The last Jaded Consumer article about American Capital Mortgage Investment (MTGE) compared it to its sister company American Capital Agency Corp. (AGNC) following its launch and, based on their common management by American Capital Ltd. (ACAS) and similarities in their stub-quarter performance, concluded that MTGE's NAV likely exceeded $20 per share at the close of 2011, and estimated annualized earnings exceeding $3.50 per share. Today, MTGE's ACAS-supplied management did not disappoint.
Taxable income per share exceeded $1, which included both $0.86 in net spread income (exceeding the quarterly dividend more than a nickel, which MTGE reinvests for shareholders) and $0.86 of "other investment related net gains" (which includes unrealized gains, or taxable income would exceed $1.07). Undistributed taxable income over the quarter was definitely "more than a dime per quarter" as predicted in the prior article; it was two dimes, and several other pieces of small change.
Of continual interest to persons hoping to net gains from dividend stocks is share price. Dividends don't feel nearly as reassuring, while shares are in a steep dive. Fortunately for holders of MTGE, management is maintaining the NAV that drives MTGE's share price. After opening the quarter with $19.96 in net book value, MTGE's ACAS-supplied management team closed the quarter with a NAV of $20.87, an increase of $0.91 (4.6%). This gain stands atop the 80¢ dividend declared during the quarter, the percent return of which turns on one's entry price but which, based on NAV, was 4% of the shares' value. Of course, shares weren't trading that close to $20 when the last quarter of the year opened, so the percentage actually realized by those long MTGE would have been higher.
Getting a combined gain of 8.6% - between taxable dividends and NAV increases that don't lead to taxes until exit - is outstanding for one quarter. Some of this is surely related to changes in value of un-exited hedge positions, which may be volatility-based "earnings" resulting from market factors that are not easy to replicate. This is not a bad thing, of course -- when MTGE's sister AGNC weathered the credit crunch, it made so much money on its hedges that some wondered whether it would be able to qualify as a REIT.
Hedges exist to protect MTGE from the effects of frightening global credit uncertainty that can impact the value of MTGE's holdings. Consider all the "income" required to be recognized by FAS 157 (not just realized gains that are of interest to the IRS, but changes in value of marketable securities and hedges). MTGE's SEC-reportable "earnings" of $1.72 per share (remember, FAS 157 requires inclusion of unrealized gains that aren't part of the taxable income that drives MTGE's dividend-paying requirement) amounted to an 8.6% gain on its NAV at the start of the quarter.
Thankfully, MTGE need not replicate this sort of excellence to produce outstanding shareholder results. MTGE is growing its net asset value while paying a substantial dividend, which it can service on the basis of its net spread income, which as a fraction of NAV at the start of the quarter amounts to 4.3%. Since MTGE ended the calendar year with a net spread of 2.38% and leverage of 8x (for a gross spread return just north of 19%), MTGE seems on track to sustain its dividend of 80¢. Of course, with MTGE's investment growing from quarter to quarter, the dividend appears set to grow.
Based on ACAS' management of AGNC and its performance thus far with MTGE, investors should expect MTGE's dividend to increase over time, while MTGE grows its net assets. Since AGNC has spent significant time trading at a premium to its NAV, investors may wish to view below-NAV trade in MTGE as particularly attractive for new investment of funds they are seeking to place in an mREIT.
Disclosure: I am long MTGE, ACAS, AGNC.