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American Capital Mortgage Investment is expected to have its Initial Public Offering (”IPO”) on Thursday, August 4, 2011. The company has reserved the symbol MTGE, and is expected to raise $374 million in this offering. American Capital Mortgage Investment is a mortgage REIT similar to Annaly Capital Management (NYSE:NLY), American Capital Agency (NASDAQ:AGNC) and Invesco Mortgage Capital (NYSE:IVR).

MTGE is a subsidiary of American Capital (NASDAQ:ACAS), an asset management company with a market capitalization of about $3.3 billion. MTGE is also selling 1.25 million shares to ACAS in a concurrent private placement.

These mREITs attempt to borrow at low interest rates and purchase mortgages that pay a higher rate, making money off the spread between those rates multiplied by the leverage used. Beyond the agency paper that mREITs such as NLY and AGNC hold, MTGE is also expected to invest in non-agency paper in a manner similar to other mixed paper mREITs such Chimera Investment Management (NYSE:CIM) and MFA Financial (NYSE:MFA). This non-agency paper usually pays a much higher interest rate, but does not have the backing that comes with government agency-guaranteed mortgages.

MTGE will be managed by American Capital MTGE Management, a subsidiary of ACAS. In structure, this is somewhat familiar to the relationship between Chimera and Annaly, where Chimera is managed by FIDAC, a wholly owned subsidiary of Annaly. Chimera is broadly seen as an Annaly subsidiary that was created in order to invest in higher risk MBS paper that did not carry the government agency backing that Annaly requires.

Generally, the performance of agency mREITs has been superior to those holding non-agency paper though 2011, though July was an especially poor month for all mREITs. The initiation of this new mREIT indicates that ACAS believes there is still significant demand for mREIT investments and/or that the company believes it can do a good job of picking through the MBS rubble and identifying the correct paper to hold over a longer-term.


Disclosure: I am long NLY, CIM.

Source: American Capital's mREIT IPO Should Indicate Investor Appetite for MBSs