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Summary

  • AGNC had a (6.54%) decrease to book value (‘BV’) during the third and fourth quarters of 2013.
  • AGNC’s stock price as of 3/14/2014 was trading at a premium (discount) to BV as of 12/31/2013 of (5.81%).
  • The variable-rate agency mREIT companies CMO and HTS had a (2.55%) and (3.04%) decrease to BV during the third and fourth quarters of 2013, respectively.
  • The fixed-rate agency mREIT companies ARR, CYS, and NLY had a (13.87%), (10.29%), and (7.23%) decrease to BV during the third and fourth quarters of 2013, respectively.
  • As of 3/14/2014, CMO traded at a modest premium to BV as of 12/31/2013, while AGNC, ARR, CYS, HTS, and NLY traded at varying discounts to BV.

Focus of Article:

The focus of this article is to examine the recent book value ('BV') per share changes of American Capital Agency Corp. (NASDAQ:AGNC) and compare the company's results to most of its agency mortgage real estate investment trust (mREIT) peers. This analysis will show recent past and current data, with supporting documentation (via Table 1). Table 1 will compare BV per share figures from AGNC and five other agency mREIT peers as of 9/30/2013 and 12/31/2013. Table 1 will also compare quarterly BV per share changes within the six companies between the third and fourth quarters of 2013. This will then be followed by a premium (discount) to BV analysis between AGNC and the five other agency mREIT peers, using stock prices as of 12/20/2013 and 3/14/2014, to show the differing levels of stock price appreciation between the six companies.

During this analysis, each company's mortgage-backed securities ("MBS") and derivative portfolios will be examined (where applicable). This article will allow readers to gain a better perspective in regard to recent BV per share changes and the current situation regarding each company's premium (discount) valuation. At the end of this article, there will be a conclusion on which agency mREIT companies had the least and most BV per share decreases (percentage-wise) during the past two quarters, and which companies currently have the highest to lowest discounts to BV as of 12/31/2013.

I am writing this particular article due to the recent requests that such an analysis be performed. Understanding the general characteristics of each company's MBS and derivative portfolios can shed some light on which companies are possibly "overvalued" or "undervalued" strictly per a "numbers" analysis. This is not the only data that should be examined to initiate a position within a particular stock/sector. However, I feel this analysis would be a good "starting point" to begin a discussion on the topic.

Side Note: There are various mREIT companies that acquire both agency and non-agency MBS holdings. This type of company is known as a "hybrid" mREIT. Due to the subtle differences between agency and non-agency MBS, I like to differentiate between "pure" (100%) agency and hybrid mREIT companies. As such, this article will only be focusing on agency mREIT companies.

Agency mREIT BV Per Share Change Analysis (Including Current Premium (Discount) to BV Analysis) - Overview:

Let us start this analysis by first getting accustomed to the information provided in Table 1 below. This will be beneficial when explaining how AGNC matches up to the company's agency mREIT peers regarding quarterly BV per share changes and the current premium (discount) to BV analysis.

Table 1 - Agency mREIT BV Per Share Changes (Including Current Premium (Discount) to BV Analysis)

(click to enlarge)

(Source: Table created entirely by myself, obtaining historical stock prices from NASDAQ and each company's BV per share figures from the SEC's EDGAR Database)

Using Table 1 above as a reference, AGNC and the five other agency mREIT peers are presented in alphabetical order according to each company's stock ticker symbol. The table provides each company's fixed and variable-rate MBS holdings as of 12/31/2013 (see blue reference "A" in Table 1 above). Table 1 also states the following information on the six agency mREIT companies (see each corresponding column): 1) BV per share at the end of the third quarter of 2013; 2) BV per share change during the third quarter of 2013 (monetary amount); 3) BV change during the third quarter of 2013 (percentage amount); 4) stock price as of 12/20/2013; 5) 12/20/2013 premium (discount) to BV per share at the end of the third quarter (monetary amount); 6) 12/20/2013 premium (discount) to BV at the end of the third quarter (percentage amount); 7) BV per share at the end of the fourth quarter of 2013; 8) BV per share change during the fourth quarter of 2013 (monetary amount); 9) BV change during the fourth quarter of 2013 (percentage amount); 10) stock price as of 3/14/2014; 11) current premium (discount) to BV per share at the end of the fourth quarter (monetary amount); and 12) current premium (discount) to BV at the end of the fourth quarter (percentage amount).

