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American Capital Agency disappoints but has reduced leverage

Brent Nyitray, CFA, MBA

American Capital Agency is one of the biggest mortgage REITs in the United States

American Capital Agency is a diversified agency mortgage REIT that invests all across the agency mortgage-backed security (MBS) space. It invests in two basic types of MBS—agency pass-through securities, which are garden-variety To-Be-Announced mortgages, and seasoned agency MBS. It also invests in collateralized mortgage obligations, which are bonds backed by MBS that offer the investor specific exposure to prepayments, credit, et cetera. It purchases only agency mortgage-backed securities, which means it buys only government-guaranteed (or -sponsored) securities—those issued by Fannie Mae, Freddie Mac, or Ginnie Mae. This means it takes no credit risk—all of its risk is interest rate risk. As a REIT, it must pay out 90% of its earnings as dividends or else it’s subject to corporate taxes.

Highlights of the quarter

Needless to say, all REITs have suffered over the last quarter, as the Fed has threatened to take away the quantitative easing (QE) punchbowl and rates have risen. The asset class has underperformed by a wide margin. Everyone expected book value per share to decline.

AGNC reported a loss of $0.45 per common share, which comprised income (loss) of $1.80 per share and $2.25 per share of unrealized gains on its mortgage portfolio. Book value per share decreased $0.22 (or 0.85%) to $25.29. The stock was down 8%.

Its portfolio consists of $77.8 billion (down from $91.7 billion) in mortgage-backed securities, of which $7.3 were a net short position in To Be Announced (TBA) securities. Previously, it was long $14.5 billion TBAs, which is a big drop in exposure. Its leverage ratio was 7.2x, versus 8.5x at the end of Q2. When you think of AGNC’s effect on the TBA market, consider that it sold $21.6 billion of TBAs over the quarter. That’s a lot for one company. To put that number into perspective, the Fed buys $45 billion a month—so 16% of the Fed’s buying would consist of taking AGNC’s selling. As this (and similar) selling abates, mortgage rates would be expected to fall again.

Read-across to the other mortgage REITs

AGNC’s best comp is Annaly (NLY). Both are agency behemoths with large exposure to 30-year fixed-rate agency mortgage-backed securities. Hatteras recently reported lower-than-expected earnings and a bigger decrease in book value per share (around 4%) in spite of the fact that it’s an ARM agency REIT. We’ll hear from heavyweights MFA Financial (MFA) and Two Harbors (TWO) next week.

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