American Capital Agency Corp. Message Board

On the call management commented that buying forward settling MBS postponed spread income into 2Q. 17 cents worth. That's a big deal and very positive for 2Q earnings/dividends.

As I discussed in my previous post, the capital deployed from the SPO into forward settling mortgages also understated BV as MBS didn't settle until 2Q (and have appreciated since then).

Happy trading--this is a great buying opportunity at well under BV (for the patient).

Sentiment: Strong Buy

I've gone over the math a few more times and it appears that much of the difference between my calculated BV of $25+ vs. reported BV of $24.25 can be explained by the shift of agency MBS purchases to the forward market as well as the payout of the full 90 cents dividend on 60+% more shares that only contributed half a quarter's worth of earnings.

If MTGE bought generic agency MBS in the cash market in mid-Feb it would be sitting on a decent gain in those securities as MBS rallied somewhat into quarter end from the lows of the quarter. However, it appears MTGE put practically the entire capital raise to work in the forward market with delivery made 60 days ahead (in April-May). MTGE thus bought agency MBS about 1+ pts lower to be delivered in the future vs. the spot market and hence postponed the eventual gain on these securities into 2Q. This bodes well for 2Q's BV (at the expense of 1Q's BV) as the forward settling MBS went up in value but weren't yet on MTGE's balance sheet at quarter end.

In any case, it's pretty clear that current book value is north of the current stock price and the economics of MTGE's are pretty favorable regardless of the snapshot in time BV as of March 31. The dollar roll market is a beautiful thing given the added spread opportunity, even if doesn't last forever. It is also a way to buy lower priced MBS and hence have embedded gains vs. MBS bought on the spot market. Also, the CPR on MTGE's continues to be a miniscule 6%, which supports solid earnings/dividends given the low premium ammortization.

We'll see if this gets explained better on the call on Monday, but in any case 2Q BV should be supportive of a higher stock price.

Sentiment: Strong Buy

Here is another stab at MTGE's BV calculation as of 3/31 and today:

Assume 62% of MTGE's BV (pre-SPO) declined 5% from $25.74 to $24.45 (equity related to agencies fell 8% and equity related to non agencies rose by 3%).

Assume 38% of MTGE's BV (SPO proceeds issued at $25.65, assume $25.50 net) rose 3% from $25.50 to $26.25 (equity related to agencies rose 2% and equity related to non agencies rose 1%).

62% x $24.45 = $15.16
plus
38% x $26.25 = $9.98
equals
$25.14 as of 3/31

Today:

$25.14 + 5% increase in equity driven by the rally in MBS so far in 2Q (equity related to agencies up 4% and equity related to non-agencies up 1%) = $26.40

So current BV is well north of $26 today if you agree with my assumptions.

That's simple back-of-the-envelope math...let's see if I'm close.

Don't forget the juicy 14.3% dividend, 1/4 of which is getting paid out in 6 weeks.

Sentiment: Strong Buy

Still a juicy buy with both yield and capital appreciation upside. Homework required for the not-so-faint of heart.

Sentiment: Strong Buy

For instance, FNM 30yr 3.0% generics, which fell from around 105 at year end to sub-103 in mid-Feb to almost 102 at the lows in March to 103.25 at the end of 1Q, are now back to 104.625. Pay-ups on prepayment protected paper probably dropped 1-2 points in 1Q but recovered almost all of their losses in 2Q.

MTGE issued 60% of its mkt cap in additional stock in mid-Feb (at $25.65) and likely bought agencies that have subsequently rallied 1.5-2 pts (or 12-16% using 8x leverage = $1.92 to $2.56 per share).

Non-agencies (which represented 28% of the portfolio prior to the SPO) were likely up 2-3 pts in 1Q. This would have offset the decline in agency mbs prices during the quarter to at least some degree. Importantly, non-agencies have probably rallied another 1-2 pts so far during 2Q. MTGE's non-agencies are carried at 60 cents on the dollar and represent predominantly alt-a and jumbos.

