American Capital Agency Corp.'s (NASDAQ:AGNC) first fiscal quarter (Q1 2013) has recently come to an end (3/31/2013). Before results are provided to the public next month, via its quarterly press release, I would like to project/analyze AGNC's Q1 2013 Book Value (at 3/31/2013). A previous article I wrote laid the groundwork for this book value prediction. In that article, I projected/analyzed AGNC's Q1 2013 Income Statement. The link to that article is here.
Note: Predicting any MREIT's accounting figures is extremely difficult when compared to other industries due to the fact of a company's various hedging strategies that are implemented. There are numerous assumptions and estimates that are used when performing such an analysis. Actual values may differ significantly from the following estimated values and all readers should be aware as such. These projections are my personal estimates and all figures detailed below should not solely be used for any investor's buying or selling decisions.
Due to the fact several figures that are needed to predict/calculate AGNC's Q1 2013 book value come directly from the income statement, I will provide two tables below from my previous article, which show AGNC's quarterly income statements. For purposes of estimating a suitable book value for Q1 2013 (BV at 3/31/2013), only regard the Q1 2013 (ESTIMATE) column shown on these two tables. I'll leave the past Q1-Q4 2012 (ACTUAL) columns for informational purposes even though they will not specifically be used in the Q1 2013 book value calculation shown later in this article.
Having provided these two tables above [in particular AGNC's Q1 2013 (ESTIMATE) column], we can now begin to calculate a projected Q1 2013 book value.
In regards to my two book value tables below, there will not be an identical sheet AGNC provides that matches the data I have prepared below. I have gathered specific information derived from multiple tables/charts or calculated figures not disclosed by AGNC within its SEC submissions. I have performed a separate analysis of AGNC's book value from what AGNC discloses for a more clear analysis of the book value calculation. AGNC, through its quarterly investor presentations, provides readers only with a "Book Value Roll Forward" slide. This roll forward uses information based only on a 3-month time frame. I feel the roll-forward AGNC provides via this quarterly slide is somewhat vague. It is inadequate when trying to project future quarterly book values. Therefore (per the tables I have created below), I perform a more detailed quarterly book value calculation. I then compare my recalculated quarterly book value calculation to AGNC's quarterly book value calculation (via its "Book Value Roll Forward" slide) to ensure there are no variances.
With the two tables I have provided above as a reference, let's take a look at my calculation for AGNC's Q1 2013 estimated book value. We'll look at the following figures (in corresponding order to the book value tables shown directly above):
B) Other Comprehensive Income (Loss)
C) Stockholder Transactions
D) Capital Share Transactions
A) Operations: [Increase (Decrease) in Net Common Equity From Operations] [Estimate of $802 million; range $700 - $900 million] [Confidence Within Range = Moderate to High][Reference "A" in Book Value Table Above]
This figure consists of the following accounts that come directly from the income statement (first table provided within this article): 1) net interest income; 2) total other income; 3) total expenses; and 4) excise tax.
Due to the fact I talked about these accounts in my previous article (link at the top of this article), I will not delve into the details on how I obtained these figures. One can look at my previous article to see how I came up with these figures. Also note the net increase (decrease) in net common equity from operations is the same as the net income figure on AGNC's income statement (first table provided within this article).
B) Other Comprehensive Income (Loss): [Increase (Decrease) in Net Common Equity From Other Comprehensive Income (Loss)] [Estimate of ($675) million; range ($450 - $850) million] [Confidence Within Range = Moderate] ][Reference "B" in Book Value Table Above]
This figure consists of the following accounts that come directly from the income statement (first table provided within this article): 1) unrealized gain (loss) on available-for-sale securities, net; and 2) unrealized gain (loss) on derivative instruments, net.
Again, due to the fact I talked about these accounts in my previous article (link at the top of this article), I will not delve into the details on how I obtained these figures. One can look at my previous article to see how I came up with these figures. Also note the net increase (decrease) in net common equity from other comprehensive income (loss) is the same as the total other comprehensive income (OCI) (loss) (OCL) figure on AGNC's income statement (first table provided within this article).
