Passing on American Capital Mortgage

Aug.15.11 | About: American Capital (MTGE)

American Capital Mortgage Investment Corp. (NASDAQ:MTGE) launched its hybrid-mREIT IPO on August 4. The MTGE IPO sold 8,000,000 shares at a $20 price. I have difficulty understanding who the brokers would target this share offering to, and will discuss the rationale for my passing on MTGE at the current time.

The agency-mREIT and hybrid-mREIT markets are so full right now that MTGE was sure to fall below offering price. At $19.53, MTGE is performing pretty well considering all the factors compared to its hybrid peers.

[Click all to enlarge]
Click to enlarge
The non-agency mREITs have taken hits to their book value per share. Both Two Harbors Investment Corp. (NYSE:TWO) and Invesco Mortgage Capital Inc. (NYSE:IVR) have experienced negative non-agency book value per share valuations. The non-agency MBS have lost value compared to the agency-paper of their peers.

MTGE will opportunistically engage in buying and selling agency-mREIT paper and non-agency mREIT paper. Agency-MBS paper is implicitly guaranteed by the U.S. Federal government. Non-agency MBS paper does not have any federal guarantee. On a related comparison, Annaly Capital Management, Inc. (NYSE:NLY) is the external manager for Chimera Investment Corporation (NYSE:CIM). Annaly owns FIDAC, which provides these external management duties.

Management Team
Gary Kain, who is also the president and CIO of American Capital Agency Corp. (NASDAQ:AGNC), is MTGE's president and CIO too and is proven in this role. Jeff Winkler has been designated as the (page 4) point man for the non-agency portfolio. We shall see how effective he is with the non-agency paper.

Financial Beneficiaries

American Capital, Ltd. (ACAS) sits back and takes a 1.25% annual percentage of AGNC equity. This is a significant percentage as AGNC recently raised additional capital via a secondary. American Capital, LLC is a subsidiary of ACAS. Officially American Capital, LLC receives the 1.25% annual skim off the top of the AGNC shareholders' equity.

I must admit I am disappointed with American Capital, LLC's decision to increase its annual percentage of MTGE's shareholder equity, in comparison to the 1.25% cut at AGNC. ACAS management decided to increase the management fee to 1.50% of shareholder equity for MTGE:
Click to enlarge
As I read the MTGE SEC S-11 filing, it appears ACAS is becoming more aggressive in the fees it's extracting from AGNC and MTGE shareholder equity.

mREITs Available to the Income Investors
Company Name Symbol
American Capital Agency AGNC
Chimera CIM
American Capital Mortgage MTGE
Invesco Mortgage IVR
Annaly NLY
Two Harbors TWO
Click to enlarge

I will wait to observe SEC filings to determine how aggressive MTGE is within the non-agency MBS markets. Based upon TWO and IVR's book valuation hits compared to their agency-MBS peers, MTGE has significant uncertainty for me to open a position at the present time.

Disclosure: I am long AGNC, NLY.