Seeking Alpha
Long-term horizon, dividend investing, mREITs, BDCs
Profile| Send Message|
( followers)  

Summary

  • I am projecting AGNC will report a total increase (decrease) in net common equity of $504 million for the six months ended 6/30/2014.
  • I am projecting AGNC will report an increase (decrease) in quarterly BV of 4.52% and generate an economic return of 7.19% for the second quarter of 2014.
  • My projection for AGNC’s book value per common share as of 6/30/2014 is stated in the “Conclusions Drawn” section of the article.
  • My projection for MTGE’s and NLY’s book value per common share as of 6/30/2014 is stated just above the “Conclusions Drawn” section of the article.
  • My buy, sell, or hold recommendation for AGNC, MTGE, and NLY is stated in the “Conclusions Drawn” section of 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 6/30/2014. Prior to results being provided to the public on 7/27/2014 (via the company's quarterly press release), I would like to analyze AGNC's BV as of 6/30/2014 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 ground works for this BV projection. In that article, I projected/analyzed AGNC's consolidated statement of comprehensive income for the second quarter of 2014. The links to my three-part projection article are provided below:

American Capital Agency Corp.'s Upcoming Q2 2014 Consolidated Statement of Comprehensive Income Projection - Part 1

American Capital Agency Corp.'s Upcoming Q2 2014 Consolidated Statement of Comprehensive Income Projection - Part 2

American Capital Agency Corp.'s Upcoming Q2 2014 Consolidated Statement of Comprehensive Income Projection - Part 3

This article will also include a brief BV discussion regarding AGNC's sister company American Capital Mortgage Investment Corp. (NASDAQ:MTGE) and the company's closest sector peer Annaly Capital Management, Inc. (NYSE:NLY). This includes a BV projection as of 6/30/2014 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 or anticipated. 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 Projected BV as of 6/30/2014:

Due to the fact that several figures needed to project/calculate AGNC's BV as of 6/30/2014 come directly from the company's consolidated statements of comprehensive income, I provide Table 1 below. Table 1 shows AGNC's consolidated statements of comprehensive income from a three- and six-months ended time frame. Using Table 1 below as a reference, one must add certain account figures from the first and second quarters of 2014 for purposes of projecting a suitable BV as of 6/30/2014.

Table 1 - AGNC Three- and Six-Months Ended Consolidated Statements of Comprehensive Income

(click to enlarge)

(click to enlarge)

(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 "Six-Months Ended (ESTIMATE)" column), we can now begin to calculate AGNC's projected BV as of 6/30/2014. 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. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC's BV as of 6/30/2014. 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 time frame. 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 Six-Months Ended BV Projection (BV as of 6/30/2014)

(click to enlarge)

(click to enlarge)

(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 6/30/2014. Unless otherwise noted, all figures below are for the "six-months ended" time frame. Let us look at the following figures (in corresponding order to the "Ref." column shown in Table 2 next to the June 30, 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 ($163) Million; Range ($563) - $237 Million

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 2 Above Next to the June 30, 2014 Column

This "net increase (decrease) in net common equity from operations" figure consists of the following amounts that come directly from AGNC's consolidated 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 discussed these amounts in my previous three-part AGNC consolidated statement of comprehensive income projection article (links at the top of this article), I will not delve into the details on how I obtained 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 $1.22 Billion; Range $815 Million - $1.62 Billion

- Confidence Within Range = Moderate to High

- See Red Reference "B" in Table 2 Above Next to the June 30, 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 consolidated statement of comprehensive income (see Tables 1 and 2 above): 1) unrealized gain (loss) on available-for-sale ('AFS') securities, net; and 2) unrealized gain (loss) on derivative instruments, net (upon reclassification to interest expense).

Due to the fact I also discussed these accounts in my previous three-part AGNC consolidated statement of comprehensive income article (links at the top of this article), I will not delve into the details on how I obtained these figures. As such, further discussion of this figure is unwarranted as well.

