When it comes to double-digit returns, it's hard to beat the mortgage REIT sector, particularly since Federal Reserve actions since the financial crisis have kept short-term interest rates at historic lows. The shining example of this type of real estate investment trust is Annaly Capital (NYSE:NLY), the original investor in mortgage-backed securities insured by government sponsored entities such as Fannie Mae and Freddie Mac.
Annaly has built its reputation on stellar yields produced by a savvy management team, building the business from its inception in 1997 to a company with a market capitalization of $15 billion and assets topping $133 billion. But there's a relative newcomer that seems intent on knocking Annaly off of its throne: American Capital Agency (NASDAQ:AGNC).
A great year for mortgage REITs
American Capital Agency went public in 2008, a year that saw other mREITs such as Hatteras Financial (UNKNOWN:HTS.DL), and Armour Residential (NYSE:ARR) enter the territory as well. Groundbreaker Annaly had shown that the carry trade could be lucrative, and the ultra-low short-term interest rate environment created a perfect climate for new companies to enter the playing field.
Both Hatteras and Armour have been successful, but American Capital Agency, under the guidance of Gary Kain, has seen explosive growth in its short life. While Hatteras' market cap sits at less than $3 billion and Armour's is under $2.5 billion, American Capital Agency sports a $13 billion capitalization. Annaly's current market cap is $15 billion, showing that American Capital is hot on its heels and could overtake the venerable mREIT in short order.
Too big, too fast?
American Capital Agency has accrued nearly as much in assets as Annaly, too. At the end of 2012, the trusts held approximately $100.5 billion, and $133.5 billion, consecutively, and it looks like Annaly may lose its premier spot sooner rather than later: American Capital Agency held a mere $58 billion in assets at the end of 2011, meaning that it nearly doubled its asset base in one year's time. How did it accomplish this?
Most of the credit for the trust's growth and success belongs to Kain, a shrewd manager who cut his teeth overseeing billions of dollars in assets at Freddie Mac. When Kain took over the reins at American Capital Agency in 2009, the company had only $2 billion in assets. Kain began building it up to its current robust level by taking advantage of lucrative financing opportunities, and using the insights gained at his former employment to reinvest in and grow the company.
Certainly, the exponential growth experienced by American Capital Agency is unusual, but there seems to be no cause for alarm. The trust still pays out a hefty $1.25 quarterly dividend, even as it approaches the girth of Annaly -- something that other mREITs must envy. As American Capital Agency continues its inexorable rise, its investors are no doubt happy to go along for the ride.
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