Why American Capital Agency reported another rise in book value

Market Realist

American Capital Agency's 2nd quarter 2014 earnings: Key points (Part 2 of 5)

(Continued from Part 1)

Book value per share is a critical metric for mortgage REITs

Since REITs are financials, they tend to trade off of two important metrics—dividend yield and book value per share. Dividend yield is typically why investors buy REITs in the first place. REITs tend to have much higher dividend yields than a typical S&P 500 stock. This is due to the fact that they must distribute 90% of their earnings as dividends.

That said, investors often think of book value per share as a floor level for the stock. In other words, if dividends are high, the stock may trade at an excess of book value. But REITs tend to trade at or just under book value. Book value, in theory, represents what a stockholder would expect to receive if the company were wound down.

American Capital Agency reports its second increase in book value per share since early 2012

AGNC’s book value per share increased from $24.49 in 1Q14 to $26.26 in the second quarter. This increase was driven by an increase in shareholders’ equity from $8.81 billion to $9.61 billion.

Book value has been under pressure as interest rates have risen

As a REIT primarily invested in 30-year fixed-rate mortgages, American Capital Agency (ANGC), along with its peer Annaly (NLY) has been reporting declining book value per share for some time while interest rates have ticked up.

These REITs suffered bigger declines in book value per share than their peers like MFA Financial (MFA), Hatteras (HTS), or Capstead (CMO), which invest primarily in adjustable-rate mortgage backed securities (or ARM MBS). These mortgages have a fixed rate for the first three, five, or seven years and then the interest rate floats. This means they have shorter duration, which is another way of saying they have less exposure to increasing interest rates.

Continue to Part 3

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