Now that a brief overview of Table 1 above has been established, this article will now proceed to highlight the recent BV per share changes between AGNC and the five other agency mREIT peers. Within this discussion, a current premium (discount) to BV analysis will also be presented.

Side Note: Out of the six agency mREIT companies that are about to be presented, I feel a further breakdown is warranted. MBS are either classified as being fixed or variable-rate in nature. Fixed-rate MBS are pools of mortgages that have a "non-changing" interest rate for the entire term of the loan. The coupon associated with a fixed-rate MBS will not change. On the other hand, variable-rate MBS are generally made up of "adjustable-rate mortgages" ("ARM") that have varying interest rate "reset" periods. ARM holdings are usually classified together based on each security's average number of months to coupon reset. This is also known as the security's "months-to-roll". This is a typical indicator of asset duration which helps identify each security's price sensitivity to market interest rate movements. Most fixed and variable-rate MBS have maturities of 15, 20, or 30 years. Capstead Mortgage Corp. (NYSE:CMO) and Hatteras Financial Corp. (NYSE:HTS) are currently classified as variable-rate agency mREIT companies. AGNC, ARMOUR Residential REIT Inc. (NYSE:ARR), CYS Investments Inc. (NYSE:CYS), and Annaly Capital Management Inc. (NYSE:NLY) are classified as fixed-rate agency mREIT companies. Readers should be aware as such when the analysis is presented below.

1) American Capital Agency Corp.:

The first agency mREIT to discuss is AGNC. Using Table 1 above as a reference, AGNC had a 97% fixed-rate (4% variable-rate) agency MBS portfolio as of 12/31/2013. AGNC had a BV of $25.27 per share at the end of the third quarter of 2013. This calculated to a BV increase (decrease) of ($0.24) per share or (0.94%). Even though this was a disappointment for some market participants, AGNC still outperformed the five other agency mREIT peers during the third quarter of 2013 regarding the mitigation of BV losses (percentage-wise). When compared to AGNC's closest peer, NLY, the company's BV decrease during the third quarter of 2013 was 1.59% less severe. This was attributed to management's cautious investment strategy of reducing AGNC's more price-sensitive 30-year fixed-rate MBS holdings, while also selling the company's lowest-coupon MBS. This "defensive posture" by AGNC's management team helped mitigate BV erosion during the third quarter of 2013. Due to the continued rebalancing efforts in regard to AGNC's MBS portfolio, management lowered the company's hedging coverage ratio from 101%, as of 6/30/2013, to 91%, as of 9/30/2013.

AGNC had a BV of $23.93 per share at the end of the fourth quarter of 2013. This calculated to a BV increase (decrease) of ($1.34) per share, or (5.60%). Even though this was a disappointment for some market participants, AGNC still outperformed all but one of the three other fixed-rate agency mREIT peers during the fourth quarter of 2013 regarding the mitigation of BV losses (percentage-wise). When compared to AGNC's closest peer, NLY, the company's BV decrease during the fourth quarter of 2013 was (0.90%) more severe. The modest drop in BV was attributed to management's strategy of continuing to reduce AGNC's "hedging coverage ratio" during the quarter. Due to the continued rebalancing efforts in regard to AGNC's MBS portfolio, management continued to lower the company's hedging coverage ratio from 91%, as of 9/30/2013, to 86%, as of 12/31/2013.

