On Friday, December 14, American Capital Agency Corp (AGNC) reported that it will maintain its quarterly dividend at $1.25 per share for the fourth quarter of 2012. The dividend will be paid out next year, on January 28, to shareholders of record on December 27, with an ex-dividend date of December 24, 2012.
Near the start of 2012, on February 6, AGNC announced a dividend policy cut, lowering the quarterly payout to $1.25 from 1.40 per share. That was a 10.71% dividend cut. Prior to that reduction, AGNC had maintained a $1.40 dividend for ten quarters. The company indicated it would be able to maintain the new $1.25 quarterly payout for the next few quarters, and also indicated that the Fed's low rate policy extension should be conducive to the mREIT's near-term success. Since then, AGNC has kept to its word and maintained that dividend rate.
American Capital Agency is a mortgage REIT that buys agency mortgages that are backed by federal agencies. Mortgage REITs generally pay out substantial dividends that are taxed as income and not at the lower corporate dividend rate. Other well-known agency mREITs include Annaly Capital Management (NLY) and Hatteras Financial (HTS). Index funds for mREITs include the FTSE NAREIT Mortgage REITs Index ETF (REM) and the Market Vectors Mortgage REIT Income ETF (MORT), though these ETFs also have exposure to non-agency mortgage REITs.
On Monday, October 29, American Capital Agency Corp. reported Q3 income of $1.3 billion or $3.98 per share, and net book value of $32.49 per share, an increase to book value of $3.08 per share from the end of Q2. AGNC's estimated taxable EPS for Q3 was $1.36, a $0.26 decline from Q2. AGNC's book value increased by $5.59 through the last 12 months.
American Capital Agency also last listed its leverage rate, at the end of Q3, was 7.0x, and that its average leverage rate throughout the quarter was 7.1x. This was lower than the leverage ratio of 7.6x AGNC had at the end of Q2 and 8.4x at the end of Q1. When reported, each of these quarterly leverage rates was the lowest leverage rate AGNC reported in over a year.
AGNC's average net interest rate spread in Q3 was 1.42%, a decrease of 23 basis points from the average Q2 spread of 1.65%. At the end of Q3, AGNC's net interest rate spread was 1.50%, a decrease of 12 basis points from the 1.62% net interest rate spread at the end of Q2.
In the first half of 2012, American Capital Agency repositioned its portfolio into lower coupon MBS and lower loan balance and HARP securities, which were less susceptible to prepayment risk than the prior holdings, reducing the impact of the decline in long-term interest rates on the AGNC's prepayments. In the company's Q3 report, AGNC noted it expects prepayment speed increases will remain muted on its portfolio despite record low mortgage rates and continued quantitative easing.
At the end of October AGNC announced that its Board of Directors authorized the repurchase of up to $500 million of its outstanding shares through December 31, 2013. The company stated "it would be its intent only to repurchase shares when the repurchase price is less than its estimate of the current net book value of a share of common stock. When AGNC purchases its stock at a discount to book value, it increases the per share book value of the remaining shares."
Despite AGNC's ability to maintain its dividend, many other agency mREITs may not be so capable, and it will likely eventually become difficult for AGNC to maintain this rate. Agency mREIT yields should decline along with their spreads and leverage, unless assets that appreciated are sold to realize gains. Currently, most investors are primarily concerned with potential book value losses associated with possible rapid spiking of U.S. Treasury yields. Additionally, the industry is susceptible to risks associated with potential changes to the federal backing of the mortgage agencies and tax treatment of mREIT dividends. Nonetheless, AGNC and other agency mREITs are likely to benefit from any fiscal cliff resolution that does not specifically target their agency backing.
Disclosure: I am long NLY.