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The focus of this article is to provide a detailed projection of American Capital Agency Corp.'s (NASDAQ:AGNC) book value ('BV') per common share as of 9/30/2013. Prior to results being provided to the public next Monday (via its quarterly press release), I would like to analyze AGNC's BV as of 9/30/2013 and provide readers a general direction on how I feel this recent quarter has panned out. A previous three-part article I wrote laid the ground works for this BV prediction. In that article, I projected/analyzed AGNC's income statement for the third quarter of 2013. The following are links to my three-part income statement projection article:

PART 1 - American Capital Agency's Upcoming Q3 2013 Income Statement Projection

PART 2 - American Capital Agency's Upcoming Q3 2013 Income Statement Projection

PART 3 - American Capital Agency's Upcoming Q3 2013 Income Statement Projection

Author's Note: Predicting a company's accounting figures within the mortgage real estate investment trust (mREIT) sector are usually more difficult when compared to other sectors due to the various derivative and asset portfolio strategies that are implemented by management each quarter. As such, there are several assumptions used when performing such an analysis. AGNC's actual reported values may differ materially from my projected values within this article due to unforeseen circumstances. This includes a deviation from the typical business strategies by management in a specific quarter when compared to past quarters. Readers should be aware as such. All projections within this article are my personal estimates and 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 in my judgment. All actual reported figures that are below my ranges within this article will be deemed a negative sign in my judgment.

Due to the fact that several figures needed to project/calculate AGNC's BV as of 9/30/2013 come directly from its income statement, I provide Table 1 below. This table is different from two similar tables I provided within my three-part income statement article due to the fact Table 1 below shows AGNC's income statement from both a three (quarterly) and nine-month perspective. The tables I provided within my three-part income statement article (linked above) only show AGNC's income statement from a three-month (quarterly) perspective. Using Table 1 below as a reference, one must add certain account figures from the first, second, and third quarters of 2013 for purposes of projecting a suitable BV as of 9/30/2013.

Table 1 - AGNC Three and Nine-Months Ended Income Statement


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Having provided Table 1 above (in particular AGNC's "9 Months Ended (ESTIMATE)" column), we can now begin to calculate a projected BV as of 9/30/2013. AGNC's projected BV as of 9/30/2013 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 quarterly SEC submissions. I perform a separate analysis of AGNC's BV from what AGNC discloses for a more clear analysis. AGNC, through its quarterly investor presentations, only provides readers with a "Book Value Roll Forward" slide. This roll forward slide uses information based only on a "three-months" time frame. I feel the information AGNC provides via this quarterly slide is somewhat vague. It is inadequate when trying to project future quarterly BV. Therefore, I perform a more detailed quarterly BV calculation. After AGNC reports its quarterly results, I then compare my recalculated quarterly BV to AGNC's quarterly BV calculation. This ensures there are no variances between AGNC's quarterly slide vs. my detailed BV calculation.

Table 2 - AGNC Three, Six, and Nine-Months Ended Book Value Calculation/Projection (BV as of 9/30/2013)


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Using Table 2 above as a reference, let us take a look at the calculation for AGNC's projected BV as of 9/30/2013. Unless otherwise noted, all figures below are for the "nine-months ended" time frame. Let us look at the following figures (in corresponding order to the "Ref." column shown in Table 2 above):

A) Operations

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

C) Stockholder Transactions

D) Capital Share Transactions

A) Operations:

- Increase in Net Common Equity From Operations Estimate of $2.39 Billion; Range $2.04 - $2.74 Billion

- Confidence Within Range = Moderate to High

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

This operations figure consists of the following accounts that come directly from AGNC's income statement (see Tables 1 and 2 above): 1) net interest income; 2) total other income (loss); 3) total expenses; and 4) excise tax.

Due to the fact I talked about these accounts in my previous AGNC three-part 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 AGNC three-part income statement article to see how I came up with these figures.