Still using Table 1 above as a reference, as of 12/20/2013, AGNC's stock price traded at $19.87 per share. When calculated, this showed AGNC's stock price was trading at a premium (discount) to BV as of 9/30/2013 of ($5.40) per share, or (21.37%). This was a material discount to BV. As of 3/14/2014, AGNC's stock price traded at $22.54 per share. As was the case for most of the mREIT sector, AGNC's stock price recently has had a modest-to-material short-term price appreciation. When calculated, this showed AGNC's stock price was now trading at a premium (discount) to BV as of 12/31/2013 of only ($1.39) per share, or (5.81%). As one can see, the discount to BV had narrowed considerably.

However, one should understand AGNC's CURRENT BV is modestly higher in the first quarter of 2014. As such, I am currently projecting a premium (discount) to BV of over (10%) through the week ending 3/14/2014. Therefore, I still feel AGNC was trading at a material discount to CURRENT BV as of 3/14/2014. While the market may continue to price a discount in the agency mREIT sector due to fears of rising interest rates (especially fixed-rate MBS portfolios), the level of discount to BV should be modest in comparison to levels seen during the latter half of 2013. As such, I feel AGNC is still attractively priced when compared to the company's agency mREIT peers (as will be shown throughout the remainder of this article).

Let us perform this same analysis on the five other agency mREIT peers and see how each company compared to AGNC regarding recent BV per share changes and current premium (discount) to BV percentages.

2) ARMOUR Residential REIT Inc.:

Using Table 1 above as a reference, ARR had a 99% fixed-rate (1% variable-rate) agency MBS portfolio as of 12/31/2013. ARR had a BV of $5.26 per share at the end of the third quarter of 2013. This calculated to a BV increase (decrease) of ($0.17) per share, or (3.13%). Even though this was only a relatively minor decrease in BV, ARR underperformed several other agency mREIT peers during the third quarter of 2013 regarding the mitigation of BV losses (percentage-wise). However, when compared to the BV increase (decrease) of ($1.26) per share, or (18.83%) during the second quarter of 2013, this minor drop to BV in the third quarter of 2013 was a positive sign.

ARR had a BV of $4.75 per share at the end of the fourth quarter of 2013. This calculated to a BV increase (decrease) of ($0.51) per share, or (10.74%). This was a material decrease in BV for just one quarter. ARR underperformed the five other agency mREIT peers during the fourth quarter of 2013 regarding the mitigation of BV losses (percentage-wise). ARR had a hedging coverage ratio of 95% as of 9/30/2013. This ratio materially increased to 121% as of 12/31/2013. Due to the extremely high hedging coverage ratio, one would expect ARR was able to mitigate BV erosion during the fourth quarter of 2013 (which was not the case). However, upon further investigation in ARR's results, the company's derivative net gain (loss) was only $128 million for the fourth quarter of 2013. Compared to ARR's agency mREIT sector peers, this was a poor net valuation gain for the quarter. Through further analysis, ARR's MBS portfolio was mainly in 20 and 30-year fixed-rate MBS, which are generally more susceptible to price movements as market interest rates move (relatively high net positive duration). ARR's interest rate swaps and swaptions comprised 64% and 36% of the company's derivative portfolio as of 12/31/2013, respectively. When compared to AGNC and the rest of the agency mREIT sector (where applicable), this was a fairly high ratio of swaptions versus swaps. Furthermore, ARR's interest rate swaptions had a weighted average negative duration of only (2.7) years. As such, ARR's derivative portfolio had a relatively low net valuation gain, while the company's MBS portfolio had a material net valuation loss (explaining the material BV decrease).

