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The focus of this article is to provide a detailed analysis of American Capital Agency Corp.'s (NASDAQ:AGNC) book value per common share as of 6/30/2013. Prior to results being provided to the public early next month (via its quarterly press release), I would like to analyze AGNC's book value as of 6/30/2013 and provide readers a general direction on how this recent quarter has panned out. A previous two-part article I wrote laid the groundwork for this book value prediction. In that article, I projected/analyzed AGNC's income statement for the second quarter of 2013. The following are links to that two-part income statement projection article:

Author's Note: Predicting a mortgage real estate investment trust's (mREIT) accounting figures are usually more difficult when compared to other sectors due to the various hedging strategies that are implemented. There are numerous assumptions that are used when performing such an analysis. Actual values may differ materially from the following estimated values within this article due to unforeseen circumstances. This includes a deviation from the typical business strategies by management in a specific quarter. 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. All actual reported figures that are above my ranges (within this article) will be deemed a positive sign when compared to my personal estimates. All actual reported figures that are below my ranges (within this article) will be deemed a negative sign when compared to my personal estimates.

Due to the fact that several figures needed to predict/calculate AGNC's book value at 6/30/2013 come directly from its income statement, I provide Table 1 below. This table is different than two similar tables within my income statement article due to the fact Table 1 shows AGNC's income statement from both a three (quarterly) and six-month (semi-annual) perspective. The tables in my income statement article (linked above) only show AGNC's income statement from a quarterly perspective. For purposes of estimating a suitable book value as of 6/30/2013, one must culminate the figures from the first quarter of 2013 (ACTUAL) column and the second quarter of 2013 (ESTIMATE) column within Table 1.

Table 1 - AGNC's Three and Six-Month Ended Income Statement


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Having provided Table 1 above (in particular AGNC's "6 Months Ended (ESTIMATE)" column), we can now begin to calculate a projected book value as of 6/30/2013. AGNC's projected book value as of 6/30/2013 will be calculated using Table 2 below.

Side Note: In regards to Table 2 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 specifically disclosed by AGNC within its SEC submissions. I perform 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 slide uses information based only on a three-month time frame. I feel the information AGNC provides via this quarterly slide is somewhat vague. It is inadequate when trying to project future quarterly book values. Therefore, I perform a more detailed quarterly book value calculation. After AGNC reports its actual quarterly results, I then compare my recalculated quarterly book value to AGNC's quarterly book value calculation (via the "Book Value Roll Forward" slide). This ensures there are no variances to the ending book value per common share amount when comparing AGNC's book value slide vs. my detailed book value calculation.

Table 2 - AGNC's Three and Six-Month Ended Book Value Calculation/Projection (BV Projected as of 6/30/2013)


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With Table 2 above as a reference, let us take a look at the calculation for AGNC's projected book value as of 6/30/2013. Unless otherwise noted, all figures below are for the six-month ended timeframe. Let us look at the following figures (in corresponding order to the references shown in Table 2 above):

A) Operations

B) Other Comprehensive Income (Loss)

C) Stockholder Transactions

D) Capital Share Transactions

A) Operations:

- Increase in Net Common Equity From Operations Estimate of $1.62 Billion; Range $1.22 - $1.92 Billion

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 2 Above Next to the June 30, 2013 Column

This operations figure consists of the following accounts that come directly from the income statement (see Tables 1 and 2 above): 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 AGNC income statement article (links 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 (see Table 1 above).

B) Other Comprehensive Income (Loss) (OCI/OCL):

- Decrease in Net Common Equity From Other Comprehensive Loss Estimate of ($3.15) Billion; Range ($2.75 - $3.65) Billion

- Confidence Within Range = Moderate to High

- See Red Reference "B" in Table 2 Above Next to the June 30, 2013 Column

This OCL figure consists of the following accounts that come directly from the income statement (see Tables 1 and 2 above): 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 AGNC income statement article (links 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 decrease in net common equity from OCL is the same as the total OCL figure on AGNC's income statement (See Table 1 above).

C) Stockholder Transactions:

- Decrease in Net Common Equity From Stockholder Transactions Estimate of ($919) Million; Range ($910 - $930) Million

- Confidence Within Range = High

- See Red Reference "C" in Table 2 Above Next to the June 30, 2013 Column

This is a fairly simple calculation. This is AGNC's dividend distributed for the first quarter of 2013 and payable for the second quarter of 2013. This figure includes the following types of shares of outstanding stock: 1) common and 2) preferred.

1) Common Stock:

a) First Quarter of 2013: The common stock dividend distributed for the first quarter of 2013 was $1.25 per share. This was the fifth consecutive quarter where AGNC has distributed 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 as of 3/18/2013 (ex-dividend date), one must take the shares outstanding at 12/31/2012 and add 57,500,000 shares in relation to the equity raise that occurred in late February/early March of 2013. This includes the 7,500,000 shares from the underwriter's allotment because these shares were issued prior to the ex-dividend date of 3/18/2013. Therefore, the following calculation is determined:

Common Shares Outstanding at 3/18/2013: 396,451,470

(*) First Quarter of 2013 Dividend Distributed: $1.25 per share

(=) Distributions to Common Stockholders: $495,564,338

b) Second Quarter of 2013: The common stock dividend declared for the second quarter of 2013 was $1.05 per share. This is due to the 16% dividend cut AGNC announced in regards to its dividend for the second quarter of 2013. The number of common shares outstanding at 3/31/2013 was 396,451,470. Through research I performed, AGNC disclosed it still had 396,451,470 common shares outstanding as of 5/16/2013. This information can be found via AGNC's filed Form S-3.

