Mortgage real estate investment trust (commonly known as mREIT) – American Capital Agency Corp. (AGNC) – reported encouraging fourth-quarter 2013 results with its net spread income per share of 76 cents, significantly exceeding the Zacks Consensus Estimate of 63 cents. Results also compared favorably with the prior-quarter figure of 61 cents.
The company had shifted its focus on shorter maturity securities and controlled leverage in mid 2013 amid volatility in the interest rate. Towards the end of the year, the volatility reduced and with increasing yields on MBS and a steeper yield curve, the current return environment looks promising according to the company.
American Capital Agency reported net interest income of $422 million in the reported quarter, exceeding the prior-quarter figure of $413 million as well as the Zacks Consensus Estimate of $316 million.
Behind the Headline Numbers
American Capital Agency reported an economic loss on common equity for the quarter of 10.8% annualized. This compared with an economic gain on common equity of 8.7% in the prior quarter. As of Dec 31, 2014, the company's net book value per common share was $23.93, down from $25.27 at the end of the prior quarter, $25.51 as of Jun 30 and $28.93 as of Mar 31, 2013.
As of Dec 31, 2013, the company's investment portfolio aggregated $68.2 billion of agency mortgage backed securities (MBS). This included $2.3 billion of net long TBA (to-be-announced) mortgage positions, at fair value, as well as $237 million of investments in agency mortgage REIT equity securities.
As of that date, American Capital Agency's investment portfolio included $65.2 billion of fixed-rate securities, $1.2 billion of adjustable-rate securities and $1.8 billion of collateralized mortgage obligations (CMOs).
Around $61.2 billion of the company's repurchase agreements were utilized for financing acquisitions of agency securities, while $2.3 billion was used to obtain U.S. Treasury securities. The company's average leverage ratio and average "at risk" leverage ratio for the fourth quarter was 7.6x and 7.5x, respectively.
During the reported quarter, the company’s average asset yield on its agency security portfolio was 2.82% (up 23 basis points sequentially) and its average cost of funds was 1.25% (down 14 bps sequentially), resulting in an average net interest rate spread of 1.57% (a sequential increase of 37 bps). The company's average asset yield reported as of Dec 31, 2013 was 2.70%, unchanged from Sep 30, 2013.
As of Dec 31, 2013, American Capital Agency had cash and cash equivalents of $2.1 billion, nearly flat sequentially and down from $2.4 billion at the prior-quarter end.
Dividend Update
On Dec 18, 2013, the company declared a fourth-quarter dividend on its common stock of 65 cents per share, reflecting nearly a 19% decline from the prior quarter. This was paid on Jan 28, 2014 to common stockholders of record as of Dec 31, 2013. As a matter of fact, the company paid a total of $4.2 billion in common dividends, or $27.61 per common share, since its initial public offering in May 2008.
Share Repurchase
In the fourth quarter, American Capital Agency repurchased approximately 28.2 million shares of its common stock, representing 7% of its outstanding shares as of Sep 30, 2013, at an average price of $20.82 per share, including expenses, and aggregating around $586 million. With this, around 43.0 million shares have been bought back for approximately $934 million since the beginning of the buyback program in the fourth quarter of 2012.
Moreover, the company declared that the share buyback authorization has been elevated to up to $2 billion from $1 billion for share buybacks since the inception of the program through Dec 31, 2014. The company plans to buyback shares at a time when the repurchase price is below its current net book value per common share estimate.
In Conclusion
American Capital Agency has taken measures to reposition its portfolio to meet the current interest rate environment. The company is also witnessing a recovery in book value with a decrease in interest rates and the solid performance of agency MBS in January. This looks encouraging for this Zacks Rank #2 (Buy) stock.
American Capital Agency is externally managed and advised by American Capital AGNC Management, LLC, an affiliate of American Capital, Ltd. (ACAS).
Investors interested in the mREIT industry may also consider stocks like Ares Commercial Real Estate Corporation (ACRE) and Blackstone Mortgage Trust, Inc. (BXMT). Both these stocks carry a Zacks Rank #2 (Buy).
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