Still using Table 1 above as a reference, as of 12/20/2013, ARR's stock price traded at $3.74 per share. When calculated, this showed ARR's stock price was trading at a premium (discount) to BV as of 9/30/2013 of ($1.52) per share, or (28.90%). This was a material discount to BV and the largest out of the six agency mREIT companies. As of 3/14/2014, ARR's stock price traded at $4.29 per share. As was the case for most of the mREIT sector, ARR's stock price recently has had a modest-to-material short-term price appreciation. When calculated, this showed ARR's stock price was now trading at a premium (discount) to BV as of 12/31/2013 of only ($0.46) per share, or (9.68%). As one can see, the discount to BV had narrowed considerably, but was still the largest when compared to the five other agency mREIT peers.

However, one should understand ARR's CURRENT BV is modestly higher in the first quarter of 2014. As such, I am currently projecting a premium (discount) to BV of at least (11%) through the week ending 3/14/2014. Therefore, I still feel ARR is trading at a material discount to CURRENT BV. One should be aware that ARR's extremely high hedging coverage ratio of 121% as of 12/31/2013 will likely impact quarterly net spreads negatively. While the market may continue to price a discount in the agency mREIT sector due to fears of rising interest rates (especially fixed-rate MBS portfolios), the level of discount to BV should be modest in comparison to levels seen during the latter half of 2013. I feel ARR should continue to trade at the highest discount to CURRENT BV based on the company's past performance, when compared to its agency mREIT peers.

3) Capstead Mortgage Corp.:

Using Table 1 above as a reference, CMO nearly had the company's entire MBS portfolio in variable-rate agency holdings as of 12/31/2013. CMO had a BV of $12.35 per share at the end of the third quarter of 2013. This calculated to a BV increase (decrease) of ($0.45) per share or (3.52%). Even though this was only a relatively minor decrease in BV, CMO underperformed the five other agency mREIT peers during the third quarter of 2013 regarding the mitigation of BV losses (percentage-wise).

CMO had a BV of $12.47 per share at the end of the fourth quarter of 2013. This calculated to a BV increase (decrease) of $0.12 per share, or 0.96%. CMO outperformed the four fixed-rate agency mREIT peers (AGNC, ARR, CYS, and NLY), and was basically in line with the other variable-rate agency mREIT peers regarding BV per share changes during the fourth quarter of 2013. This was mainly due to the fact CMO's entire MBS portfolio was in ARM holdings, which did not have modest-to-material price reductions during the fourth quarter of 2013 (unlike fixed-rate MBS). Even though the company's 12/31/2013 weighted average coupon ("WAC") and weighted average net yield were the lowest out of the six agency mREIT companies, CMO also had the lowest hedging costs. CMO had a hedging coverage ratio of only 30% as of 9/30/2013. This hedging coverage ratio only increased to 34% as of 12/31/2013. CMO utilized forward-starting 1-month London Interbank Offered Rate (LIBOR) payer interest rate swaps. These interest rate swaps were directly tied to the current and forecasted 1-3 month borrowing rates of the company's repurchase ("repo") loans. As such, these interest rate swaps had extremely low negative durations and overall costs associated with them. CMO's interest rate swaps had a weighted average fixed pay rate of only 0.50% as of 12/31/2013. As such, the following two factors explain why CMO had a minor increase in BV for the fourth quarter of 2013: 1) lower valuation risk on CMO's MBS portfolio due to the nature of the ARM holdings (rates reset); and 2) continued low overall hedging costs due to extremely low negative durations.

Still using Table 1 above as a reference, as of 12/20/2013, CMO's stock price traded at $12.46 per share. When calculated, this showed CMO's stock price was trading at a premium (discount) to BV as of 9/30/2013 of $0.11 per share, or 0.89%. Unlike the five other agency mREIT peers, CMO was actually trading at a minor premium to BV. As I correctly stated in past articles and comments, this led me to believe CMO's stock price had a lower probability of incurring a material price appreciation, when the rest of the agency mREIT sector would have a nice "bounce-back" in valuations because of their steep discounts to BV. As we now can see, this assumption has proved to be correct. As of 3/14/2014, CMO's stock price traded at $13.02 per share. When calculated, this showed CMO's stock price was now trading at a premium (discount) to BV as of 12/31/2013 of $0.55 per share, or 4.41%. Between 12/20/2013 and 3/14/2014, CMO's stock had only a price appreciation of $0.56 or 4.5%, while the five other agency mREIT peers had an increase of at least 12% (AGNC's stock price had appreciated 13.4%). As such, CMO's stock price appreciated less when compared to the five other agency mREIT peers, who previously were trading at material discounts to BV.

