IPO Preview: American Capital Mortgage Investment

Aug. 2.11 | About: American Capital (MTGE)

Based in Bethesda, Maryland, American Capital Mortgage Investment (proposed symbol MTGE) scheduled a $374 million IPO (including a concurrent $25 million private placement with the ‘parent’ ACAS), with a market cap of $374 million at the price range mid-point of $20, for Thursday, August 4, 2011. The full IPO calendar for the week of August 1 includes 3 scheduled IPOs.

OBSERVATIONS -- Yet another startup mortgage REIT that intends to borrow short at low interest rates, then leverage its portfolio by borrowing, then buy longer term mortgages.

Two in the same category that have IPO’d in the last six weeks have declined in price.

Market

IPO

July 28

% Change

Price to Book

% sold

Cap ($mm)

Price

Price

from IPO

Book Value

in IPO

American Cap Mort (NASDAQ:MTGE)

$375

$20.00

n/a

n/a

1.00

100%

AG Mortgage Trust (NYSE:MITT)

$181

$20.00

$19.57

-2.15%

0.99

59%

IPO date: June 29

Apollo Residntl (NYSE:AMTG)

$188

$20.00

$18.35

-8.25%

0.92

97%

IPO date: July 21

Click to enlarge


VALUATION -- MTGE doesn’t seem like a good deal on the IPO for several reasons:

Notice in the above table that MTGE wants to IPO at book value, while the two recent comparables currently sell discounts to book value.

And notice in the table below that other REITS in the asset class currently pay relatively high yields. Two sell for just 1.15 times book value, according to Google Finance.

Similar mortgage REITS

IPO Mrkt

Price /

Annual

As of July 28, 2011

Cap (mm)

BookValue

div yield

Invesco Mortgage (NYSE:IVR)

$1,420

1.4

19.0%

American Cap Agency AGNC

$4,870

1.2

19.0%

Annaly Capital (NYSE:NLY)

$14,050

1.15

14.8%

Hatteras Financial (NYSE:HTS)

$3,210

1.15

14.0%

Chimera Inv (NYSE:CIM)

$3,210

0.9

16.2%

Click to enlarge


However, MTGE will probably complete its IPO because the parent, American Capital, will encourage its own clients to buy. The purpose of the IPO appears to be to increase fees to ACAS, but not necessarily to provide a good investment vehicle for shareholders.

ABOUT THE PARENT -- American Capital, Ltd. (NASDAQ:ACAS) is a publicly traded private equity firm and global asset manager with $37 billion in assets under management as of March 31, 2011. ACAS has a market capitalization of $3.47 billion.

BUSINESS -- Yet another startup mortgage REIT that intends to borrow short at low interest rates, then leverage its portfolio by borrowing, then buy longer term mortgages.

The targeted leveraged portfolio includes agency mortgage investments, non-agency mortgage investments and other mortgage-related investments.

PURPOSE -- The apparent real purpose of the REIT is to generate management fees for its ultimate parent, ACAS.

MANAGEMENT -- MTGE itself will be externally managed and advised by American Capital MTGE Management, LLC, an indirect subsidiary of American Capital, LLC, which is a wholly-owned portfolio company of the ultimate parent American Capital, Ltd. (ACAS).

MANAGER WILL BUY A CONCURRENT PRIVATE PLACEMENT -- Concurrently, MTGE is selling to American Capital an aggregate of $25.0 million (1,250,000 shares) of common stock at the initial public offering price in a private placement.

CONFLICTS -- There are conflicts of interest in the relationship between the Manager and American Capital.
Because MTGE has no employees, its Manager is responsible for making all of investment decisions. Certain of the Manager’s officers are employees of American Capital or its affiliates and these persons do not devote their time exclusively to MTGE.

MTGE’s Manager’s Investment Committee consists of Messrs. Wilkus, Erickson, Flax, Kain, Winkler and McHale, each of whom is an officer of American Capital or the parent company of MTGE’s Manager and has significant responsibilities to American Capital and certain of its portfolio companies, affiliated entities or managed funds

USE OF PROCEEDS -- Of $374 million from the IPO and the concurrent private placement.
proceeds are allocated (on a leveraged basis) to invest in targeted assets, which include agency mortgage investments, non-agency mortgage investments and other mortgage-related investments.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.