C) Stockholder Transactions: [Increase (Decrease) in Net Common Equity From Stockholder Transactions] [Estimate of ($499) million; range ($490 - $500) million] [Confidence Within Range = High] ][Reference "C" in Book Value Table Above]
This is a fairly simple calculation. This is the dividend payable by AGNC in Q1 2013 for their outstanding 1) common + 2) preferred shares.
1) The common stock dividend declared in Q1 2013 was $1.25 per share. This has been the fifth consecutive quarter where AGNC has declared a quarterly dividend of $1.25 per share. The number of common shares outstanding at 12/31/2012 was 338,951,470. In order to arrive at the common shares outstanding at 3/31/2013, you must take the shares outstanding at 12/31/2012 and add the 57,500,000 shares in relation to the Q1 2013 equity raise that occurred in late February/early March. You include all shares (including the 7,500,000 share underwriter's allotment) because they were issued prior to the Q1 2013 ex-dividend date of 3/18/2013. Therefore, the following calculation is determined:
Common Shares Outstanding at 3/18/2013: 396,451,470
(*) Q1 2013 Dividend Payable: $1.25 per share
(=) Distributions to Common Stockholders: $495,564,338
2) Also, you have to add the preferred stock dividend declared in Q1 2013 of $0.50 per share. There were 6,900,000 preferred shares outstanding as of the ex-dividend date of 3/28/2013.
Preferred Shares Outstanding at 3/28/2013: 6,900,000
(*) Q1 2013 Dividend Payable: $0.50 per share
(=) Distributions to Preferred Stockholders: $3,450,000
Therefore, after adding the common + preferred stock dividend declarations, there will be a total distribution of $499,014,338 for Q1 2013.
D) Capital Share Transactions: [Increase (Decrease) in Net Common Equity From Capital Share Transactions] [Estimate of $1.803 billion; range $1.802 - $1.804 billion] [Confidence Within Range = High] ][Reference "D" in Book Value Table Above]
This figure is basically the amount of capital raised in relation to the Q1 2013 Late February/early March equity raise of 57.5 million shares. The calculation is as follows:
Common Shares from Q1 2013 Equity Raise: 57,500,000
(*) Price Per Share (net of all expenses): $31.34 per share
(=) Net Proceeds from Q1 2013 Equity Raise: $1,802,050,000
For simplicity, we won't discuss AGNC's stock-based compensation program. These shares are immaterial for book value purposes.
Remaining BV Calculation: After adding up the four figures above (A through D), the total increase (decrease) in net common equity is approximately $1.43 billion for Q1 2013 (reference "E" in book value table above). Therefore, we can now calculate an estimated Q1 2013 book value:
Net Common Equity at Beginning of Period: $10,723,104
(+) Total Increase in Net Common Equity: $1,430,932
(=) Net Common Equity at End of Period: $12,154,036
(/) Common Shares Outstanding at 3/31/2013: 396,451,470
(=) Book Value Per Common Share: $30.66 per share
Conclusion from this article: To sum up all the information I have discussed above, I am estimating AGNC will report a Q1 2013 (3/31/2013) book value of $30.66 per common share. This is a $0.98 per share decrease from 12/31/2013's book value. My range for AGNC's Q1 2013 book value is $30.50-$31.10 per share. This decrease in Q1 2013 book value can be attributed to two main factors:
1) The main culprit for the Q1 2013 book value decrease is the unrealized losses that have hit AGNC's existing portfolio in the current quarter. This is due to a general modest rise in interest rates during Q1 2013. In the current environment, when market interest rates rise, the existing agency securities on AGNC's books will decrease in fair market value (NYSE:FMV). This is due to the fact that current market agency securities will now yield a rate closer to the agency securities on AGNC's books. Therefore, the market is less willing to pay a higher premium on AGNC's existing securities if/when sold. The difference in interest income for the agency securities currently on the market vs. AGNC's existing portfolio agency securities tightens. Therefore, an overall FMV decrease on AGNC's agency securities occurs. These "FMV adjustments" occur each quarter as fluctuations in market interest rates occur.
2) Another factor in AGNC's Q1 2013 book value decrease was the late February/early March equity raise of 57.5 million shares at a net price of $31.34 per share. This is the first time (since I've analyzed data on AGNC) where an equity raise was actually below the previous quarter's book value. Instead of being accretive to book value, this past equity raise slightly diluted book value. Furthermore, this recent equity raise closed in late February/early March. Therefore, even if immediately deployed, AGNC's new capital was only deployed for a maximum of 1 month in this quarter. In Q2 2013, AGNC will most likely have this capital fully deployed for the entire 3 months. This will help boost interest income and thus ultimately book value.