However, one should understand CMO's CURRENT BV is probably modestly higher in the first quarter of 2014. As such, I am currently projecting a premium (discount) to BV of around 1% through the week ending 3/14/2014. Therefore, I feel CMO is basically trading in line with the company's CURRENT BV. While CMO seems to generally be a safer investment when compared to the five other agency mREIT peers, this aspect continues to be priced into the stock already. While past and current holders of CMO have benefited from owning this stock when compared to the five other agency mREIT peers regarding BV decreases during 2013, the continued "non-discount" to CURRENT BV would seem to point out the company continues to have a lower probability of material price appreciation. It appears CMO continues to be the "safest" choice within the agency mREIT sector.

4) CYS Investments Inc.:

Using Table 1 above as a reference, CYS had an 85% fixed-rate (15% variable-rate) agency MBS portfolio as of 12/31/2013. CYS had a BV of $10.10 per share at the end of the third quarter of 2013. This calculated to a BV increase (decrease) of ($0.10) per share, or (0.98%). CYS outperformed the other agency mREIT peers during the third quarter of 2013 regarding the mitigation of BV losses (percentage-wise), with the exception of AGNC. When compared to the BV increase (decrease) of ($2.67) per share, or (20.75%), during the second quarter of 2013, this minor drop to BV in the third quarter of 2013 was a positive sign.

CYS had a BV of $9.24 per share at the end of the fourth quarter of 2013. This calculated to a BV increase (decrease) of ($0.86) per share, or (9.31%). CYS underperformed the other agency mREIT peers during the fourth quarter of 2013 regarding the mitigation of BV losses (percentage-wise), with the exception of ARR. CYS's hedging coverage ratio was 94% as of 9/30/2013. CYS's hedging coverage ratio decreased to 91% as of 12/31/2013. Due to the continued relatively high hedging coverage ratio, one would expect CYS was able to mitigate BV erosion during the fourth quarter of 2013 (which was not the case). However, upon further investigation, CYS's interest rate swaps and caps comprised 62% and 38% of the company's derivative portfolio as of 12/31/2013, respectively. When compared to the rest of the agency mREIT sector, CYS is currently the only company to use interest rap caps. While CYS's interest rate swaps had an average fixed pay rate of only 1.17%, the company's interest rate caps had an average fixed pay rate of 1.40%. CYS's interest rate caps underperformed when compared to the company's interest rate swaps during the fourth quarter of 2013. As such, CYS's derivative portfolio had a relatively low net valuation gain, while the company's MBS portfolio had a material net valuation loss (explaining the material BV decrease).

Still using Table 1 above as a reference, as of 12/20/2013, CYS's stock price traded at $7.47 per share. When calculated, this showed CYS's stock price was trading at a premium (discount) to BV as of 9/30/2013 of ($2.63) per share, or (26.04%). As was the case with AGNC and ARR, this was a material discount to BV. As of 3/14/2014, CYS's stock price traded at $8.92 per share. As was the case for most of the mREIT sector, CYS's stock price recently has had a modest-to-material short-term price appreciation. When calculated, this showed CYS's stock price was now trading at a premium (discount) to BV as of 12/31/2013 of only ($0.32) per share, or (3.46%). As one can see, the discount to BV had narrowed considerably and was the smallest discount when compared to the four other fixed-rate agency mREIT peers.

