9 High-Yield Shares Compared

Mortgage REIT sector analysis highlights Annaly Capital Management's new NLY-J preferred shares (8.875% coupon) as a strategic issuance, while MFA Financial's MFA-C preferreds offer a reasonable 10.3-10.4% stripped yield, contrasting with less attractive fixed-rate MFA-B. Notably, ARMOUR Residential REIT (ARR) common shares significantly underperformed last week, dropping 4.6% to a 0.92x price-to-NAV following a public share offering that negatively impacted investor sentiment.

Analysis

A review of the mortgage REIT sector reveals specific valuation pressures and strategic actions impacting key players. Annaly Capital Management (NLY) recently issued a new 8.875% fixed-rate preferred share, NLY-J, a move deemed prudent for the company's capital structure despite valuations on its preferred suite being generally unattractive; NLY-F and NLY-I exhibit negative yields-to-call, and the new NLY-J, having already risen to $25.10, offers limited upside due to its five-year call feature. In contrast, MFA Financial's (MFA) floating-rate preferred share, MFA-C, is considered reasonably valued, providing a stripped yield of 10.3-10.4%, which is a significant 130-140 basis point premium over its 9.00% yielding baby bonds. However, MFA's fixed-rate preferred, MFA-B, is less appealing due to its lower 8.84% yield and high dependency on falling interest rates for capital appreciation. Meanwhile, ARMOUR Residential REIT's (ARR) common stock significantly underperformed peers with a 4.6% weekly decline after the company announced a public share offering at approximately 98% of book value. This dilutive action pushed the stock's price-to-NAV ratio down to a projected 0.92x, placing it in a neutral valuation range but highlighting investor sensitivity to equity issuance below NAV.

Key Decisions for Investors

• The recent 4.6% drop in ARMOUR Residential REIT (ARR) to a 0.92x price-to-NAV, triggered by a dilutive share offering, signals negative investor sentiment and warrants a cautious stance on the common stock.
• For Annaly Capital Management (NLY), the current suite of preferred shares presents an unfavorable risk-reward profile, with negative yields-to-call on older issues and limited upside on the new NLY-J, suggesting investors look elsewhere for value.
• Within MFA Financial's (MFA) offerings, the floating-rate MFA-C preferred share appears to be the most attractive option, offering a superior yield spread over both the company's baby bonds and its interest-rate sensitive fixed-rate preferred, MFA-B.