As a side note to this factor, if you look at AGNC's Q3 2012 book value calculation, there was an increase in book value from $29.41 at 6/30/2012 to $32.49 per share at 9/30/2012. This was a huge increase of $3.08 per share for only 3 months of activity. One reason for this huge quarterly appreciation in book value was due to the modest interest rate decline that occurred. This in turn increased the unrealized gains in AGNC's portfolio by an approximate $1.2 billion for the quarter. This was a huge increase in unrealized value. The other reason for this huge quarterly book value increase in Q3 2012 was the 36.8 million equity raise in July 2012. The net equity raised from this offering was at $33.80 per share. When compared to 6/30/2012's book value of $29.41, this was a premium of $4.39 per share. This was a huge accretion to book value. I feel Q4 2012's + Q1 2013's book value decrease is basically on offset to the huge book value gains that occurred in Q3 2012.
Conclusions from both articles: After looking at both AGNC's Q1 2013's IS + BV estimates, I feel we can assume the following:
1) Interest income + net spread income will remain strong in Q1 2013. This will ultimately have a positive impact when looking at AGNC's Q1 2013 net income + EPS figures. I estimate a Q1 2013 net income figure of $802 million, which equates to an EPS figure of $2.22 per share.
2) There will be a continued decrease in unrealized gains due to the general trend of interest rates rising during Q1 2013. Therefore, AGNC will report a somewhat weak other comprehensive income figure. I estimate a Q1 2013 comprehensive income figure of $127 million, which equates to a comprehensive income figure of $0.35 per share.
3) There will be a modest decrease in book value in Q1 2013. This is basically the same trend as Q4 2012. Again, this is due to the fact of the general trend of interest rates rising during Q1 2013. In regards to this specific topic, I would suggest looking at AGNC's investor presentation slides for Q3 2012 (slide 11). Management has predicted a modest book value decrease happening when interest rates rise.
In my opinion, seeing stronger net interest income and net spread income trumps unrealized losses sustained when interest rates rise. The increase in interest income/net income is a current, realized revenue stream directly affecting cash. The unrealized gain/loss account changes quarter to quarter, depending on how interest rates fluctuate. These unrealized gain/loss accounts have no impact on cash until reclassified to realized when sold. Furthermore, management can put derivative strategies in place to help mitigate the unrealized losses that will occur in a rising interest rate market. I feel confident that AGNC's management team has been ahead of the curve in regards to predicting interest rate volatility via their derivative strategies.
I feel AGNC should continue to trade at a rather modest premium to book value. One main reason is the yield obtained through ownership of this stock. The current annual yield by owning AGNC is approximately 15%. This is a main reason why investors are attracted to this stock and to the MREIT sector in general. More and more investors are looking for a steady stream of dividend income. For instance, let's say an investor purchases an MREIT stock yielding 15% and holds it for 5 years. They then sell it 5 years later at the exact same price that they purchased it. Their capital gain amount is $0. However, through dividends, this investor actually makes a profit of 75% (15% x 5 years). I feel this is quite an enticing proposition for most investors looking for a steady stream of income.
I'll make one last point in regards to AGNC's dividend/dividend sustainability. If one does not know, the dividend is based on its estimated REIT taxable income. The estimated REIT taxable income calculation opens with one's "realized" net income for the quarter. It doesn't include any unrealized gains/losses, which are categorized in the other comprehensive income (OCI) section of the balance sheet (within stockholder's equity). No unrealized gain/loss amounts are included in any dividend payment calculation because it's a component of GAAP (accrual basis of accounting). The dividend is based on the tax/cash basis of accounting. Furthermore, AGNC's undistributed taxable income related to their 2012 tax year had a balance of $749 million. This is its balance AFTER it accounted for its Q4 2012 dividend. This UTI balance is at its highest level ever. Due to the increases in net spread income/net income (realized income) in a rising interest rate environment, dividend sustainability (through estimated REIT taxable income) should not be a concern for at least the next few quarters.
Disclosure: I am long AGNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.