buyer. To illustrate, management gave the example of a 30-year, 3% TBA MBS where the price drop as of December was $0.24 -- the difference between a January settlement and a February settlement. This dollar amount translates into a financing rate that the repo market simply can't beat.

The beauty of this situation, of course, is that it is as open-ended as QE3 -- and is apt to continue through the rest of this year. Since it translates into savings for the company, American Capital Agency's management can't resist taking advantage. To boot, the terms have become even more favorable in the first quarter of 2013 than they were last quarter.

What about Annaly?
American Capital Agency's management seems so enamored of the TBA market that it makes me wonder why others, namely Annaly, don't participate. While it is possible that it does, and just doesn't talk about it, that paltry spread convinces me that this is not the case.

Not that Annaly is sitting on its hands. It has taken steps to relieve its spread compression, most notably the bid to purchase the remaining shares of CreXus Investment , which invests in commercial MBSes. Indeed, Annaly's CEO recently commented that, with the power of Annaly's balance sheet, CreXus could present a "spectrum of opportunity," that could well be "exponential."

Both of these mREITs are coping with Fed behavior in the current environment, while trying to predict future actions, as well. But, that special brand of shrewdness is precisely -- as American Capital Agency's CIO Gary Kain says -- what investors are paying management for.

Annaly Capital Management has a history of paying huge dividends to shareholders, but these payouts have taken a hit over the past year or two. Will the CreXus purchase revive those juicy divvies? To find out more about Annaly's plans, as well as other crucial issues investors have to understand about Annaly's business model before buying the stock, check out this brand-new premium research report. Our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of the company's strategy. Click here now to claim your copy.

The article Can This Mortgage REIT Outmaneuver the Fed? originally appeared on Fool.com.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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


Increase your money and finance knowledge from home

Investment Strategies

What's your investing game plan?

View Course »

What is Short Selling?

Make a profit when stocks prices fall.

View Course »

Add a Comment

*0 / 3000 Character Maximum