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Summary

  • I am projecting American Capital Agency will report a total increase (decrease) in net common equity of $101 million for the three-months ended 3/31/2014.
  • I am projecting American Capital Agency will report a book value of $24.45 per common share as of 3/31/2014 (BV range is stated within the article).
  • I am projecting American Capital Agency will report an increase (decrease) in quarterly BV of 2.16% and generate an economic return of 4.79% for the first quarter of 2014.
  • I am projecting American Capital Mortgage will report a book value of $21.94 per common share as of 3/31/2014 (BV range is stated within the article).
  • I am projecting Annaly Capital Management will report a book value of $12.40 per common share as of 3/31/2014 (BV range is stated within the article).

Focus of Article:

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 3/31/2014. Prior to results being provided to the public on 4/28/2014 (via the company's quarterly press release), I would like to analyze AGNC's BV as of 3/31/2014 and provide readers a general direction on how I believe this recent quarter has panned out. A previous three-part article I wrote laid the groundwork for this BV projection. In that article, I projected/analyzed AGNC's income statement for the first quarter of 2014. The links to my three-part income statement projection article are provided below:

American Capital Agency's Upcoming Q1 2014 Income Statement Projection (Part 1)

American Capital Agency's Upcoming Q1 2014 Income Statement Projection (Part 2)

American Capital Agency's Upcoming Q1 2014 Income Statement Projection (Part 3)

This article will also include a brief BV discussion regarding AGNC's sister company American Capital Mortgage Corp. (NASDAQ:MTGE) and the company's closest sector peer, Annaly Capital Management, Inc. (NYSE:NLY). This includes a BV projection as of 3/31/2014 for both companies.

Side Note: Predicting a company's accounting figures within the mortgage real estate investment trust (mREIT) sector is usually more difficult when compared to other sectors due to the various hedging 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 could occur because management deviates from a company's prior business strategy and pursues a new strategy that was not previously disclosed. 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.

Overview of AGNC's BV as of 3/31/2014:

Due to the fact that several figures needed to project/calculate AGNC's BV as of 3/31/2014 come directly from the company's statement of comprehensive income, I provide Table 1 below. Table 1 shows AGNC's statements of comprehensive income from a three-months (quarterly) timeframe. Using Table 1 below as a reference, one must add certain account figures from the first quarter of 2014 for purposes of projecting a suitable BV as of 3/31/2014.

Table 1 - AGNC Three-Months Ended Statements of Comprehensive Income

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(Source: Table created entirely by myself, partially using data obtained from AGNC's quarterly investor presentation slides)

Having provided Table 1 above (in particular AGNC's "Three-Months Ended (ESTIMATE)" column), we can now begin to calculate AGNC's projected BV as of 3/31/2014. This projection will be calculated using Table 2 below.

Side Note: There will not be an identical sheet AGNC provides that matches the data I have prepared in Table 2 below. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC's BV as of 3/31/2014. AGNC, through the company's quarterly investor presentations (see link above), only provides readers with a "Book Value Roll Forward" slide. This roll forward slide uses information based only on a quarterly timeframe. I believe the information AGNC provides within this slide is somewhat vague. It is inadequate when trying to calculate a projected BV figure. Therefore, I perform a more detailed quarterly BV calculation/analysis. After AGNC reports the company's quarterly results, I then compare my recalculated quarterly (ACTUAL) BV to AGNC's roll forward slide. This ensures there are no variances between the two sets of BV figures.

Table 2 - AGNC Three-Months Ended BV Projection (BV as of 3/31/2014)

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(Source: Table created entirely by myself, including all calculated figures and projected valuations)

Using Table 2 above as a reference, let us take a look at the calculation for AGNC's projected BV as of 3/31/2014. Unless otherwise noted, all figures below are for the "three-months ended" timeframe. Let us look at the following figures (in corresponding order to the "Ref." column shown in Table 2 next to the March 31, 2014 column):

A) Operations

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

C) Stockholder Transactions

D) Capital Share Transactions

A) Operations:

- Increase (Decrease) in Net Common Equity From Operations Estimate of ($412) Million; Range ($812) - ($12) Million

- Confidence Within Range = Moderate

- See Red Reference "A" in Table 2 Above Next to the March 31, 2014 Column

This "net increase (decrease) in net common equity from operations" figure consists of the following amounts that come directly from AGNC's statement of comprehensive income (see Tables 1 and 2 above): 1) net interest income; 2) total other income (loss); 3) total expenses; and 4) income tax provision (benefit) excise tax.

