On Jul 18, 2013, we downgraded our long-term recommendation on
American Capital Agency Corp.
) - a mortgage real estate investment trust (REIT) - from
Outperform to Underperform. Amid the increasing yields on the
U.S. Treasury 10-year note and apprehensions that the Fed will
soon pull out its quantitative easing policies (QE) program,
mortgage REIT (commonly known as mREIT) stocks are continuing to
lose their shine. The lower-than-expected results during the
first quarter came as a disappointment. Alongside, the stock made
a dividend cut in the recent past.
AMER CAP AGENCY (AGNC): Free Stock Analysis
KIMCO REALTY CO (KIM): Free Stock Analysis
MACERICH CO (MAC): Free Stock Analysis Report
WALTER INV MGMT (WAC): Free Stock Analysis
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Why the Downgrade?
In the past couple of years, with low short-term rates and
quantitative easing policies, mREITs have benefited from lower
borrowing costs, leading to higher yields. Through interventions
in the long-term mortgage and treasury bonds market, the Fed
managed to keep the long-term interest rates low.
As REITs are required to pay out 90% of their earnings to
shareholders for favorable tax treatment, the mREITs ended up
paying double-digit yields, which easily surpassed the returns
from the Treasury bonds. Thus, high-yield seeking investors
showed preference for mREITs over bonds.
Amid apprehensions of the Fed pulling out its quantitative easing
policies and increasing yields on the U.S. Treasury 10-year note,
investors are favoring the relatively risk free treasury notes
and discarding their investments in mREITs.
In June, American Capital Agency also slashed its quarterly cash
dividend by 16% to $$1.05 per share. Also, the company reported
disappointing first-quarter 2013 results with its net spread
income per share of 78 cents significantly lagging the Zacks
Consensus Estimate of $1.08. Hurt by lower pricing on its
mortgage-backed securities portfolio, American Capital Agency's
book value suffered a considerable downfall during the quarter.
Over the last 60 days, the Zacks Consensus Estimate for 2013
moved south 13.4% to $3.24. For 2014, it dipped 14.9% to $3.53.
Therefore, American Capital Agency now carries a Zacks Rank #5
American Capital Agency is scheduled to report second-quarter
2013 earnings after the closing bell on Jul 29, 2013. The Zacks
Consensus Estimate for the upcoming quarter results is pegged at
88 cents per share.
The earnings ESP (Read:
Zacks Earnings ESP: A Better Method
) for American Capital Agency is +6.82% for the second quarter.
However, we are skeptical about a positive earnings surprise
owing to the company's Zacks Rank #5 (Strong Sell).
Other Stock to Consider
REITs that are currently performing better include
Walter Investment Management Corp.
Kimco Realty Corporation
The Macerich Company
). All of them carry a Zacks Rank #2 (Buy).