C) Stockholder Transactions:

- Increase (Decrease) in Net Common Equity From Stockholder Transactions Estimate of ($468) Million; Range ($453) - ($483) Million

- Confidence Within Range = High

- See Red Reference "C" in Table 2 Above Next to the June 30, 2014 Column

This "net increase (decrease) in net common equity from stockholder transactions" figure is AGNC's dividend distributed for the first quarter of 2014 and payable for the second 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:

The common stock dividend for the first quarter of 2014 was $0.65 per share. This was the second consecutive quarter where AGNC had distributed a quarterly dividend of $0.65 per share. AGNC had common stock dividend distributions of ($229.3) million for the first quarter of 2014 (or through the three-months ended 3/31/2014).

b) Second Quarter of 2014:

Prior to projecting AGNC's common stock dividend distributions for the second quarter of 2014, let us first discuss how the number of AGNC's outstanding shares of common stock could change during any given quarter. AGNC has three programs which could affect the number of outstanding shares of common stock when quarterly dividends are declared.

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 for nearly two years. Furthermore, since AGNC's stock price continued to trade below my projected "CURRENT BV" per share figure throughout the second 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 was no activity in regards to this plan for the second quarter of 2014. 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 second 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 (increased from $1.0 billion during the prior quarter). As of 3/31/2014, AGNC had $992 million 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 second quarter of 2014, the company did not mention anything about a repurchase of outstanding shares of common stock during the current quarter (unlike in past quarters where repurchased shares were disclosed). Since this statement was made on 6/17/2014, AGNC could have repurchased outstanding shares of common stock during the remaining 13 days of the second quarter of 2014. However, I am making the assumption management refrained from repurchasing any outstanding shares of common stock from 6/18/2014 through 6/30/2014.

By taking all of the assumptions above into consideration, I am projecting the number of outstanding shares of common stock as of 6/26/2014 (ex-dividend date) remained at 352.8 million. The common stock dividend declared for the second quarter of 2014 was $0.65 per share. This was an unchanged common stock dividend when compared to the first quarter of 2014. As such, the following calculation is determined:

Outstanding Shares of Common Stock as of 6/26/2014: 352.8 million

(*) Second 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 were ($459) million for the six-months ended 6/30/2014. Now let us project the preferred stock dividend distributions.

2) Preferred Stock:

a) First Quarter of 2014:

The preferred stock dividend for the first quarter of 2014 was $0.50 per share. This was the eighth consecutive quarter where AGNC had distributed a quarterly dividend of $0.50 per share. AGNC had preferred stock dividend distributions of ($3.5) million for the first quarter of 2014 (or through the three-months ended 3/31/2014).

b) Second Quarter of 2014:

The dividend declared on AGNC's "Series A Preferred Stock" for the second quarter of 2014 was $0.50 per share. This was an unchanged Series A Preferred Stock dividend when compared to the first quarter of 2014. There were still 6.9 million outstanding shares of Series A Preferred Stock as of 6/27/2014 (ex-dividend date). As such, the following calculation is determined:

Outstanding Shares of Series A Preferred Stock as of 6/27/2014: 6.9 million

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

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

AGNC had a 7 million "depository share" issuance (each representing a 1/1,000th interest in a share of 7.750% Series B Cumulative Redeemable Preferred Stock) during the second quarter of 2014. This will be termed AGNC's "Series B Preferred Stock". Furthermore, in connection with the Series B Preferred Stock offering, AGNC granted the underwriters an option to purchase up to an additional 1.1 million depositary shares to cover overallotments. I am assuming the full option was exercised by the underwriters. As such, as of 6/27/2014 (ex-dividend date), I am projecting AGNC had 8.1 million outstanding depository shares. Since this issuance occurred during the second quarter of 2014, the dividend declared on AGNC's Series B Preferred Stock was only $0.36059 per share (prorated dividend). As such, the following calculation is determined:

Outstanding Shares of Series B Preferred Stock as of 6/27/2014: 8.1 million

(*) Second Quarter of 2014 Dividend Payable: $0.36059 per share

(=) Distributions to Series B Preferred Shareholders: ($2.9) million

Therefore, I am projecting AGNC's dividend distributions to preferred shareholders (Series A and B) were ($6.4) and ($9.9) million for the second quarter of 2014 and six-months ended 6/30/2014, respectively.