However, one should understand CYS's CURRENT BV is modestly higher in the first quarter of 2014. As such, I am currently projecting a premium (discount) to BV of at least (7%) through the week ending 3/14/2014. Therefore, I still feel CYS is trading at a modest discount to CURRENT BV. While the market may continue to price a discount in the agency mREIT sector due to fears of rising interest rates (especially fixed-rate MBS portfolios), the level of discount to BV should be modest in comparison to levels seen during the latter half of 2013. I feel CYS should continue to trade in line with the company's agency mREIT peers. As such, I currently feel CYS is slightly overpriced when compared to AGNC, HTS, and NLY.

5) Hatteras Financial Corp.:

Using Table 1 above as a reference, HTS had a 93% variable-rate (7% fixed-rate) agency MBS portfolio as of 12/31/2013. HTS had a BV of $21.31 per share at the end of the third quarter of 2013. This calculated to a BV increase (decrease) of ($0.87) per share or (3.92%). HTS underperformed the five other agency mREIT peers during the fourth quarter of 2013 regarding the mitigation of BV losses (percentage-wise). When compared to the BV increase (decrease) of ($6.00) per share, or (21.29%), during the second quarter of 2013, this minor drop to BV in the third quarter of 2013 was a positive sign.

HTS had a BV of $21.50 per share at the end of the fourth quarter of 2013. This calculated to a BV increase (decrease) of $0.19 per share, or 0.88%. HTS outperformed the four fixed-rate agency mREIT peers (AGNC, ARR, CYS, and NLY), and was basically in line with the other variable-rate agency mREIT peers regarding BV per share changes during the fourth quarter of 2013. HTS's outperformance during the fourth quarter of 2013 can be attributed to three factors. First, a majority of HTS's MBS portfolio was in ARM holdings, which did not have modest-to-material price reductions during the fourth quarter of 2013 (unlike fixed-rate MBS). Second, HTS experienced reduced prepayment risk on the company's ARM holdings during the fourth quarter of 2013. For instance, the weighted average conditional prepayment rate ('CPR') for HTS decreased from 19.7% for the third quarter of 2013 to only 14.2% for the fourth quarter of 2013. When calculated, this was a decrease in the CPR of (5.5%) and was a larger reduction when compared to HTS's fixed-rate agency mREIT peers. Third, HTS continued to increase the company's hedging coverage ratio. HTS had a hedging coverage ratio of 56% as of 9/30/2013. HTS's hedging coverage ratio increased to 65% as of 12/31/2013.

Still using Table 1 above as a reference, as of 12/20/2013, HTS's stock price traded at $16.78 per share. When calculated, this showed HTS's stock price was trading at a premium (discount) to BV as of 9/30/2013 of ($4.53) per share, or (21.26%). As was the case with AGNC, ARR, and CYS, this was a material discount to BV. As of 3/14/2014, HTS's stock price traded at $19.61 per share. As was the case for most of the mREIT sector, HTS's stock price recently has had a modest-to-material short-term price appreciation. When calculated, this showed HTS's stock price was now trading at a premium (discount) to BV as of 12/31/2013 of ($1.89) per share, or (8.79%). As one can see, the discount to BV had narrowed considerably, but was still the second-largest when compared to the five other agency mREIT peers.

However, one should understand HTS's CURRENT BV is modestly higher in the first quarter of 2014. As such, I am currently projecting a premium (discount) to BV of at least (10%) through the week ending 3/14/2014. Therefore, I still feel HTS is trading at a material discount to CURRENT BV. While the market may continue to price a discount in the agency mREIT sector due to fears of rising interest rates (especially fixed-rate MBS portfolios), the level of discount to BV should be modest in comparison to levels seen during the latter half of 2013. Out of the two variable-rate agency mREIT companies, CMO has clearly performed better over the past several quarters. However, HTS just reported a quarter fairly similar to CMO. I feel this is an important observation. As of 3/14/2014, CMO's stock price was trading at a premium (discount) to BV as of 12/31/2013 of 4.41%, while HTS's stock price was trading at a premium (discount) to BV as of 12/31/2013 of (8.79%). Granted, CMO seems to have the more efficient business model. However, a 13.20% "advantage" seems to be slightly overdone. As such, while CMO has limited upside potential, HTS has room to move closer to BV in the future. Depending on an investor's risk tolerance and timing of the market, when compared to CMO, I feel HTS continues to have the better opportunity for stock price appreciation. As such, I feel HTS is currently underpriced when compared to CMO.