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

- Decrease in Net Common Equity From Other Comprehensive Loss Estimate of ($3.18) Billion; Range ($2.83 - $3.53) Billion

- Confidence Within Range = Moderate to High

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

This OCL figure consists of the following accounts that come directly from AGNC's 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 three-part 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 AGNC three-part income statement article to see how I came up with these figures.

C) Stockholder Transactions:

- Decrease in Net Common Equity From Stockholder Transactions Estimate of ($1.23) Billion; Range ($1.20 - $1.26) Billion

- Confidence Within Range = High

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

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

1) Common Stock:

a) First and Second Quarters of 2013: The common stock dividend for the first quarter of 2013 was $1.25 per share. This was the fifth consecutive quarter where AGNC had distributed a quarterly dividend of $1.25 per share. AGNC had common stock dividend distributions of ($495.6) million for the first quarter of 2013.

The common stock dividend for the second quarter of 2013 was $1.05 per share. This was a 16% dividend cut when compared to its common stock dividend for the first quarter of 2013. AGNC had common stock dividend distributions of ($416.0) million for the second quarter of 2013.

When combined, AGNC had common stock dividend distributions of ($911.6) million through the six-months ended 6/30/2013.

b) Third Quarter of 2013: During any given quarter, there are three programs, which could affect the number of outstanding common shares of stock AGNC has when it declares its quarterly dividend. Let us first discuss each program before making a final projection on the number of outstanding common shares as of 9/26/2013 (ex-dividend date).

AGNC's "at-the-market offering program" enables the company 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 during the past several quarters. Furthermore, since its stock price has continued to trade below my "CURRENT BV" per share figure (updated weekly) throughout most of the third quarter of 2013, I am assuming no additional shares were issued under AGNC's at-the-market offering program.

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 BV. Any equity issuance performed during the third quarter of 2013 would have been contrary to this notion.

A third program that could affect the number of outstanding shares of common stock is AGNC's "stock repurchase program." This program, which was 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 6/30/2013, AGNC had $416 million remaining under its stock repurchase program. AGNC intends to buyback outstanding shares of common stock only when the repurchase price is materially accretive to BV. When AGNC declared its dividend distributions for the third quarter of 2013, it also stated the company had repurchased 11.9 million outstanding shares of common stock during the current quarter. Since this statement was made on 9/19/2013, AGNC could have repurchased additional outstanding shares of common stock during the remaining 11 days in the third quarter of 2013. However, I am making the assumption management refrained from repurchasing any additional outstanding shares of common stock from 9/19/2013 through 9/30/2013. My projected BV per share range as of 9/30/2013 takes any additional buybacks into consideration.

By taking all the above assumptions into consideration, I am projecting the number of outstanding shares of common stock as of 9/26/2013 (ex-dividend date) was 384.3 million. When compared to the prior quarter's ending balance of 396.2 million, this is a decrease of 11.9 million shares. The common stock dividend for the third quarter of 2013 was $0.80 per share. This was a 24% dividend cut when compared to AGNC's dividend for the second quarter of 2013. As such, the following calculation is determined:

Common Shares Outstanding at 9/26/2013: 384.3 million

(*) Third Quarter of 2013 Dividend Payable: $0.80 per share

(=) Distributions to Common Stockholders: ($307.5) million

When adding the dividend distributions of ($495.6) million for the first quarter of 2013, ($416.0) million for the second quarter of 2013, and a payable figure of ($307.5) million for the third quarter of 2013, I am projecting AGNC's distributions to common stockholders will be ($1.22) billion for the nine-months ended 9/30/2013. Now let us determine the preferred stock dividend distributions.

2) Preferred Stock:

a) First and Second Quarters of 2013: The preferred stock dividend for the first quarter of 2013 was $0.50 per share. This was the fourth consecutive quarter where AGNC had distributed a quarterly dividend of $0.50 per share. AGNC had preferred stock dividend distributions of ($3.45) million for the first quarter of 2013.

