Earlier in the year, American Capital Agency (NASDAQ:AGNC) surprised many when it announced that it had bought $400 million of stock in its mREIT peers. However, as I noted back in February, this turned out to be a brilliant strategy. Not only was the company able to deploy capital without leveraging itself, but it was able to take advantage of market inefficiencies, buying mREIT stock at a large discount to book value.
One of the mREIT investments disclosed by the company was Hatteras Financial (NYSE:HTS). On January 29, American Capital Agency disclosed that it directly held 7.30 million Hatteras shares, good for a 7.5% stake. Assuming it bought those shares at an average price of $17 each, the company invested around $124 million. However, as of June 27, this position had fallen by nearly 3 million shares, or 40%, to 4.37 million, down to a 4.53% stake.
Given that Hatteras was trading at around $20 per share last quarter, American Capital Agency likely made at least $3 per share on its sale, or 15%. The company also booked at least one or two dividend payments of $0.50 each. Doing some math, this comes out to $11.50 million in realized gains plus dividends and another $17.50 million in unrealized gains waiting to be booked for a total return of 23% in less than six months. Not too shabby.
Disclosure: The author is long AGNC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.