Ouch! Mortgage REITs Get Slammed

Mortgage REITs took a beating this week.                                                             Photo: Flickr/Daniel Novto.

Some of the nation's largest mortgage REITs are anything but thankful following Thanksgiving, as they have all watched their stocks tumble over the past week.

The S&P 500 finished down just a few fractional percentage points following its strong rebound on Friday thanks to the great news coming out of the jobs report, but the same can't be said of mortgage REITs Annaly Capital Management (NLY +2.98%), ARMOUR Residential REIT (ARR +3.95%), American Capital Agency (AGNC +3.22%), Two Harbors (TWO 0.09%), and Invesco Mortgage Capital (IVR +1.33%), which saw their stocks plummet:

This week has continued a broader trend, as the mortgage REIT sector has had a remarkably difficult 2013, which is due in large part to the reality of rising interest rates that have driven down the value of mortgage bonds.

The 10-year Treasury yield rose once more this week-- from 2.75% last Friday to 2.87% at the time of writing -- which again contributed to the sell-off of the stock in the companies. With rumors abounding the Federal Reserve will begin to limit its bond-buying programs, many have begun to conclude that rates have only one way to go: up.

Yet the rising rates weren't the only thing, as other news helped bring down the stock in the companies.

A sell recommendation
Thursday was the first day noted investment bank Goldman Sachs began covering Annaly Capital Management and American Capital Agency, and the words of analyst Eric Beardsley were not kind, as he issued a sell recommendation for each.

Beardsley confirmed the attitude of many surrounding the companies: "With Fed tapering on the horizon, we feel that it's better to get ahead of the risks and 'not own' the stocks going into a potentially volatile period for agency MBS spreads. We believe it will be very difficult for the stocks to generate total returns that perform in-line with or beat the market in a rising rate environment -- even with the stocks already trading at significant discounts to book value."

Buying while it's down
Invesco announced after the market closed on Monday that its board has authorized an additional $20 million in common stock repurchases (it repurchased nearly 7 million shares for more than $100 million in the most recent quarter), but that couldn't bolster the stock, as the price is still down on the week.

Invesco trades at a discount to tangible book value, and its CEO, Richard King, said of the announcement -- which also included news of almost $500 million investments -- "[w]e are pleased that we continue to create value for our shareholders by funding residential and commercial loans and by deploying capital to repurchase shares." Still, the news of the share buyback couldn't help prop up the stock.

Neutral or nothing
Two Harbors Investment also received a rating from Goldman Sachs -- but it was a little more favorable at "neutral," which help explains why the stock was down, but not nearly as much as the others. It is also less dependent on agency MBSes than Annaly and American Capital Agency.

No news = big losses
Interestingly enough, although ARMOUR Residential REIT has been out of the headlines for the most part, it was the biggest loser on the week, falling about 6%. The reason is undoubtedly the company's nearly 99% portfolio concentration in fixed-rate agency securities. 

These five mortgage REITs had a rough week, but that's been true of most of 2013, as they've all seen their stocks fall in dramatic ways, with Two Harbors being the best performer of the bunch, falling 13%: