Mortgage real estate investment trust (commonly known as mREIT), American Capital Agency Corp.'s (AGNC) third-quarter 2014 net spread and dollar roll income of 86 cents per share (excluding "catch-up" premium amortization) significantly exceeded the Zacks Consensus Estimate of 77 cents.
Results benefited from the strategic decisions implemented by the company to counter the changing interest rate and mortgage market scenario. For the third quarter, net spread and dollar roll income included 43 cents per share of dollar roll income, reflecting an uptick from 39 cents in the preceding quarter.
However, results came a cent below the prior-quarter figure of 87 cents. The company's annualized economic loss on common equity was 1.1% in the reported quarter, compared with the economic return on common equity of 39.6% in the prior quarter. Moreover, as of Sep 30, 2014, the company's net book value per share was $25.54, down 2.7% from $26.26 per share as of Jun 30, 2014, driven by wider mortgage spreads.
Net interest income of $269 million came below the prior-quarter level of $290 million and also missed the Zacks Consensus Estimate of $297 million.
Behind the Headline Numbers
As of Sep 30, 2014, the company's investment portfolio aggregated $69.5 billion of agency mortgage-backed securities (MBS). This included $17.7 billion of net long TBA (to-be-announced) mortgage position at fair value.
Including its net TBA position, American Capital Agency's "at risk" leverage ratio was 6.7x as of Sep 30, 2014, compared with 6.9x as of Jun 30, 2014. For the third quarter, its investment portfolio had a CPR (constant prepayment rate) of 10%, versus 9% in the prior quarter.
Average asset yield on the company's agency security portfolio was 2.71%, unchanged sequentially. Combined annualized net interest rate spread on its repo and dollar roll funded assets was 1.90%, compared with 1.84% in the prior quarter.
Moreover, as of Sep 30, 2014, American Capital Agency had cash and cash equivalents of $1.71 billion, down from $1.75 billion at the end of the prior quarter.
Dividend Update
In September, the company disclosed a change in its common stock dividend distribution schedule – the distributions would now be made monthly instead of quarterly. As per this move, the company announced its first monthly dividend of 22 cents per share on Oct 16. This dividend would be paid on Nov 7, 2014 to shareholders of record on Oct 31.
On Sep 18, 2014, the company declared a third-quarter dividend on its common stock of 65 cents per share, unchanged from the preceding quarter. This was paid on Oct 27 to common stockholders of record as of Sep 30, 2014. As a matter of fact, the company paid a total of $4.9 billion or $29.56 per share in common dividends, since its initial public offering in May 2008.
Share Repurchase Update
American Capital Agency disclosed an extension of its current share repurchase program through Dec 31, 2015. Notably, during the third quarter, the company did not buy back any of its common stock and as of Sep 30, 2014, the company had an authorization of $992 million left.
Conclusion
Going forward, we believe that the concerted measures to reposition its portfolio so as to meet the current interest rate environment and control the leverage level would help this Zacks Rank #1 (Strong Buy) stock ride on the growth trajectory.
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 American Capital Mortgage Investment Corp. (MTGE) and Ares Commercial Real Estate Corp. (ACRE). Both these stocks carry a Zacks Rank #2 (Buy).
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