Mortgage REITs are Still a BUY Following QE3

Last week, the Fed announced it will purchase an additional $40 billion per month of Agency MBS. The purchase time frame is open-ended, but will be reviewed as economic developments dictate. In addition to additional purchases, the Fed also extended the commitment to keep interest rates low to at least mid-2015.  We believe that the FED decision is a positive for Mortgage REITS.

In the short term, we may see some profit taking.  Longer term, we believe the technical picture appears extremely strong and fundamentals such as carry and prepays remain favorable.

In addition, investors have looked to mortgage REITs to take advantage of the recovering U.S. housing market. Mortgage REITs do not directly invest in real estate but invest in the mortgages on real estate properties.  The Vanguard REIT ETF — which tracks the performance of an index that measures the performance of publicly traded equity REITs — is up over 15 percent for the year, outperforming the Dow Jones Industrial by a large margin.

We see AMTG, MTGE and AGNC as best positioned to benefit from the announcement given the mix of lower coupon fixed-rate MBS in the portfolio.  As is the case, the positives for book value are offset by lower reinvestment yields on new MBS purchases given the spread tightening.

Apollo Residential Mortgage, Inc. (NASDAQ: AMTG) is a real estate investment trust that invests in and manages residential mortgage-backed securities and other residential mortgage assets throughout the United States.  Apollo Residential Mortgage is trading at $22.488, near its 52-week high.  Apollo Residential Mortgage has a current dividend yield of 13.97%.  Apollo Residential Mortgage is rated a 1.8 (STRONG BUY rating) by First Call analysts.

American Capital Mortgage Investment Corp. (NASDAQ: MTGE) is a real estate investment trust formed in 2011 that invests in and manages a leveraged portfolio of agency mortgage investments, non-agency mortgage investments and other mortgage-related investments.  American Capital Mortgage is trading at $23.23, near its 52-week high.  American Capital Mortgage has a current dividend yield of 13.73%.  American Capital Mortgage is rated a 2.1 (BUY rating) by First Call analysts.

American Capital Agency (NASDAQ: AGNC) invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae (FNMA), Freddie Mac (FHLMC) and Ginnie Mae (GNMA).   American Capital Agency is trading at $36.49, near its 52-week high.  American Capital Agency has a current dividend yield of 13.7%.  American Capital Agency is rated a 2.2 (BUY rating) by First Call analysts.