Since AGNC's stock price has continued to trade lower throughout the remainder of the second quarter of 2013 (post 5/16/2013), I am assuming no additional shares were issued under its "at-the-market offering" program. This program enables AGNC to publicly offer and sell a certain aggregate number of common shares in privately negotiated transactions pursuant to the sales agreement with Mitsubishi UFJ Securities. AGNC has not exercised its right to use this offering program for the past several quarters.

AGNC also sponsors a "dividend reinvestment and direct stock purchase" program. This plan allows stockholders to purchase additional shares of AGNC's common stock by reinvesting some or all of the cash dividends received. Stockholders may also make optional cash purchases of AGNC's common stock (subject to certain limitations detailed in the plan's prospectus). The last time activity occurred within this program was the first quarter of 2011.

Therefore, I am making the assumption there will be no activity in regards to this plan for the current quarter (as was the case with AGNC's "at-the-market offering" program discussed above). For both of these programs, it is in the shareholders' best interests that AGNC only issues additional common shares when it would be accretive to book value. From 5/17/2013 till AGNC's ex-dividend date of 6/26/2013, any additional equity issuances would have been contrary to this notion.

A third program that could affect the number of outstanding common shares AGNC has is its "stock repurchase" program. This program (created in October 2012) allows AGNC to repurchase up to $500 million of its outstanding shares of common stock through 12/31/2013. As of 3/31/2013, AGNC had $423 million remaining available for stock repurchases under this program.

AGNC intends to repurchase outstanding shares of common stock only when the repurchase price is materially accretive to book value. Even though AGNC's stock price traded well below my projected, ever-changing CURRENT book value (changes daily) throughout the entire latter half of the quarter, I am assuming no share buybacks occurred during the second quarter of 2013. Even if a share buyback occurred, the effect would be minimal on a book value per share perspective. For instance, during the fourth quarter of 2012, AGNC initiated a share buyback of 2,647,080 shares at a cost of $76.8 million. This buyback only had a net accretive effect of $0.02 per share towards the 12/31/2012 book value. My projected book value per share range as of 6/30/2013 takes this possible buyback into consideration (among the various other estimates and assumptions in this calculation).

By taking all the above assumptions into consideration, I am projecting 396,451,470 shares of common stock were outstanding on AGNC's ex-dividend date of 6/26/2013. As such, the following calculation is determined:

Common Shares Outstanding at 6/26/2013: 396,451,470

(*) Second Quarter of 2013 Dividend Payable: $1.05 per share

(=) Distributions to Common Stockholders: $416,274,044

2) Preferred Stock:

a) First Quarter of 2013: One must include the preferred stock dividend distribution of $0.50 per share for the first quarter of 2013. There were 6,900,000 preferred shares outstanding as of 3/28/2013 (ex-dividend date).

Preferred Shares Outstanding at 3/28/2013: 6,900,000

(*) First Quarter of 2013 Dividend Distribution: $0.50 per share

(=) Distributions to Preferred Stockholders: $3,450,000

b) Second Quarter of 2013: Again, one must include the preferred stock dividend declared of $0.50 per share for the second quarter of 2013. There were still 6,900,000 preferred shares outstanding as of the ex-dividend date of 6/26/2013.

Preferred Shares Outstanding at 6/26/2013: 6,900,000

(*) Second Quarter of 2013 Dividend Payable: $0.50 per share

(=) Distributions to Preferred Stockholders: $3,450,000

Therefore, after adding both the common and preferred stock dividend distribution/payable for the first and second quarters of 2013, there will be total distributions to stockholders of $918,738,382 as of 6/30/2013. This amount is the red reference "C" in Table 2 above.

D) Capital Share Transactions:

- Increase in Net Common Equity From Capital Share Transactions Estimate of $1.80 Billion; Range $1.75 - $1.85 Billion

- Confidence Within Range = High

- See Red Reference "D" in Table 2 Above Next to the June 30, 2013 Column

This figure is basically the amount of capital raised in relation to the late February/early March equity raise of 57.5 million shares during the first quarter of 2013. The calculation is as follows:

CS Issued During First Quarter of 2013: 57,500,000

(*) Price Per Share (net of all expenses): $31.34 per share

(=) Net Proceeds First Quarter of 2013: $1,802,050,000

As stated within the stockholder transactions account above, I am making the assumption no additional shares were issued in the second quarter of 2013 via AGNC's "at-the-market offering" or "dividend reinvestment and direct stock purchase" program. I am also making the assumption no outstanding shares were repurchased via AGNC's "stock repurchase" program.