Due to the fact I talked about these amounts 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. As such, further discussion of this figure is unwarranted.

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

- Increase (Decrease) in Net Common Equity From Other Comprehensive Income (Loss) (OCI/(OCL)) Estimate of $820 Million; Range $320 Million - $1.32 Billion

- Confidence Within Range = Moderate

- See Red Reference "B" in Table 2 Above Next to the March 31, 2014 Column

This "net increase (decrease) in net common equity from OCI/(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.

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. As such, further discussion of this figure is also unwarranted.

C) Stockholder Transactions:

- Increase (Decrease) in Net Common Equity From Stockholder Transactions Estimate of ($233) Million; Range ($218) - ($248) Million

- Confidence Within Range = High

- See Red Reference "C" in Table 2 Above Next to the March 31, 2014 Column

This is a fairly simple calculation. This is AGNC's dividend payable for the first quarter of 2014. This figure includes the following types of outstanding shares of stock: 1) common and 2) preferred.

1) Common Stock:

a) First Quarter of 2014:

During any given quarter, AGNC has three programs that could affect the number of outstanding shares of common stock when quarterly dividends are declared. Let us first discuss each program before making a projection on the number of outstanding shares of common stock as of 3/27/2014 (ex-dividend date).

AGNC's "at-the-market offering program" enables the company to publicly offer and sell a certain aggregate number of shares of common stock in privately negotiated transactions pursuant to the sales agreement with Mitsubishi UFJ Securities. AGNC has not exercised the company's right to use this offering program during the past several quarters. Furthermore, since AGNC's stock price continued to trade below my "CURRENT BV" per share figure throughout the first quarter of 2014 (which I updated weekly), I am assuming no additional shares were issued under the company's at-the-market offering program.

AGNC also sponsors a "dividend reinvestment and direct stock purchase program." This plan allows AGNC's shareholders to acquire additional shares of common stock by reinvesting some or all of the cash dividends received. AGNC's shareholders may also make optional cash purchases of the company'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. As was the case with AGNC's at-the-market offering program, I am making the assumption there will be no activity in regards to this plan for the current quarter. It is in a shareholder's best interest AGNC only issues additional shares of common stock when the issuance price would be accretive to BV. Any common stock issuance performed during the first quarter of 2014 would have been contrary to this notion.

The 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, currently allows AGNC to repurchase up to $2.0 billion of the company's outstanding shares of common stock through 12/31/2014 (recently increased from $1.0 billion). As of 12/31/2013, AGNC had $1.1 billion remaining under the company's 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 dividend distributions for the first quarter of 2014, it also stated the company had repurchased 3.4 million outstanding shares of common stock during the current quarter. Since this statement was made on 3/20/2014, AGNC could have repurchased additional outstanding shares of common stock during the remaining 11 days of the first quarter of 2014. However, I am making the assumption management refrained from repurchasing any additional outstanding shares of common stock from 3/21/2014 through 3/31/2014.

By taking all of the assumptions above into consideration, I am projecting the number of outstanding shares of common stock as of 3/27/2014 (ex-dividend date) was 352.8 million. The common stock dividend declared for the first quarter of 2014 was $0.65 per share. This was an unchanged common stock dividend when compared to the fourth quarter of 2013. As such, the following calculation is determined:

Outstanding Shares of Common Stock as of 3/27/2014: 352.8 million

(*) First Quarter of 2014 Dividend Payable: $0.65 per share

(=) Distributions to Common Shareholders: ($229.3) million

As such, I am projecting AGNC's dividend distributions to common shareholders are ($229.3) million for the three-months ended 3/31/2014. Now let us project the preferred stock dividend distributions.

2) Preferred Stock:

a) First Quarter of 2014:

The preferred stock dividend declared for the first quarter of 2014 was $0.50 per share. This was an unchanged preferred stock dividend when compared to the fourth quarter of 2013. There were still 6.9 million outstanding shares of preferred stock as of 3/28/2014 (ex-dividend date). As such, the following calculation is determined:

Outstanding Shares of Preferred Stock as of 3/28/2014: 6.9 million

(*) First Quarter of 2014 Dividend Payable: $0.50 per share

(=) Distributions to Preferred Shareholders: ($3.5) million

As such, I am projecting AGNC's dividend distributions to preferred shareholders are ($3.5) million for the three-months ended 3/31/2014.

