One of the perils of mortgage REITs is that they're actively managed. From quarter to quarter, the portfolio can change substantially.

Active managers may add new hedges, or move the portfolio in a way that would alter its ability to pay dividends.

In the spotlight for this earnings season is American Capital Agency Corp. (NASDAQ:AGNC).

What's so special about this mREIT?
Last quarter, American Capital Agency's portfolio managers derisked its underlying portfolio by reducing its positions in 30-year mortgages to add to its 15-year mortgages. Its earnings supplement revealed that it cut its holdings of 30-year mortgages by 8 percentage points, adding that capital to its position in 15-year mortgages.

A chart from American Capital Agency's earnings presentation shows the shift in the investment portfolio:

Agncportfolio
Source: American Capital Agency Q2 Presentation.

This was a very different strategy than that employed by Annaly Capital Management (NYSE:NLY), which simply reduced its leverage to 6.2 times. American Capital Agency was levered at 8.4 times.

Moving to shorter-duration mortgages minimizes the potential losses to book value if interest rates rise. However, it also strains the company's spread between borrowing costs and the yield on its total investment portfolio. Annaly Capital created similar protection by walking leverage down.

At the end of the last quarter, American Capital Agency earned 3.08% on 15-year mortgages compared to 3.73% on 30-year mortgages.

Why it matters
Mortgage REITs can make money from the change in the price of mortgage-backed securities, and the yields of the MBSes they hold. By shifting toward 15-year investments, American Capital Agency's book value should have much better protection in a rising rate environment. 

However, adding more 15-year mortgages this quarter could affect its dividend payments going forward as lower yields result in lower profitability. American Capital Agency paid an average cost of funds of 1.49% as of June 30. If it were to shift further into 15-year paper, margins would shrink considerably as 15-year mortgages yield some 70 basis points less than 30-year mortgages.

Buying into bigger spreads
Only one big question remains: Was American Capital Agency opportunistic in making new investments during the last quarter, when the 10-year U.S. Treasury yield peaked near 3%? If it was, the company may have locked in spreads similar to 30-year mortgages in safer 15-year mortgages.

Likewise, we'll also be watching Annaly Capital's results to see if it used its ability to releverage the portfolio during September, when commercial MBSes and 30-year MBSes -- which make up the bulk of the portfolio -- were yielding 30-40 basis points more than today.

Given that the "accepted" range of leverage for mREITs is around 8 times equity, Annaly Capital could may have moved up its leverage ratio to buy into bigger spreads, improving its ability to pay large dividend yields.

Of course, it's quite possible that portfolio managers did the opposite, buying more hedges and selling MBSes into a rising yield environment. Unfortunately, we won't know until both mREITs report earnings in November. 

Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.