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Must-know update: American Capital Agency and its background

Brent Nyitray, CFA, MBA

American Capital Agency's 1Q14 earnings: Important takeaways (Part 1 of 5)

American Capital Agency is one of the biggest mortgage REITs in the U.S.

American Capital Agency (AGNC) is a diversified agency mortgage REIT that invests all across the agency mortgage-backed security (MBS) space. Mortgage Backed Securities are pools of similar mortgages that packaged into a security. This increases the liquidity of individual mortgages, which makes them more attractive to investors and has the additional benefit of lowering rates to the borrower. 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. As a REIT, it must pay out 90% of its earnings as dividends or else it’s subject to corporate taxes.

American Capital Agency is a major purchaser of MBS

American Capital Agency is one of the biggest REITs in the U.S. by market capitalization—Annaly Capital Management (NLY) is the other—and as such, it’s one of the biggest ultimate lenders in the mortgage market. Pension funds, REITs, foreign investors, and the Fed are the biggest buyers of mortgage backed securities. That said, American Capital Agency, currently, has about $67 billion in assets, and at its peak, the Fed was purchasing $40 billion of agency MBS a month. Even with the Fed absent, the REITs are large providers of mortgage financing in the U.S.

American Capital Agency versus its peers

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. It mainly invests in fixed rate mortgages, which means the best comp for American Capital Agency is in fact Annaly Capital (NLY). Other agency REITs, like MFA Financial (MFA) or Capstead (CMO) invest primarily in adjustable rate securities. These REITs tend to have less interest rate risk than AGNC for similar amounts of leverage. Finally, there are non-agency REITs like Newcastle (NCT), which invest in non-agency MBS, which means they take credit risk.

Continue to Part 2

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