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American Capital book value per share falls 12% as To Be Announced securities jettisoned

Brent Nyitray, Sr Real Estate Analyst

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 that 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.

(Read more: Mortgage REITs get crushed as rates increase)

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 $2.37 per common share, which comprised income of $4.61 per share and $6.98 per share of unrealized losses on its mortgage portfolio. Book value per share decreased $3.42 (or 11.8%) to $25.51. After the close, the stock traded up from $21.85 to $23.00.

Its portfolio consists of $91.7 billion in mortgage-backed securities, of which $14.5 were To Be Announced (TBA) securities. Its leverage ratio was 8.5x. Looking closer at the internals, AGNC’s TBA portfolio dropped from $27.3 billion to $14.5 billion. This has pressured mortgage spreads and helped push rates higher. As this (and similar) selling abates, mortgage rates would be expected to fall again.

(Read more: Radar Logic futures curve predicts flat real estate prices until September 2014)

Read-across to the other mortgage REITs

AGNC’s 12% drop in book value was a pleasant surprise, and much lower than than the decline experienced by Hatteras (HTS). Given that Hatteras is an adjustable-rate agency REIT, you would have expected it to outperform American Capital in a declining bond market. Competitor Capstead (CMO) did weather the storm, but it was hiding in the short-duration agency ARM (adjustable-rate mortgage) space. Later this week, we’ll hear from Annaly (NLY), which is the mortgage REIT bellwether, and also from Redwood Trust (RWT). Annaly is more or less a comp to American Capital. Redwood will give us insight into origination patterns.

(Read more: Government mortgage-backed securities rally in anticipation of more quantitative easing)

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