After combining the common and preferred stock dividend distributions for the first quarter of 2014, I am projecting AGNC's total "distributions to stockholders from estimated REIT taxable income/undistributed taxable income ('UTI')" are ($233) million for the three-months ended 3/31/2014. Therefore, I am projecting AGNC has an increase (decrease) in net common equity from stockholder transactions of ($233) million for the three-months ended 3/31/2014 (see red reference "C" in Table 2 above).

D) Capital Share Transactions:

- Increase (Decrease) in Net Common Equity From Capital Share Transactions Estimate of ($74) Million; Range ($124) - ($74) Million

- Confidence Within Range = High

- See Red Reference "D" in Table 2 Above Next to the March 31, 2014 Column

As stated earlier, I am making the assumption no additional shares of common stock were issued under AGNC's at-the-market offering, dividend reinvestment, or direct stock purchase programs during the first quarter of 2014. Also, since there were no additional equity raises during the first quarter of 2014, the following figures should have no activity: 1) "issuance of common stock," 2) "issuance of restricted stock," and 3) "issuance of preferred stock."

AGNC's "issuance of common stock under stock-based compensation program" figure should also have no activity during the first quarter of 2014. Each Board of Directors member typically receives several thousand shares of AGNC's common stock annually as part of the company's Equity Incentive Plan for independent directors. Unlike past years, this issuance has yet to occur as of 3/31/2014. Due to immateriality, further discussion of this figure is unwarranted.

Regarding AGNC's "repurchases of common stock" figure, I am making the assumption AGNC repurchased 3.4 million outstanding shares of common stock under the company's stock repurchase program during the first quarter of 2014 (as discussed earlier). These shares were repurchased at a total cost of ($74) million at an average price of $22.10 per share (including all related expenses). This assumes no additional outstanding shares of common stock were repurchased during the last 11 days of the first quarter of 2014.

Therefore, I am projecting AGNC has an increase (decrease) in net common equity from capital share transactions of ($74) million for the three-months ended 3/31/2014 (see red reference "D" in Table 2 above).

Remainder of BV Calculation:

After adding up the four referenced figures discussed above (see red references "A, B, C, D" in Table 2 above), I am projecting AGNC has a "total increase (decrease) in net common equity" of $101 million for the three-months ended 3/31/2014 (see red reference "(A+B+C+D) = E" in Table 2 above).

Having this figure established, let us now calculate AGNC's projected BV per common share as of 3/31/2014 (see red references "E, F, G, H" in Table 2 above):

Total Increase (Decrease) in Net Common Equity: $101 million

(+) Net Common Equity at Beginning of Period: $8.52 billion

(=) Net Common Equity at End of Period: $8.63 billion

(/) Outstanding Shares of Common Stock as of 3/31/2014: 352.8 million

(=) BV Per Common Share as of 3/31/2014: $24.45

Brief Discussion of MTGE's BV Projection for the First Quarter of 2014 (BV as of 3/31/2014):

When compared to AGNC, I am projecting MTGE to have a similar proportional BV per share increase (percentage wise) for the first quarter of 2014. Each company's agency MBS and derivative portfolios were similar as of 12/31/2013. The only material difference between each company's MBS portfolio was the fact that MTGE also had a minor non-agency MBS portfolio as of 12/31/2013. MTGE's non-agency MBS portfolio slightly increased during the fourth quarter of 2013. MTGE had a total non-agency MBS portfolio of $928 million as of 9/30/2013. As of 12/31/2013, this balance increased (decreased) by $83 million to $1.0 billion. When compared to MTGE's agency MBS portfolio of $4.9 billion as of 12/31/2013, management slightly increased the proportional share of the company's non-agency MBS portfolio by 5% during the fourth quarter of 2013. As such, MTGE's proportional share on the company's non-agency MBS portfolio increased from 12% as of 9/30/2013 to 17% as of 12/31/2013. Due to the flat to slight appreciation in real estate prices, including the continued decrease in mortgage delinquencies and foreclosures, most non-agency MBS should have similar valuation adjustments when compared to agency MBS during the first quarter of 2014. Also, MTGE recently acquired Residential Credit Solutions, a licensed mortgage servicer. This should begin to have a minor positive impact on earnings and BV during the first quarter of 2014.

