American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported comprehensive income for the third quarter of 2012 of $1.3 billion, or $3.98 per common share, and net book value of $32.49 per common share. Economic return, defined as dividends on common shares plus the change in net book value per common share, for the period was $4.33 per common share, or 59% on an annualized basis.
Third Quarter 2012 Financial Highlights
•$3.98 comprehensive income per common share, comprised of: ◦$0.25 net income per common share
◦$3.73 other comprehensive income ("OCI") per common share ■Driven by net unrealized gains on investments marked-to-market through OCI
•$0.79 net spread income per common share ◦Comprised of interest income, net of cost of funds (including interest rate swaps) and operating expenses
◦$0.86 per common share, excluding approximately $(0.07) per common share of "catch-up" premium amortization cost due to change in projected constant prepayment rate ("CPR") estimates
•$1.36 estimated taxable income per common share
•$1.25 dividend per common share declared on September 11, 2012
•$1.52 estimated undistributed taxable income per common share as of September 30, 2012 ◦Represents an increase of $26 million from $492 million as of June 30, 2012 to $518 million as of September 30, 2012
◦On a per share basis, decreased $0.09 per common share from June 30, 2012
•$32.49 net book value per common share as of September 30, 2012 ◦Increased $3.08 per common share, or 10%, from $29.41 per common share as of June 30, 2012
•59% annualized economic return on common shares ◦Comprised of $1.25 dividend per common share and $3.08 increase in net book value per common share
Other Third Quarter Highlights
•$90 billion investment portfolio as of September 30, 2012
•7.0x leverage as of September 30, 2012 ◦7.1x average leverage for the quarter
•9% actual portfolio CPR for the quarter ◦9% actual portfolio CPR for the month of October 2012
◦14% average projected portfolio life CPR as of September 30, 2012
•1.42% annualized net interest rate spread for the quarter ◦1.53% annualized net interest rate spread for the quarter, excluding "catch-up" premium amortization cost due to change in projected CPR estimates
◦1.50% net interest rate spread as of September 30, 2012
•$1.2 billion of net equity proceeds raised during the quarter from a follow-on common stock offering
After taking some time to review the entire report I'd have to say they are holding on, but expecting some possibly rough waters ahead. Their earnings power going forward from here is facing still increasing pressure. UDI did decrease, albeit a small amount, the point is it turned. The total package of core + other realized earnings covered the dividend with an .11 buffer, the least I think I've seen. The annualized weighted average yield on the Company's investment portfolio decreased from 2.91 to 2.66 during the quarter. .25 NET income per share is nothing to brag about.
What really saved the day was the low 9% CPR. That is low when compared to the others in its class. I know they go out of their way to select mortgages that have a lower CPR risk (HARP) and in this case it is paying off. They seem confident going forward that the rate will be lower than they originally guestimated. What concerns me is that even with the surprisingly low CPR rate they were only able to squeeze out .79 on the CORE earnings. Leverage is now around 7 to 1. Average current yield is 1.5%. How much more can they delever before impairing earnings to the point of not being able to support the current dividend, it appears to be getting closer. Spreads are still compressing.
Beside the CPR rate the other glowing stat was the big rise in BV. Selling the last SPO around 34 sure didn't hurt. But BV won't support the share price forever. Yield is a big factor. For example, if the dividend drops to 1.00 per quarter, the yield based on the 32.49 current BV falls off to near 12%. Something to consider with spreads still tightening and SPOs less likely this quarter. BV may be a guide to some, but look around and see how many other mREITs are now selling under their BVs since recently having to cut their dividends.
The share buy back plan is interesting. To issue it NOW is very interesting. At 32.49 BV I wouldn't think they would consider buying anything that wasn't at least a 10% premium to BV or around 29.24. Do they see rougher waters ahead? A hedge for possibly going over the fiscal cliff? Remember the debt ceiling "crisis" and what the markets did? I think it is good that they put a plan in place, yes it is more of a threat than a promise, but they are now covered on the low end. But what kind of message does this really send?
All in all I still think AGNC is the best in class. However, it is bleeding and vultures look for blood.
I am starting to think book value is a stone tumbling in the current, more than it is a rock anchored in the streambed. It will take more thought to decide what the impact will be. All the old tranches of securities with higher spreads went up in value, but it really is not earnings unless those securities get sold, which is what I think they are doing to get the funds for the repurchase.Whatever,... they are doing a better job than I could hope to do.