6) Annaly Capital Management Inc.:

The last agency mREIT to analyze is NLY. Using Table 1 above as a reference, NLY had an 89% fixed-rate (11% variable-rate) agency MBS portfolio as of 12/31/2013. NLY had a BV of $12.70 per share at the end of the third quarter of 2013. This calculated to a BV increase (decrease) of ($0.33) per share, or (2.53%). NLY was basically in line with the company's agency mREIT peers during the third quarter of 2013. NLY's BV decrease was worse than both AGNC and CYS during the third quarter of 2013, but better than ARR, CMO, and HTS. When compared to NLY's closest peer, AGNC, the company's BV decrease during the third quarter of 2013 was (1.59%) more severe.

NLY had a BV of $12.13 per share at the end of the fourth quarter of 2013. This calculated to a BV increase (decrease) of ($0.57) per share, or (4.70%). NLY outperformed the company's fixed-rate agency mREIT peers and underperformed the company's variable-rate agency mREIT peers during the fourth quarter of 2013 regarding the mitigation of BV losses (percentage-wise). When compared to NLY's closest peer, AGNC, the company's BV decrease during the fourth quarter of 2013 was 0.90% less severe. This was mainly due to the continued increase in NLY's hedging coverage ratio. NLY had a hedging coverage ratio of 82% as of 9/30/2013. NLY's hedging coverage ratio increased to 95% as of 12/31/2013. While AGNC increased (decreased) the company's hedging coverage ratio by (5%) during the fourth quarter of 2013, NLY increased (decreased) the company's hedging coverage ratio by 13%. Within just two quarters, NLY has increased the company's hedging coverage ratio by 35% (95% as of 12/31/2013 versus 60% as of 6/30/2013).

Still using Table 1 above as a reference, as of 12/20/2013, NLY's stock price traded at $10.10 per share. When calculated, this showed NLY's stock price was trading at a premium (discount) to BV as of 9/30/2013 of ($2.60) per share, or (20.47%). As was the case with AGNC, ARR, CYS, and HTS, this was a material discount to BV. As of 3/14/2014, NLY's stock price traded at $11.33 per share. As was the case for most of the mREIT sector, NLY's stock price recently has had a modest-to-material short-term price appreciation. When calculated, this showed NLY's stock price was now trading at a premium (discount) to BV as of 12/31/2013 of ($0.80) per share, or (6.60%). As one can see, the discount to BV had narrowed considerably (as was the case with most of NLY's agency mREIT peers).

However, one should understand NLY's CURRENT BV is modestly higher in the first quarter of 2014. As such, I am currently projecting a premium (discount) to BV of at least (10%) through the week ending 3/14/2014. Therefore, I still feel NLY is trading at a material discount to CURRENT BV. While the market may continue to price a discount in the agency mREIT sector due to fears of rising interest rates (especially fixed-rate MBS portfolios), the level of discount to BV should be modest in comparison to levels seen during the latter half of 2013. I feel NLY should continue to trade in line with the company's agency mREIT peers and very closely to AGNC.

Side Note: NLY also had corporate debt (also known as "commercial paper") and commercial real estate debt/investment portfolios as of 12/31/2013. In my opinion, these two additional facets make NLY a slightly more attractive investment when compared to the company not having these two portfolios. As such, a continued expansion of these two portfolios could be seen as a positive sign. However, to put things in perspective, NLY's corporate debt and commercial real estate debt/investment portfolios had a combined balance of $1.8 billion as of 12/31/2013. In comparison, NLY's MBS portfolio had a balance of $73.4 billion as of 12/31/2013. As such, NLY's corporate debt and commercial real estate debt/investment portfolios make up only a minor portion (under 3%) of NLY's overall assets.

