As an income-driven investor always in search of a sustainable mid-to-higher yielding mortgage REIT play, I've decided to shift my focus to the non-agency mortgage REIT sector and highlight several of the reasons why I'm staying slightly bullish on shares of American Capital Mortgage Investment Corporation (MTGE).
Recent Performance and Trend Behavior
On Monday, shares of MTGE, which currently possess a market cap of $1.06 billion, a forward P/E ratio of 6.51, and a dividend yield of 15.26% ($2.80), settled at a price of $18.35/share. Based on their closing price of $18.35/share, shares of MTGE are trading 5.10% below their 20-day simple moving average, 7.25% below their 50-day simple moving average, and 10.32% below their 200-day simple moving average.
These numbers indicate a short-term, mid-term and long-term downtrend for the stock which generally translates into a moderate selling mode for both short-term traders and long-term investors.
That being said, I actually think the company's recent trend behavior signals somewhat of a buying opportunity especially since shares are fairly cheap (current P/E ratio of 4.67 and forward P/E ratio of 6.51) and possess a yield in the mid-double-digits (current yield as of 12/2/13 is 15.26%).
Shareholders Could See MTGE Buyback Shares
On November 13, CIO Gary Kain was quoted as saying, "When agency mREITs trade at discounts to book value, it's a lot different than a bank or insurance company trading at a discount . Why? Because the assets held at an agency REIT are fairly easy to mark, and they're easy/liquid to trade. The benefit of selling mortgages and buying back stock is pretty clear".
It should be noted that Mr. Kain was pertaining to both American Capital Agency (AGNC) as well as American Capital Mortgage Investment Corp.
Considering the fact that the company's most recently filed 10-Q indicated that there were approximately 52.90 million shares outstanding, I'd consider any buyback of at least 2.645 million shares (roughly 5% of the company's total shares outstanding), or more a positive.
If, for any reason, the buyback program indicates the repurchase of less than 5% of all shares outstanding, I'd actually refrain from establishing a position at this current point in time.
Here's Why MTGE Should Consider Dumping Their Pay-Fixed Interest Rate Swaps
In a recently published article, my fellow SA colleague Positive Concavity, noted that if MTGE were to dump a portion of their pay-fixed interest rate swaps, on both quarterly and annual basis, overall results could experience a positive impact.
For example, "As of Q3 2013, MTGE's interest rate swaps had a weighted average duration of -5.6 with a net pay rate of 1.36% (Receive rate of 0.26% / Pay rate of 1.62%). If we assume that the MSRs have a weighted average duration of -15, roughly every $1 of MSR replaces $2.7 of pay-fixed swaps (-15/-5.6). [I derived the -15.0 duration from a JP Morgan IO pricing sheet for 3.5% and 4.0% coupon 30-Year IOs]. The MSR to swap duration ratio roughly equates to unwinding ~$1.3BN (500*~2.7) of pay-fixed swaps, which reduces negative carry to increases earnings by $18MM or 1.5% to ROE. Based on the rough estimates, the $500MM of MSR enhances MTGE's ROE by 3.2% while reducing mortgage basis risk. The ROE enhancement can be much higher than 3.2% if MTGE does not hedge the entire amount of option risk embedded in MSRs. It is also important to note that the 3.2% of additional ROE is attributed to non-interest rate risk factors discussed previously. In a sense, MSRs are a venue for MTGE to take on risk other than interest rate risk and non-agency credit risk to enhance earnings".
Are there any risk factors investors should consider before establishing a position in American Capital Mortgage Investment Corporation? Yes there are, and according to the company's most recent 10-K, there are a number of risk factors all investors should consider. These factors include but are not limited to controlling the special servicing of the mortgage loans included in the CMBS in which we may invest and, in such cases, the special servicer may take actions that could adversely affect the company's interests, and the fact that the company may invest in non-prime mortgage loans or investments collateralized by non-prime mortgage loans, which are subject to increased risks.
For those of you who may be considering a position in American Capital Mortgage Investment Corporation, I'd keep a watchful eye on a number of things over the next 12-24 months as each could play a role in the company's long-term growth.
For example, near-term investors should focus on the company's recent performance and trend behavior, while long-term investors should keep an eye on how soon the company plans on initiating a share buyback program as well as how soon the company considers dumping its pay-fixed interest rate swaps.