American Capital Agency (NASDAQ:AGNC) likely just posted the best results in the agency mREIT sector with its Q2 2014 performance. The company had a monster quarter, seeing tremendous book value gains as well as robust net spread plus dollar roll income of $0.87 per share. However, there were some areas of weakness, such as with the CPRs, up 200 basis points to 9%, and a narrowing net interest rate spread.
As of June 30, AGNC's book value was $26.26, a $1.77, or 7.2%, increase from $24.49 as of March 31. This increase does not factor in the $0.65 per share quarterly dividend declared on June 17. When combined, AGNC posted a $2.42, or 9.9%, total economic return in Q2, or nearly 40% annualized. As of Monday's (July 28) close, AGNC trades at a nearly 10% discount to its book value, one of the largest in the agency mREIT sector.
AGNC's performance was better than I was expecting. As I noted in an earlier article, AGNC was not seeing the large book value gains other mREITs were seeing earlier in the year. What changed in Q2 was that AGNC chose to reduce the amount of hedges it uses while maintaining its leverage intact. The company noted that the outlook for the MBS market remained strong, with the Fed Tapering now priced in, greatly reducing implied volatility. Overall, quite the impressive quarter for AGNC. I expect the stock to rally on the news and for the dividend to remain at the current level, implying a forward yield of 11%.
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