Remember that MTGE actually grew BV nicely (by 53 cents or 2%) in 4Q despite a 1 pt drop in agency prices as non-agencies rallied. All other agency reits (including AGNC) reported a 3+% drop in BV in 4Q.

On top of all of this is the fact that MTGE took advantage of a golden opportunity to lock in some awesome spreads as agencies cheapened up a ton and repo financing costs went down. This is super positive for earnings and dividends. I bet that MTGE is now taking advantage of the super low cost of hedging to add and extend protection so that its BV can be protected further should extension fears return to the market.

People selling in the $24s will regret it when MTGE prints a BV number well north of $26 (if everything stays constant) by the end of 2Q. 1Q BV will very likely show a $25+ handle (as I have illustrated above).

The dividend yield at $25 = 14.4%. At $24 = 15%. And it's sustainable given the economics MTGE was able to lock in as a result of the large SPO. This may not be the case with AGNC though. Smart investors should care (but not always in the short run).

Sentiment: Strong Buy

Remember that MTGE did a very large offering (60% of its mkt cap) at $25.65 in mid February--at/near the lows of the MBS sell-off. This is essentially the same as averaging down when the market got cheap. Since then those securities recovered a large portion of their losses. In addition, non-agencies (30%+ of MTGE's equity at the time) rallied throughout the quarter and into 2Q. If you average all of this out current BV is likely north of $26 currently ($25+ at the end of 1Q).

AGNC did not average down very much during the quarter (10% offering) given their size plus had zero non-agency exposure. AGNC's BV went down 8.5% during the quarter (I estimate it recovered at least half of those losses so far in 2Q).

If you assume MTGE's agency MBS declined in lock step with AGNC's but MTGE's non agencies rallied 2-3%, then that would have put MTGE's BV at $24.50 or so. But then MTGE averaged down 60% of its equity at the lows and likely bought agencies which have subsequently rallied 1+ pts (which at 7-8X leverage is sweet). Doing this math gets you to a BV for MTGE well north of $25 at quarter end and north of $26 currently.

Still a bit of a black eye for Gary Kain for not protecting BV as he has been known to do.

Ironically, buying agency MBS at the low means higher spreads were locked in, which is positive for earnings and the dividend.

Sell Mortimer, sell. Great buying oppty for the rest of us.

Sentiment: Strong Buy

Agencies have rallied strongly since quarter end and BV here is up at least 3-4% to around $13.50 (based on my estimates). The stock should approach $13+ as investors figure this out. The dramatic decline in the company's portfolio CPR in April to the low teens is a positive for earnings as well.

So we get the best of both worlds--higher earnings (and stable to rising dividends) and a higher BV.

Happy times.

Sentiment: Strong Buy

BV at the end of 1Q was probably $25.75 or so (my calculations) based on higher non-agency prices offset by somewhat weaker agency prices and lower pay-ups for prepay protected MBS. That may be a conservative figure, however, given that the large secondary done in February was likely deployed quickly in MBS that have subsequently rallied strongly. So BV at the end of 1Q may be closer to $26+ or so.

More importantly, since quarter end both agencies and non-agencies are up strongly and pay-ups on prepay protected agencies are up (given the greater likelihood of refinancing for non-prepay protected agencies). That means current BV is approaching $27 or so. A 5% premium to this figure gets you a $28+ stock in short order, plus the dividend yield of 13.6% that should be sustainable.

Happy times.

Sentiment: Strong Buy

With the rally in rates, MBS agency prices have recovered almost the entire decline since year end. Hence CYS' book value is currently likely around the $13.25+ level by my estimate, although it was likely lower than that at the end of 1Q. CYS' book includes very liquid securities obviousy so on a snapshot basis you are looking at owning this at a 12% discount to NAV. This is among the cheapest of all agency mreits. The 11% dividend isn't too shabby in the absolute sense given the lower extension risk associated with the company's 15 yr heavy agency mix. Looks like pretty good risk/reward to me.

Sentiment: Strong Buy