Shares of mortgage real estate investment trust (commonly known as mREIT), American Capital Agency Corp. (AGNC), rose 1.63% in after-hours trading on the NASDAQ as the company’s fourth-quarter 2014 net spread and dollar roll income of 92 cents per share (excluding estimated "catch-up" premium amortization) significantly exceeded the Zacks Consensus Estimate of 74 cents.
Fourth-quarter 2014 comprehensive income available to shareholders totaled $304 million or 86 cents per share as against a loss of $25 million or 7 cents per share in the prior quarter.
Results benefited from the strategic decisions implemented by the company to counter the changing interest rate and mortgage market scenario. For the fourth quarter, net spread and dollar roll income included 47 cents per share of dollar roll income, reflecting an uptick from 43 cents in the preceding quarter.
The company’s annualized economic return on common equity was 13.4% in the reported quarter, compared with the economic loss on common equity of 1.1% in the prior quarter. Moreover, as of Dec 31, 2014, the company’s net book value per share was $25.74, reflecting a marginal uptick of 0.8% from $25.54 per common share as of Sep 30, 2014.
Net interest income of $250 million came below the prior-quarter level of $269 million and also missed the Zacks Consensus Estimate of $322 million.
Behind the Headline Numbers
As of Dec 31, 2014, the company's investment portfolio aggregated $71.5 billion of agency mortgage-backed securities (“MBS”). This included $14.8 billion of net long TBA (to-be-announced) mortgage position at fair value.
Inclusive of its net TBA position, American Capital Agency’s "at risk" leverage ratio was 6.9x as of Dec 31, 2014, compared with 6.7x as of Sep 30, 2014. For the fourth quarter, the company’s investment portfolio had a CPR (constant prepayment rate) of 9%, versus 10% in the prior quarter.
Average asset yield on the company’s agency security portfolio (inclusive of "catch-up" premium amortization cost) for the fourth quarter was 2.57%, down from 2.71% in the prior quarter. Combined annualized net interest rate spread on its repo and dollar roll funded assets was 1.85%, compared with 1.90% in the prior quarter.
Moreover, as of Dec 31, 2014, American Capital Agency’s cash and cash equivalents edged up to $1.72 billion from $1.71 billion at the end of the prior quarter.
Dividend Update
American Capital Agency is now making its dividend distributions monthly instead of quarterly. As a result, during the fourth quarter, the company declared a monthly dividend of 22 cents per share, leading to a total of 66 cents for the quarter, compared with 65 cents per share for the prior quarter. That culminates into a 12.1% annualized dividend yield based on the company’s closing stock price of $21.83 per share on Dec 31, 2014.
Notably, the company has paid a total of $5.1 billion in common dividends or $30.22 per common share, since its initial public offering in May 2008.
Conclusion
Going forward, we believe that this Zacks Rank #1 (Strong Buy) stock’s concerted measures to reposition its portfolio so as to meet the current interest rate environment and control the leverage level would help it ride on the growth trajectory.
The company currently anticipates the management of the combination of prepayment and extension risk to be vital, as the 10-year Treasury rate headed back near its lows. However, with a relatively low leverage and favorable asset composition, the company seems well poised to navigate through the odds.
The company 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 Apollo Commercial Real Estate Finance, Inc. (ARI) and CYS Investments, Inc. (CYS). Both these stocks carry the same rank as American Capital Agency.
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