We previously had a position in American Capital Agency Corp. (AGNC) and we noted that it went ex-dividend on June 19. We also noted that AGNC's smaller mREIT brother American Capital Mortgage Investment (MTGE) went ex-dividend on the same date.
Before MTGE went ex-dividend, we were concerned that the company would take advantage of its market price premium in comparison to its book value and issue a secondary share offering. Now that the company's shares are trading ex-dividend with regards to its $.90 per share quarterly dividend, we believe that the likelihood of a secondary offering is less likely to happen, since its estimated premium based on our forecasted book value as of June 30 will only be 5.39%. We believe that based on these three factors, we don't have to worry about a secondary offering for a few months anyway.
American Capital Mortgage is another one of our favorite mREITs. The first thing we like about it is that it is managed by an affiliate of American Capital (ACAS), which also manages the mortgage book for American Capital Agency . We previously held American Capital Agency and we sold it on May 11 because we were concerned that it would issue a secondary offering of stock to take advantage of its 10% market price premium to book value.
AGNC did not issue the secondary offering, but MTGE ended up issuing a secondary offering. We also like the fact that an investor is achieving a 15.4% annualized dividend yield by holding MTGE, based on its most recent quarterly dividend of $.90 per share. Even if MTGE reduces its dividend by 10.7% like AGNC did, it would still provide investors a nearly 14% annualized dividend yield, which is more than satisfactory in our opinion.
Finally, we like that the company's spread income per share increased from $.86 in Q4 2011 to $1.07 in Q1 2012, in spite of the steadily flattening yield curve and the increased shares outstanding due to the secondary offering that brought in $258.3M worth of equity capital in March 2012.
We also like American Capital Mortgage's size. MTGE was founded in March 2011, went public in August 2011 and already it has increased its size to $4.3B as of Q1 2012. We believe that MTGE has the scale to compete favorable against smaller mREITs and the ability to move quicker than larger mREITs.
The last item that sticks out in our opinion is MTGE's mortgage portfolio. MTGE is managed by the same company that manages American Capital Agency's mortgage portfolio. Though MTGE is not limited to agency MBS Securities, non-agency securities only represent 4% of its assets. We find that AGNC and its sibling MTGE are amongst our favorite mREITs because American Capital, LLC is able to acquire and maintain a portfolio of securities with favorable prepayment characteristics and lower coupons as beneficial to returns in the current market and to maintaining reasonable performance in a variety of potential market scenarios. This has led to MTGE's agency MBS portfolio enjoying Constant Prepayment Rates well below the Fannie Mae and Freddie Mac fixed rate universe.
In conclusion, we have a favorable opinion of MTGE and recommend it to investors who want or need high current income from their investments. As the estimated premium on the shares is less than we were anticipating, we will take advantage of this to enter into a position ourselves. We believe that the Federal Reserve will maintain its low interest rate policy.
Though we were disappointed to see the Fed persist in its ridiculous Operation Twist program, we were glad that it did not go further with a third round of quantitative easing. This ensures that if MTGE, AGNC and other mREITs have to cut dividends, the dividend cuts will not be steep and that investors will still be able to generate satisfactory double-digit dividend yields on their mREIT investments.
Additional disclosure: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.