A Deeper Look At American Capital Mortgage

Apr.17.12 | About: American Capital (MTGE)

I recently wrote an article discussing the unique asset selection characteristics of American Capital Agency management (NASDAQ:AGNC). AGNC's managers have experienced lower prepay speeds due to unique security selection in HARP securities. AGNC management has accumulated Home Affordable Refinance Program (HARP) securities that carry low balances ($85,000 - $125,000) or high loan to values (105% to 125%). Readers have asked about AGNC sister company American Capital Mortgage (MTGE).

Similar to AGNC, MTGE is an externally managed mortgage REIT. MTGE was formed to invest throughout the total mortgage market including both agency and non-agency sectors. AGNC is focused on the agency sector. MTGE's ability to move between agency and non-agency securities provides diversification and the ability for managers to allocate capital to the highest risk adjusted return.

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The vast majority of MTGE's portfolio remains agency securities. Non-agencies represent $76MM or less than 5% of the portfolio.

MTGE Agency Portfolio

MTGE's agency mortgage portfolio looks very similar to sister company AGNC. MTGE is seeking to minimize prepayments in its agency portfolio.

  1. 95% of MTGE 15-year securities are backed by either lower loan balances or HARP.
  2. 86% of MTGE 30-Year securities are backed by either lower loan balances or HARP.

This rationale is very similar to that of AGNC's agency model.

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Conclusion: While MTGE has been set up to purchase both agency and non-agency securities, as of the latest financial reports the majority of the portfolio is agency. As one could expect the portfolio composition looks very similar to that over AGNC's agency portfolio. Investors looking for exposure to hybrid REITs that have a track record of investing in both agency and non-agency securities should look at MFA Financial and Two Harbors. As opposed to investing in a hybrid "start-up" I am sticking with managers who have performed through various market cycles. MFA specifically was founded in 1997 and has earned its stripes.

MFA Financial (MFA) - Hybrid REIT (Agency and Non-Agency)

Price to Book Value: 1.0x

Dividend Yield: 13.3%

Market Capitalization: $2.6 billion

Leverage: 3.2x

Two Harbors (TWO) - Hybrid REIT (Agency and Non-Agency)

Price to Book Value: 1.1x

Dividend Yield: 15.9%

Market Capitalization: $2.1 billion

Leverage: 4.5x

Disclosure: I am long MFA, TWO.