When taking all quarterly activities into consideration (including additional data not included within this article), I am projecting MTGE will report the following BV per common share as of 3/31/2014:

MTGE's Projected BV as of 3/31/2014 = $21.94 Per Common Share

MTGE's Projected BV Range as of 3/31/2014 = $21.19 - $22.69 Per Common Share

Brief Discussion of NLY's BV Projection for the First Quarter of 2014 (BV as of 3/31/2014):

When compared to AGNC, I am projecting NLY to have a fairly similar proportional BV per share increase (percentage wise) for the first quarter of 2014. Each company's agency MBS and derivative portfolios were somewhat similar as of 12/31/2013. However, each company had a different strategy regarding hedging activities going into the first quarter of 2014. AGNC had a hedging coverage ratio of 91% as of 9/30/2013. AGNC's hedging coverage ratio decreased to 86% as of 12/31/2013. In comparison, 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. As such, 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%. Since a majority of derivative instruments had a net valuation loss for the first quarter of 2014 (discussed within my income statement series; links provided at the top of this article), I am projecting AGNC outperformed NLY regarding derivative results for the first quarter of 2014. This negative aspect of NLY when compared to AGNC is offset by the fact the company also had a corporate debt (also known as "commercial paper") and commercial real estate debt/investment portfolio as of 12/31/2013. Due to the flat to slight appreciation in real estate prices, including the continued decrease in mortgage delinquencies and foreclosures, these two additional portfolios should have positive valuation adjustments during the first quarter of 2014 (among several other factors).

When taking all quarterly activities into consideration (including additional data not included within this article), I am projecting NLY will report the following BV per common share as of 3/31/2014:

NLY's Projected BV as of 3/31/2014 = $12.40 Per Common Share

NLY's Projected BV Range as of 3/31/2014 = $12.10 - $12.70 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 as of 3/31/2014:

AGNC's Projected BV as of 3/31/2014 = $24.45 Per Common Share

AGNC's Projected BV Range as of 3/31/2014 = $23.70-$25.20 Per Common Share

This projection is a $0.52 per common share increase (decrease) from AGNC's BV as of 12/31/2013. This increase can be attributed to two factors.

The first factor is in relation to the activity within AGNC's statement of comprehensive income. I am projecting AGNC reports a net income (loss) of ($412) million for the first quarter of 2014. This calculates to a projected increase (decrease) in quarterly BV of ($1.17) per common share. I am also projecting the company reports other comprehensive income (loss) of $820 million for the first quarter of 2014. This calculates to a projected increase (decrease) in quarterly BV of $2.32 per common share. When AGNC's net income (loss) and total other comprehensive income (loss) figures are combined, I am projecting a comprehensive income (loss) of $408 million for the first quarter of 2014. This calculates to a projected increase (decrease) in quarterly BV of $1.15 per common share.

The second factor is in relation to the activity within AGNC's equity section of the balance sheet. AGNC accrued for a quarterly dividend distribution of ($0.65) per common share during the first quarter of 2014. However, AGNC also repurchased 3.4 million outstanding shares of common stock throughout the quarter at a modest to material discount to the company's CURRENT BV. The share repurchases calculate to a projected increase (decrease) in quarterly BV of $0.02 per common share.

When combined, these two factors account for a quarterly BV increase (decrease) of $0.52 per common share. Therefore, when compared to 12/31/2013, I am projecting AGNC will report an increase in BV per common share as of 3/31/2014. I believe the market will take this as a positive sign because this would mean AGNC's BV per common share has increased by 2.16%. Furthermore, this would mean AGNC's "economic return" (dividends accrued for and net change in BV) would be 4.79% for the first quarter of 2014.

AGNC has continued to take steps to appropriately "hedge" the company's investment portfolio against MBS price declines that can stem from a rising interest rate environment. If mortgage interest rates/U.S. Treasury yields were to once again rapidly increase during the foreseeable future (which I personally do not think will occur), AGNC's derivative instruments will once again record a material net valuation gain, thus partially offsetting a material MBS valuation loss.

Currently, I feel the stock is still attractively priced at $22.77 per share as of 4/25/2014 (7% discount to my projected BV as of 3/31/2014). As such, I currently rate AGNC a SOLID HOLD/BUY since the stock is trading at a modest 5%-10% discount to BV as of 3/31/2014 and a material discount to CURRENT BV (over a 10% discount; BV as of 4/25/2014). I would rate AGNC a STRONG BUY if the stock were to trade at a steeper material discount to CURRENT BV over the next several months. If such a discount were to occur, I would aggressively look to increase my existing position in the stock. All investors should understand each buy, sell, or hold decision is based on one's risk tolerance, time horizon, and dividend income goals.

Disclosure: I am long AGNC, MTGE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in NLY.

Source: American Capital Agency's Upcoming Q1 2014 Book Value Projection