American Capital Mortgage Update: A Deep Value mREIT With A 13% Yield

Jul.31.14 | About: American Capital (MTGE)

Summary

MTGE sees a 4.4% Q/Q increase in its book value to $22.73.

Net spread plus dollar roll income was $0.72 per share, easily covering the current $0.65 per share dividend.

At current prices, MTGE yields 13% and trades at a similar 13% discount to its book value.

For these reasons I remain long MTGE stock.

American Capital Mortgage (NASDAQ:MTGE), posted some of its best results in quite some time. The company had a stellar Q2 2014, seeing a tremendous book value gain as well as strong income generation. This is in sharp contrast to what the company was experiencing in the early part of 2013 as I noted in a previous article.

As of June 30, MTGE's book value was $22.73 per share, a $0.95, or 4.4%, increase from $21.78 per share as of March 31. The book value increase is AFTER the $0.65 per share quarterly dividend declared on June 17. When combining both the dividend and book value gains, MTGE posted a $1.60, or 7.3%, total economic return in Q2, or nearly 30% annualized. As of July 30, MTGE is trading at around $19.85 per share, a massive 13% discount to its book value, one of the largest in the mREIT sector.

Due to the volatility in the MBS market caused by Fed tapering, MTGE has been investing more into alternative investments, including mortgage servicing rights, TBA mortgage positions, and other high return areas. This move was also sparked by a tightening of spreads in the agency and non-agency portfolio. MTGE saw its net spread plus dollar roll income increase to $0.72 per share, well above the current dividend of $0.65 per share, and a major improvement from the $0.59 per share generated in Q1. All this was done without greatly increasing the leverage ratio, up to an average of 5.6x from 5.3x (including net TBA) last quarter. Clearly, these moves to diversify the portfolio paid off in a big way during the quarter. Due to its strong income generation and discount to book value, MTGE is a solid choice.

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Disclosure: The author is long MTGE. 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.