The preferred stock dividend for the second quarter of 2013 was also $0.50 per share. This was the fifth consecutive quarter where AGNC had distributed a quarterly dividend of $0.50 per share. AGNC also had preferred stock dividend distributions of ($3.45) million for the second quarter of 2013.

When combined, AGNC had preferred stock dividend distributions of ($6.9) million through the six-months ended 6/30/2013.

b) Third Quarter of 2013: As was the case with the first and second quarters of 2013, the preferred stock dividend for the third quarter of 2013 was $0.50 per share. There were still 6,900,000 preferred shares outstanding as of 9/27/2013 (ex-dividend date).

Preferred Shares Outstanding at 9/27/2013: 6,900,000

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

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

When adding the dividend distributions of ($3.45) million for the first quarter of 2013, ($3.45) million for the second quarter of 2013, and a payable figure of ($3.45) million for the third quarter of 2013, I am projecting AGNC's distributions to preferred stockholders will be ($10.35) million for the nine-months ended 9/30/2013.

Therefore, after adding both the common and preferred stock dividend distributions / payables for the first, second, and third quarters of 2013, I am projecting total "distributions to stockholders from estimated REIT taxable income / undistributed taxable income ('UTI')" of ($1.23) billion for the nine-months ended 9/30/2013 (see red reference "C" in Table 2 above).

D) Capital Share Transactions:

- Increase in Net Common Equity From Capital Share Transactions Estimate of $1.53 Billion; Range $1.48 - $1.58 Billion

- Confidence Within Range = High

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

AGNC's "issuance of common stock" figure is mainly the amount of capital proceeds 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: 57.5 million

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

(=) Net Proceeds First Quarter of 2013: $1.80 billion

As stated within the stockholder transactions account above, I am making the assumption no additional shares were issued in the third quarter of 2013 via AGNC's dividend reinvestment program or direct stock purchase program.

The capital transactions figure also includes AGNC's "issuance of common stock under 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 shares were issued via this program for the third quarter of 2013. Even if activity did occur within this program during the third quarter of 2013, its effects would be immaterial for BV projection purposes. My projected BV per share range as of 9/30/2013 takes this possibility into consideration.

Regarding AGNC's "repurchases of common stock" figure, I am making the assumption 11.9 million shares of outstanding common stock were repurchased via AGNC's stock repurchase program for the third quarter of 2013. These shares were repurchased at a total cost of ($262.6) million with an average price of $22.16 per share. This assumes no additional outstanding shares of common stock were repurchased during the last 11 days of the quarter. During the second quarter of 2013, AGNC repurchased 0.3 million shares of outstanding common stock for a total cost of ($6.9) million. When combined, I am projecting AGNC has repurchased a total of 12.2 million of outstanding shares of common stock at a cost of ($269.5) million for the nine-months ended 9/30/2013.

When combining the $1.80 billion in capital raised, $468,000 in stock-based compensation, and ($269.5) million in outstanding shares of common stock repurchased, I am projecting AGNC will have an increase in net common equity from capital share transactions of $1.53 billion for the nine-months ended 9/30/2013 (see red reference "D" in Table 2 above).

Rest of Book Value Calculation:

When adding up the four referenced figures above (see red references "A, B, C, D" in Table 2 above), I am projecting a "total decrease in net common equity" of ($488) million for the nine-months ended 9/30/2013 (see red reference "(A+B+C+D = E)" in Table 2 above).

Now we can calculate AGNC's projected BV per common share as of 9/30/2013 (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: ($487,641)

(=) Net Common Equity at End of Period: $10,235,062

(/) Number of CS Outstanding at 9/30/2013: 384.3 million

(=) BV Per Common Share as of 9/30/2013: $26.63 per share

Brief Discussion of MTGE's BV Projection for the Third Quarter of 2013 (As of 9/30/2013):

Even though I am not providing any detailed spreadsheets on AGNC's sister company American Capital Mortgage Corp. (NASDAQ:MTGE) in this article, I will state my projected BV as of 9/30/2013 for this company as well.

