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American Capital Agency Corp. Message Board

  • rlp2451 rlp2451 Oct 4, 2012 1:12 PM Flag

    Morgan Stanley Downgrades mREITS, Likes Hybrids Better

    Still have a $37 target price for AGNC though:
    In a new report Thursday Morgan Stanley says it’s now more positive on hybrid mortgage REITs than agency mREITs given its constructive view on housing. MS upgrades Invesco Mortgage Capital Inc. (IVR) to overweight, downgrades American Capital Agency Corp. (AGNC) and MFA Financial (MFA) to equal-weight, and downgrades Annaly Capital Management (NLY) to underweight.

    Morgan Stanley moves to a favorable outlook on hybrid mREITs in a sustained housing recovery and is raising its hybrid mREIT price targets by 15%. MS says it’s become more guarded on agency mREITs and now has a neutral outlook on the sector. MS housing strategists recently raised their housing price projections for 2013 to 4-6% year-over-year and also look for mortgage credit availability to improve to some extent. More from MS:


    We prefer hybrids to agency mREITs at this point in the cycle on 1) higher yields as non-agency prepayments are likely to increase (non-agency MBS is carried at a discount), and 2) future portfolio growth in higher yield assets as non-agency originations begin to increase from today’s very low levels. We believe prime jumbo will be the first area in the non-agency space to benefit from slightly increased credit availability, and therefore we upgrade IVR to OW.

    We are increasing our price targets a median of 15% for the hybrid mREITs on 1) an estimated 10.2% median increase to book value in 3Q on higher non-agency pricing (AAA ABX up 15% q/q) and 2) a multiple re-rating. The hybrid mREITs are trading in-line with the agency mREITs (median P/B of 1.03x vs. 1.01x for the agency mREITs) despite our expectations for higher earnings and dividend growth (+15% y/y dividend growth in ‘13 vs. -4% for the agencies).

    Following QE3 and extended low rate guidance from the Fed, we expect earnings and dividends will remain under pressure for agency mREITs on lower asset yields. We forecast a median dividend cut of 4% in 2013 and believe stock appreciation in the agency space will be driven by book value growth (estimate a median of 4.6% for 3Q), but P/B multiples will remain range-bound. We downgrade NLY to UW and AGNC to EW.

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    • "We downgrade ... AGNC to EW."

      EW? Is that an abbreviation of EEEWWW? (Just kidding).

      Well, since Ray and YBF agree that "MTGE will be the king", no harm done. The king is dead. Long live the king!

    • One thing they didn't mention is that hybrids will begin [have begun?] to steal investors from agency MREIT's. This will have the effect of driving up the PPS further. I think the hybrids yield will come down to about 12% [maybe less??] due to demand driving up the PPS. I'm up about $2.50 now, and that could go to $10.00 in less than a year if the divvy is increased by 15% next year as Morgan speculates. If that happens, by the end of 2013, my 63,500 shares will have returned $1 million for cap gains and divvies combined. Beats working.

      P.S. Had a great time at Enchantment in Sedona, AZ and the Biltmore in Phoenix. Happy to advise if anyone is going there.

    • I can't say I disagree, nor do I think AGNC/ACAS/MTGE management would disagree.

      Hybrids have more flexibility and can take more risk, which is good when the risk you're profiting from is being squeezed in the Agency sector.

      And it's silly to think that agency mREITs should appreciate in price in normal economic conditions. They should pay out all their profits, and grow by issuing more shares. BV should be about as constant as possible, and stock price with it. Of course, when the ground is moving under us, the BV will shift and so will the profit flow. Interesting call on IVR and prime-jumbo loans. I'm off to DD the crap out of it right now, though this news has made existing holders more happy than I think I will be with it.

      Eventually MTGE will be the king and AGNC will be the Dolomites. Growing, slowly, but not going anywhere for a while.

      Now. About that SPO they didn't mention the timing of...

    • I can't say I disagree, nor do I think AGNC/ACAS/MTGE management would disagree.

      Hybrids have more flexibility and can take more risk, which is good when the risk you're profiting from is being squeezed in the Agency sector.

      And it's silly to think that agency mREITs should appreciate in price in normal economic conditions. They should pay out all their profits, and grow by issuing more shares. BV should be about as constant as possible, and stock price with it. Of course, when the ground is moving under us, the BV will shift and so will the profit flow. Interesting call on IVR and prime-jumbo loans. I'm off to DD the crap out of it right now, though this news has made existing holders more happy than I think I will be with it.

      Eventually MTGE will be the king and AGNC will be the Dolomites. Growing, slowly, but not going anywhere for a while.

      Now. About that SPO they didn't mention the timing of...

 
AGNC
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