After combining the common and preferred stock dividend distributions for the first and second quarters of 2014, I am projecting AGNC's total "distributions to stockholders from estimated REIT taxable income/undistributed taxable income ('UTI')" were ($468) million for the six-months ended 6/30/2014. Therefore, I am projecting AGNC had an increase (decrease) in net common equity from stockholder transactions of ($468) million for the six-months ended 6/30/2014 (see red reference "C" in Table 2 above).

D) Capital Share Transactions:

- Increase (Decrease) in Net Common Equity From Capital Share Transactions Estimate of ($81) Million; Range ($131) - ($31) Million

- Confidence Within Range = High

- See Red Reference "D" in Table 2 Above Next to the June 30, 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 second quarter of 2014. Also, since there were no additional common stock equity raises during the second quarter of 2014, the following figures should have no activity: 1) "issuance of common stock"; 2) "issuance of restricted stock"; and 3) "issuance of common stock under stock-based compensation program".

As stated earlier, AGNC had a 7 million depository share issuance during the second quarter of 2014 (equivalent to 7,000 shares of Series B Preferred Stock). Since I am assuming the full option was exercised by the underwriters, I am projecting 8.1 million depository shares were issued during the second quarter of 2014 at a gross price of $25 per share. When calculated, I am projecting gross proceeds of $203 million from the depository share issuance. After the underwriter's discount, net proceeds were $24.2125 per share. When calculated, I am projecting an "issuance of preferred stock" figure of $195 million for the six-months ended 6/30/2014.

The liquidation preference of the depository shares is $25 per share. When calculated, I am projecting a "preferred stock $25,000 per share liquidation preference" figure of ($201) million for the six-months ended 6/30/2014. This amount needs to be reversed out of Table 2 due to the fact this issuance was in relation to preferred stock and this analysis is projecting AGNC's BV per common share.

Regarding AGNC's "repurchases of common stock" figure, I am making the assumption AGNC did not repurchase any outstanding shares of common stock under the company's stock repurchase program during the second quarter of 2014 (as discussed earlier). Therefore, this amount will remain unchanged at ($74) million for the six-months ended 6/30/2014.

Therefore, I am projecting AGNC had an increase (decrease) in "net common equity from capital share transactions" of ($81) million for the six-months ended 6/30/2014 (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 had a "total increase (decrease) in net common equity" of $504 million for the six-months ended 6/30/2014 (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 6/30/2014 (see red references "E, F, G, H" in Table 2 above):

Total Increase (Decrease) in Net Common Equity: $504 million

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

(=) Net Common Equity at End of Period: $9.03 billion

(/) Outstanding Shares of Common Stock as of 6/30/2014: 352.8 million

(=) BV Per Common Share as of 6/30/2014: $25.60

Brief Discussion of MTGE's Projected BV as of 6/30/2014:

When compared to AGNC, I am projecting MTGE had a similar proportional BV per share increase (percentage wise) for the second quarter of 2014. Each company's agency MBS and derivative portfolios were fairly similar as of 3/31/2014. The only material difference between each company's MBS portfolio was the fact MTGE also had a minor non-agency MBS portfolio as of 3/31/2014. MTGE's non-agency MBS portfolio slightly underperformed when compared to the company's agency MBS portfolio during the first quarter of 2014. MTGE had a total non-agency MBS portfolio of $1.01 billion as of 12/31/2013. This balance increased (decreased) by $25 million to $1.03 billion as of 3/31/2014. When compared to MTGE's agency MBS portfolio of $4.9 billion, management increased (decreased) the proportional share of the company's non-agency MBS portfolio by 2% during the first quarter of 2014. 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 somewhat similar valuation gains when compared to agency MBS during the second quarter of 2014. With that being said, I am projecting agency MBS will once again slightly outpace non-agency MBS during the second quarter of 2014. However, MTGE recently acquired Residential Credit Solutions ('RCS'), a licensed mortgage servicer. During the first quarter of 2014, MTGE invested $23 million in RCS. During April 2014, MTGE had already invested an additional $25 million in RCS. This should begin to have a minor positive impact on earnings and BV during the second quarter of 2014 as this business continues to expand operations.