Conclusions Drawn (PART 1):

This article has examined AGNC and five other agency mREIT peers in regard to recent BV per share changes and a current premium (discount) to BV analysis. Using Table 1 as supporting evidence, the following were the combined BV percentage changes for the variable-rate agency mREIT companies during the third and fourth quarters of 2013 (in order of least to most severe BV decrease):

CMO: (2.55%) decrease in BV

HTS: (3.04%) decrease in BV

The following were the combined BV percentage changes for the fixed-rate agency mREIT companies during the third and fourth quarters of 2013 (in order of least to most severe BV decrease):

AGNC: (6.54%) decrease in BV

NLY: (7.23%) decrease in BV

CYS: (10.29%) decrease in BV

ARR: (13.87%) decrease in BV

The following are the 3/14/2014 premium (discount) to BV as of 12/31/2013 percentages for the variable-rate agency mREIT companies (in order of highest to lowest discount):

HTS: (8.79%) price-to-book premium (discount)

CMO: 4.41% price-to-book premium (discount)

The following are the 3/14/2014 premium (discount) to BV as of 12/31/2013 percentages for the fixed-rate agency mREIT companies (in order of highest to lowest discount):

ARR: (9.68%) price-to-book premium (discount)

NLY: (6.60%) price-to-book premium (discount)

AGNC: (5.81%) price-to-book premium (discount)

CYS: (3.46%) price-to-book premium (discount)

Therefore, it seems the variable-rate mREIT companies (CMO and HTS) had the lowest combined BV decrease during the third and fourth quarters of 2013 by a slim-to-modest margin. However, as of 3/14/2014, CMO traded at a modest premium to BV as of 12/31/2013 and a minor premium to CURRENT BV. As of 3/14/2014, HTS traded at a modest discount to BV as of 12/31/2013 and a material discount to CURRENT BV. Out of the two variable-rate agency mREIT companies, I feel HTS has the greater potential upside regarding stock price appreciation. In comparison, AGNC had only lost an additional (3.99%) in BV (percentage-wise) when compared to CMO, yet currently trades a net discount to BV as of 12/31/2013 of (10.22%) when compared to CMO. Similar to HTS, when compared to CMO, I feel AGNC has the greater potential upside regarding stock price appreciation.

Technically, variable-rate agency mREIT companies "should" have less valuation losses if interest rates once again spike higher due to the interest rate reset factor regarding ARM holdings. However, when interest rates remain flat or decrease, I feel the edge in MBS valuation gains goes to the fixed-rate agency mREIT companies. This assumption seemed to play out during the third quarter of 2013, where CMO had a BV increase (decrease) of (3.52%), while AGNC and CYS had a BV increase (decrease) of (0.94%) and (0.98%), respectively.

If I were currently looking to initiate or add to my positions in the agency mREIT sector based on the factors of past mitigation of BV losses and the premium (discount) to CURRENT BV, I would first look to AGNC, HTS, or NLY.

If I was concerned about a spike in interest rates over the short term, I would look towards HTS as a possible investment. If I felt interest rates over the short term would remain flat or decrease, I would look towards AGNC and NLY as a possible investment. If one currently holds a position in CMO, I would continue to hold this investment, but not add to my position due to the continued minor premium to CURRENT BV (limited upside potential).

Final Note: After dividends are declared for the entire agency mREIT sector for the first quarter of 2014, I will provide PART 2 of this article, taking a look at the recent past and current dividend rates and yields for these six agency mREIT companies.

Source: American Capital Agency's Recent Book Value And Dividend Compared To Its Agency mREIT Peers - Part 1

Additional disclosure: I currently have no position in ARR, CMO, CYS, HTS, or NLY.