The earnings press releases from American Capital Agency (AGNC) and Annaly Capital (NLY) dropped into the email box within minutes of each other and the 2012 first quarter results were similarly close to the 2011 fourth quarter results posted by these two high-yield mortgage REIT companies.
Outside of some nice gains on the sale of mortgage-backed securities, the results from Annaly Capital closely mirrored the company's 2011 fourth quarter performance. Leaving out the gains, net income was 54 cents per share, no change from the fourth quarter. The annualized interest rate spread remained at 1.71% compared to the end of 2011, although it was down significantly from 2.17% spread earned in the 2011 first quarter.
The portfolio earnings rate declined by 8 basis points as did the cost of funds rate. The Annaly constant prepayment rate for the first quarter was 19%, up slightly from the fourth quarter's 17%. Book value per share increased by 2.7% in the quarter to $16.18. All in all, the financial results from Annaly reflect the interest rate environment in the 2012 first quarter - not much changed.
American Capital Agency
American Capital Agency reported $2.44 of total net income per share, up from $2.27 in the fourth quarter. More impressive was the quarter's $1.42 of net interest earnings per share, compared to 98 cents earning in the fourth quarter. The company's portfolio earning rate increased 26 basis points to 3.32% in the quarter and the costs of funds declined by 15 basis points to 1.01%, resulting in a 41 basis point increase in net interest earned to 2.31%. The portfolio constant prepayment rate for the quarter was 10%, similar to the fourth quarter result. The American Capital Agency book value increased by 4.9% to $29.01.
American Capital Agency definitely won the first quarter battle between the two largest mortgage REITs. The company's portfolio management techniques are minimizing portfolio prepayment rates in the face of low mortgage rates. The low cost to borrow funds stems from the company's willingness to fund with lower cost repurchase agreements which have shorter average maturities. About 45% of the borrowings are repo agreements. Higher cost interest rate swaps protect against rising short-term rates.
Annaly Capital shares are currently about 10 cents above the book value, which seems to be where the shares like to trade. American Capital Agency shares are about $2.10 above book, showing higher market expectations concerning the ability of the company to continue to grow the book value. American Capital Agency also has the higher dividend yield, making this stock a win-win when compared to its larger competitor.