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 6/30/2014:

MTGE's Projected BV as of 6/30/2014 = $22.60 Per Common Share

MTGE's Projected BV Range as of 6/30/2014 = $21.85 - $23.35 Per Common Share

Brief Discussion of NLY's Projected BV as of 6/30/2014:

When compared to AGNC, I am projecting NLY had a fairly similar proportional BV per share increase (percentage wise) for the second quarter of 2014. Each company's agency MBS portfolio was somewhat similar as of 3/31/2014. However, as was highlighted in my three-part AGNC consolidated statement of comprehensive income projection series (see links above), I had discussed certain subtle differences in each company's agency MBS portfolio. Furthermore, each company had a different strategy regarding derivative instruments going into the second quarter of 2014. I will note a few of these differences. Both companies had fairly similar hedging coverage ratios as of 3/31/2014. However, one key difference in strategies was each company's TBA MBS and forward settling MBS position. AGNC had a material net long position as of 3/31/2014 while NLY had a small net (short) position. Offsetting this first difference, NLY did not have a U.S. Treasury securities position as of 3/31/2014. On the other hand, AGNC had a total net long (short) U.S. Treasury securities position of ($7.3) billion as of 3/31/2014.

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 6/30/2014:

NLY's Projected BV as of 6/30/2014 = $12.80 Per Common Share

NLY's Projected BV Range as of 6/30/2014 = $12.40 - $13.20 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 6/30/2014:

AGNC's Projected BV as of 6/30/2014 = $25.60 Per Common Share

AGNC's Projected BV Range as of 6/30/2014 = $24.85 - $26.35 Per Common Share

This projection is a $1.11 per common share increase (decrease) from AGNC's BV as of 3/31/2014. This increase can be attributed to two factors.

The first factor is in relation to the activity within AGNC's consolidated statement of comprehensive income. I am projecting AGNC reports a net income (loss) of ($22) million for the second quarter of 2014. This calculates to a projected increase (decrease) in quarterly BV of ($0.06) per share (does not back out the preferred stock dividend to avoid double counting; already backed out in BV calculation above). I am also projecting the company reports OCI/(OCL) of $651 million for the second quarter of 2014. This calculates to a projected increase (decrease) in quarterly BV of $1.85 per share. When AGNC's net income (loss) and OCI/(OCL) figures are combined, I am projecting a comprehensive income (loss) of $629 million for the second quarter of 2014. This calculates to a projected increase (decrease) in quarterly BV of $1.78 per share (does not back out the preferred stock dividend to avoid double counting; already backed out in BV calculation above).

The second factor is in relation to the activity within AGNC's equity section of the balance sheet. AGNC accrued for quarterly dividend distributions of ($0.65) per common share during the second quarter of 2014. Furthermore, AGNC had the Series B Preferred Stock / depository share issuance which was slightly dilutive to BV. The Series B Preferred Stock / depository share issuance calculates 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 $1.11 per common share. Therefore, when compared to 3/31/2014, I am projecting AGNC will report an increase in BV per common share as of 6/30/2014. I believe the market will take this as a positive sign because this would mean AGNC's BV per common share had an increase (decrease) of 4.52% during the second quarter of 2014. In addition, this would mean AGNC generated an "economic return" (dividends accrued for and net change in BV) of 7.19% for the second 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 believe AGNC is attractively priced at $23.24 per share as of 7/21/2014. I continue to rate AGNC, MTGE, and NLY as a SOLID HOLD when trading at a minor to modest discount to CURRENT BV. I continue to rate AGNC, MTGE, and NLY as a BUY when I believe the company's stock price is trading a material discount (over 10% discount) to CURRENT BV. As such, I currently rate AGNC as a BUY since the stock is trading at an approximate (10%) premium (discount) to BV as of 6/30/2014 and to CURRENT BV (BV as of 7/21/2014).

Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation may not fit each investor's current investing strategy.

Source: American Capital Agency's Upcoming Q2 2014 Book Value Projection

Additional disclosure: I have no position in NLY.