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Like its sister company American Capital Agency Corp (NASDAQ:AGNC), American Capital Mortgage Investment Corp (NASDAQ:MTGE) saw a sharp decline in its book value during Q1 2013. However, unlike AGNC, MTGE's book value was helped by its holdings of non-agency securities, which buffered the decline. On Friday, MTGE's shares fell about 3.5% in sympathy with the abysmal quarter posted by AGNC. MTGE currently offers a $0.90 quarterly dividend and at current prices yields about 14.30%.

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After the closing bell on May 3, MTGE reported its Q1 2013 results. For the quarter, MTGE saw a net loss of $26.6 million, or $0.56 per share. The majority of this loss came from net unrealized losses on agency securities, which totaled $1.66 per share in the quarter. This was partly offset by $0.64 per share in net unrealized gains on non-agency securities. During the quarter, MTGE reported $0.62 per share in net spread income and $0.17 per share in estimated net carry income (also known as "dollar roll income") associated with purchases of agency mortgage backed securities ("MBS") on a forward-settlement basis through the "to-be-announced" ("TBA") dollar roll market. MTGE reported $0.80 per share in estimated taxable income and had about $0.45 per share in undistributed taxable income as of quarter end, down from $1.17 last quarter. During the quarter, MTGE saw its book value decline 6%, or $1.49, to $24.25 per share from $25.74 per share reported in Q4 2012. Including the $0.90 dividend declared on March 7, MTGE saw a 2.3% economic loss during the quarter, or 9.2% annualized.

As of quarter end, MTGE's investment portfolio totaled $11.8 billion and was comprised of $6.5 billion in fixed-rate agency securities, a $4.5 billion in net long TBA positions and $727.4 million in non-agency securities. MTGE's agency securities portfolio mix was 27% 15-year fixed-rate, 1% 20-year fixed-rate, and 72% 30-year fixed-rate. 83% of MTGE's agency securities were either lower loan balance mortgages or "HARP" loans, both of which have favorable prepayment attributes than generic agency securities. As of quarter end, MTGE's non-agency portfolio mix was 59% Alt-A, 16% prime, 10% option ARM and 15% subprime.

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During the quarter, MTGE's average asset yield on its total portfolio was 3.11%, compared to 3.08% for Q4 2012. When excluding the premium amortization benefit related to changes in projected CPR estimates, the annualized average yield of the portfolio was 2.98%. As of March 31, 2013, the average asset yield was 3.00%, a 9 bps increase from 2.91% as of December 31, 2012. MTGE's average cost of funds increased 9 bps to 1.10% during the quarter and was 1.10% as of March 31, 2013. The increase in cost of funds was due to higher average swap costs.

MTGE's average net interest rate spread for the quarter was 2.01%, a decrease of 6 bps from 2.07% during Q4 2012. When including TBA income, the average net interest rate spread was 2.27%. As of March 31, 2013, the average net interest rate spread was 1.90%, and when including estimated TBA income it rises to 2.09%.

MTGE's book value declined 6%, or $1.49, to $24.25 per share from $25.74 per share reported in Q4 2012. This is the first quarter on quarter decline in MTGE's short history. The vast majority of this decline was due to unrealized losses on agency securities, which resulted in a $1.66, or 6.4%, per share decline in book value. However, one bright spot for MTGE were its non-agency holdings, which actually resulted in a $0.64, or per share 2.5% increase in book value. Without these non-agency assets, MTGE's book value would have declined 8.5% instead of 6%. This would have been very similar to the 9% decline in book value that AGNC suffered.

Conclusion

In my opinion, the key operating metric that one should focus on for mREITs is the net interest rate spread. When including TBA income, the average net interest rate spread for Q1 2013 was 2.27% and 2.01% when excluding TBA income. This is very similar to Q4 2012, which saw MTGE post a net interest rate spread of 2.07%. Also, when one removes the impact of net other investment income, we can see that the ROE for MTGE was 10.1% during the quarter, not much different from the 12.7% ROE posted for Q4 2012.

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Q4 2012 was arguably MTGE's strongest quarter in its history, while Q1 2013 was its weakest. While it is difficult to ignore a 6% quarter to quarter decline in book value, one should remember that asset values are only one piece of the mREIT puzzle. These are highly levered vehicles designed primarily for income. It was noted during AGNC's conference call that during Q1 2013, MBS prices retreated to pre-QE3 levels. However, it was also mentioned that prices for agency MBS have recovered since April as the economic recovery seems to have faltered. The case can be made that since MTGE and AGNC hold very similar agency assets that MTGE also experienced a similar increase in its MBS prices. Therefore, it is likely that MTGE's book value is currently higher than the $24.25 reported as of March 31.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Source: American Capital Mortgage Investment Corp Posts The Worst Quarter In Its Short History