The capital transactions figure also includes all "stock-based compensation" program costs. During the first quarter of 2013, $468 thousand of stock-based compensation program costs were accounted for. This cost was in relation to 15,000 shares of common stock being awarded to the board of director members. I am assuming no additional capital was generated via this program for the second quarter of 2013. Even if activity did occur within this program, its effects would be immaterial for purposes of this book value calculation. My projected book value per share range as of 6/30/2013 takes this possibility into consideration (among the various other estimates and assumptions in this calculation).

Therefore, the total capital share transactions figure of $1.80 billion as of 3/31/2013 remains unchanged through 6/30/2013. This amount is the red reference "D" in Table 2 above.

Rest of Book Value Calculation:

After adding up the four referenced figures within Table 2 above (red references "A" through "D"), the total decrease in net common equity as of 6/30/2013 is projected to be ($651) million. This amount is the red reference "E" in Table 2 above.

Now one can calculate AGNC's projected book value per common share as of 6/30/2013 (in '000's except for number of shares data and per share amount):

Net Common Equity at Beginning of Period: $10,722,703

(+) Total Decrease in Net Common Equity: ($650,941)

(=) Net Common Equity at End of Period: $10,071,762

(/) Number of CS Outstanding at 6/30/2013: 396,451,470

(=) BV Per Common Share as of 6/30/2013: $25.40 per share

Conclusions Drawn:

To sum up all the information I have discussed above, I am estimating AGNC will report a book value of $25.40 per common share as of 6/30/2013. This is a ($3.52) per share decrease from AGNC's 3/31/2013 book value and a ($6.23) per share decrease from AGNC's 12/31/2012 book value. My range for AGNC's 6/30/2013 book value is $24.60 - $26.20 per common share. AGNC's 6/30/2013 vs. 3/31/2013 ($3.52) per common share decrease in book value can be attributed to two main factors:

The main culprit for the 6/30/2013 vs. 3/31/2013 book value decrease is the huge unrealized loss that has impacted AGNC's existing MBS portfolio in the current quarter. AGNC's "unrealized loss on available-for-sale securities, net" account has been projected to sustain a ($2.41) billion loss for the second quarter of 2013. This account alone attributes to a ($6.08) per common share drop in book value for the second quarter of 2013. This is a devastating loss for only one quarter's worth of valuation adjustments. This is due to the "across-the-board" material MBS price declines sustained on AGNC's investment portfolio. These MBS price declines occurred due to the overall "spike" in US interest rates during the second quarter of 2013 (see the linked article at the beginning of this article for further details).

Typically, when U.S. market interest rates rise (generally speaking), existing MBS holdings will decrease in value. The higher the rise in interest rates (for instance mortgage rates and US Treasury yields), the further the MBS price declines. This directly lowers AGNC's asset valuations and ultimately what AGNC is deemed "to be worth" (aka book value of a company). Therefore, an overall fair market value ('FMV') write-down or "market-to-market" devaluation adjustment is necessary.

The huge unrealized loss on AGNC's MBS holdings have been offset by AGNC's derivative instruments for the second quarter of 2013. AGNC's derivative/hedging instruments will have a projected $1.5 billion net gain for the second quarter of 2013. This account alone attributed to a $3.78 per common share increase in book value for the current quarter. This is a positive sign in regards to AGNC's overall mitigation of risk (to an extent). Specifically, extremely large valuation gains will be achieved on AGNC's interest rate swaps, swaptions, and U.S. Treasuries - short positions. This will be partially offset by a rather material net loss on AGNC's TBA MBS portfolio. AGNC's management has properly mitigated some of the extremely large valuation losses within its "unrealized gain (loss) on available-for-sale securities, net" account (see above paragraph). In almost every other quarter in the past, AGNC has recorded a net derivative expense/loss. This was due to the overall continued decrease in overall US market interest rates (including flat or extremely small positive interest rate movements) over the past several years. However, this pattern has sharply reversed course in the second quarter of 2013. As such, AGNC's derivatives will finally prove worthwhile having.

Therefore, AGNC will once again sustain a material book value per common share loss. However, when compared to the broader sentiment of the markets, a book value of $25.40 per common share as of 6/30/2013 is relatively positive news. Many other researchers and institutional analysts are projecting lower book value estimates (very broad range of estimates along the spectrum). If AGNC reports a book value within my stated range of $24.60 - $26.20 per common share, I feel the market will see this as positive news and gain confidence once again in AGNC's management team.

Yes, further "bumpy" times are likely ahead for AGNC and the rest of the mREIT sector. However, AGNC has taken steps within the past year to properly hedge/mitigate the MBS price declines that can stem from a continued rising interest rate environment. If US interest rates continue to sharply increase for the foreseeable future (which I personally do not think will occur), AGNC's derivative instruments will continue to exhibit valuation gains. As such, these hedges will combat the asset devaluations sustained by AGNC's investment portfolio in a rising interest rate environment.

Source: American Capital Agency's Upcoming Q2 2013 Book Value Projection (As Of June 30, 2013)