When compared to AGNC, I am projecting MTGE will have a rather similar proportional BV increase for the third quarter of 2013. AGNC's and MTGE's MBS and hedging portfolios were extremely similar as of 6/30/2013. The only material difference between the two companies at 6/30/2013 was within the to-be-announced ('TBA') MBS and forward settling securities account. AGNC held a net long TBA MBS and forward settling securities position of $15.4 billion at 6/30/2013. Meanwhile, MTGE only held a total net long TBA MBS and forward settling securities position of $91 million at 6/30/2013.

When taking all quarterly activities into consideration, I am projecting MTGE will report the following BV per common share figure:

MTGE = Book Value of $23.92 per common share as of 9/30/2013

My MTGE BV range as of 9/30/2013 is $23.12 - $24.72 per common share.

Conclusions Drawn:

To sum up all the information discussed above, I am projecting AGNC will report the following BV per common share figure:

AGNC = Book Value ('BV') of $26.63 per common share as of 9/30/2013

This projection is a $1.12 per common share increase from AGNC's 6/30/2013 BV. However, this is still a ($2.30) per share decrease from AGNC's 3/31/2013 BV. My range for AGNC's BV as of 9/30/2013 is $25.83 - $27.43 per common share. AGNC's 9/30/2013 vs. 6/30/2013 BV increase of $1.12 per common share can be attributed to two main factors.

The main culprit for the quarterly BV increase of $1.12 per common share is the modest projected unrealized gain in relation to AGNC's MBS portfolio for the third quarter of 2013. Specifically, AGNC's "unrealized loss on available-for-sale securities, net" account has been projected to have a valuation gain of $325 million for the third quarter of 2013. This account alone attributes to a $0.85 per common share increase in BV for the third quarter of 2013. When the FED announced it will not begin to taper its QE3 purchasing program in September 2013, positive MBS price movements reversed AGNC's existing valuation loss prior to the end of the quarter. In fact, a slight to modest valuation gain should occur on AGNC's MBS portfolio for the third quarter of 2013.

Another factor in the quarterly BV increase of $1.12 per common share is the reduction in quarterly dividend distributions. For the second quarter of 2013, AGNC reported a quarterly dividend of $1.05 per common share. As such, quarterly distributions totaled ($416.0) million. However, AGNC cut its dividend to $0.80 per common share in the third quarter of 2013. As such, quarterly distributions will only total ($307.5) million during the third quarter of 2013. This calculates to a quarterly dividend reduction of $108.5 million or $0.25 per share. When combined, these two factors account for a quarterly BV increase of $1.10 per common share.

Therefore, I am projecting AGNC will report a modest increase in BV per common share as of 9/30/2013 when compared to 6/30/2013. This projected BV increase will help reverse two prior quarter's worth of material BV declines. If AGNC reports a BV within my stated range of $25.83 - $27.43 per common share, I feel the market will see this as positive news and increase its confidence in AGNC's management team.

AGNC has taken steps within the past year to properly "hedge" its MBS portfolio against further MBS price declines that can stem from a rising interest rate environment. If market interest rates "spike" higher during the foreseeable future (which I personally do not think will occur), AGNC's derivative instruments will once again exhibit valuation gains thus offsetting MBS price declines. As such, these hedges will mitigate some of the valuation losses sustained on AGNC's MBS portfolio in a rising interest rate environment.

Final Note on Future AGNC Articles: I will be providing a quarterly dividend sustainability article after AGNC provides its results for the third quarter of 2013. This article will be provided to readers in mid-November 2013. I will also provide a series of articles on the valuation of AGNC's MBS and derivative portfolios as of 11/15/2013. The first part of this series will be provided to readers in late November 2013. A dividend range scenarios article for the fourth quarter of 2013 will be provided to readers in December 2013. Finally, I would like to thank my loyal readers for their continued positive feedback and discussion points in the comments section of my articles (including personal messages).

Source: American Capital Agency's Upcoming Q3 2013 Book Value Projection (As Of September 30, 2013)