Why Real Estate Investment Trusts Were Pounded This Week

NEW YORK (TheStreet) -- Real estate investment trusts (REITs) were pummeled this week amid a cocktail of bad news. American Capital Agency Corp (AGNC), Annaly Capital Management (NLY), CYS Investments  (CYS), Two Harbors Investment (TWO) and Ellington Financial (EFC) were trading lower by week's end.

The sector suffered the majority of losses on Tuesday after American Capital reported earnings a day earlier. The Maryland-based firm reported a third-quarter loss of $1.80 a share, dismally failing to meet analysts' target of 77 cents a share in profit, according to Thomson Reuters surveys. The company blamed volatility in interest rates and mortgage spreads for the earnings loss, two factors which significantly influence competitors in the space.

Also weighing on the industry was a Financial Times report the Federal Reserve Bank of New York had instigated a "deep dive" investigation into banks' relationship with mortgage REITs. The Fed is concerned that if interest rates should succumb to volatility, mortgage REITs might diminish their stake in mortgage-backed securities (MBS), sparking a larger-scale market selloff. The firms in question have increased their MBS holdings by 188% since 2009 to a combined $460 billion stake.

American Capital Agency Corp dropped 9% during the course of the week, though it edged 0.73% higher in Friday trading. Year to date, shares have fallen 24.3%.

TheStreet Ratings team rates American Capital Agency Corp as a Hold with a ratings score of C. The team has this to say about its recommendation:

"We rate American Capital Agency Corp (AGNC) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its compelling growth in net income, notable return on equity and attractive valuation levels. However, as a counter to these strengths, we also find weaknesses including weak operating cash flow and a generally disappointing performance in the stock itself."

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