On June 11, after the markets closed, American Capital Agency Corp (AGNC) announced that it is maintaining its quarterly dividend at $1.25 per share for the second quarter of 2012. The dividend is payable on July 27, 2012 to shareholders of record as of June 21, 2012, with an ex-dividend date of June 19, 2012, or next Tuesday. Investors will be pleased to hear that the dividend was maintained, as dividend cuts have proliferated the asset class over the last year.
American Capital Agency is an agency mREIT which buys agency mortgages that are backed by federal agencies. Other well-known agency mREITs include Annaly Capital Management (NLY) and Hatteras Financial (HTS). Index funds for mREITs include the FTSE NAREIT Mortgage REITs Index ETF (REM) and the Market Vectors Mortgage REIT Income ETF (MORT) - though these ETFs also have exposure to non-agency mortgage REITs.
See below a recent performance chart for AGNC:
Click to enlarge
Earlier this year, on February 6, AGNC announced a dividend policy cut, lowering the quarterly payout to $1.25 from 1.40 per share. That was a 10.71 percent dividend cut, reducing the mREIT's dividend from about 19 percent to about 17 percent. Prior to that reduction, AGNC had maintained its prior $1.40 dividend for ten quarters. The company indicated it would be able to maintain its $1.25 quarterly payout for the next few quarters, and also indicated that the Fed's low rate policy extension should be conducive to the mREIT's near-term success.
On March 7, American Capital Agency announced the pricing of the secondary public offering of 62 million shares of common stock, for total estimated gross proceeds of about $2.0 billion. The company has often instituted such secondaries after going ex-dividend, generally to either purchase new securities due to prepayments or to increase the leverage rate at which the mREIT holds its agency-backed RMBSs. So far this year, agency-backed RMBSs have performed relatively well, much like Treasuries, and so it appears that this most recent secondary was well timed. Hopefully for AGNC shareholders, the funds were quickly deployed into RMBSs.
Some may expect that another secondary will occur following this ex-dividend, but there is no such certainty. It is a move AGNC likes to use, but one the could amplify its risk profile, especially as U.S. debt now trades at or near its all-time highs. Leveraging up potentially peaking investments could be a risky move, but then again, the same thing could have been said about any of the four secondaries AGNC instituted in 2011, or the one earlier this year.
Last month, AGNC reported Q1 net income of $641 million, or $2.66 per share, and comprehensive income of $587 million, or $2.44 per share. The company also reported that as of the end of March, AGNC's net book value was $29.06 per share. Given the large secondary at the start of the quarter, and the known positive subsequent performance of agency RMBSs, it appears likely that AGNC will report increased book value when it reports in Q2 earnings.
American Capital Agency last reported that its average asset yield for the first quarter increased 26 basis points to 3.32%. The REIT's annualized weighted average portfolio yield was 3.14% and its average asset yield was 3.06%, both an increase of one basis point from Q4 of 2011.
The company's average net interest rate spread during Q1 was 2.31%, a 41 basis point increase from its 1.90% spread during Q4 of 2011. A large part of this increase was due to changes in projected CPR estimates, which if excluded would reduce AGNC's spread to 2.13%. This would still be a 16 basic point increase over the prior quarter. At the end of Q1, AGNC's spread was 2.07 percent.
American Capital Agency also reported that its leverage ratio was 8.4x as of March 31, 2012, and that its average leverage for the quarter was 8.2x. Last quarter, AGNC reported its leverage to be 7.9x at the end of the quarter and 7.6x on average throughout the quarter. It would not be outside the realm of possibility for AGNC to report a leverage rate near or above 9x when it reports its Q2 results in late July.
American Capital Agency offers one of the highest yields among all mREITs, and possibly the highest yield within publicly traded agency-only mREITs. Nonetheless AGNC shares contain significant leveraged interest rate risk, which could become an issue if and/or when interest rates ever begin to substantially rise.
Disclaimer: This article is intended to be informative, and should not be construed as personalized advice as it does not take into account your specific situation or objectives.
Disclosure: I am long NLY.
