On August 7, Gary Kain, President and Chief Investment Officer of American Capital Agency Corp (AGNC), purchased 20,000 shares of AGNC for $32.75 per share, or a total of $655,000. This investment may be seen as a sign of Mr. Kain's confidence in the underlying agency mortgage REIT business, and more specifically in AGNC. This sizable purchase is the only insider activity within AGNC since June 11.
Gary Kain has been the president of AGNC since January of 2009 and the REIT's Chief Investment Officer since April of 2011. Mr. Kain previously worked for the Federal Home Loan Mortgage Corporation ("Freddie Mac"). During his time at Freddie Mac, Mr. Kain held numerous positions, including Head Trader (1995-2001), Vice President of Mortgage Portfolio Strategy (2001 to 2005), Senior Vice President of Mortgage Investments & Structuring (2005 to 2008) and Senior Vice President of Investments and Capital Markets (2008 to 2009).
American Capital Agency buys residential mortgage backed securities that are backed by federal agencies, including Mr. Kain's former employer and its sister agency, Fannie Mae. These securities come with an implied government backing, but no explicit government guarantee. Other well-known agency mREITs include Annaly Capital Management (NLY), which is the largest publicly traded mortgage REIT, and Hatteras Financial (HTS). Index funds for mREITs include the iShares FTSE NAREIT Mortgage REITs Index ETF (REM) and the Market Vectors Mortgage REIT Income ETF (MORT), though these ETFs also hold REITs that invest in non-agency backed securities, as well as some commercial mortgage paper.
American Capital Agency shares have appreciated approximately 20 percent over the last 12 months, not counting dividends paid. American Capital Agency currently pays a quarterly dividend of $1.25, which would work out to a 14.7 percent annualized yield. See a 1-year performance chart for AGNC, noting dividends paid: (click to enlarge)
On August 2, American Capital Agency reported earnings for the second quarter of 2012. The mortgage REIT reported comprehensive income of $480 million, or $1.58 per share, and a net loss of $261 million, or $0.88 per share. American Capital Agency also reported that its net book value per share totaled $29.41 at the end of the second quarter, an increase of $0.35 from the end of Q1.
At the start of 2012, AGNC lowered its dividend from $1.40 to $1.25 per share. American Capital Agency had maintained the prior payout for 10 quarters. Shortly after AGNC went ex-dividend during Q1, the mREIT instituted a significant secondary offering and subsequently used the proceeds to acquire more agency-backed securities. Since then, the value of most RMBS paper has appreciated, while providing income, helping AGNC shares performed exceedingly well.
Following AGNC's report, shares of the mREIT began to fall. The decline was not brought about by the report, but instead largely because of recent equity strength and U.S. dollar/treasury weakness. Between its report on August 2 and when Mr. Kain made his recent acquisition, on August 6, AGNC shares declined by about 5.75 percent. Mr. Kain clearly found this move significant enough to warrant increasing his position in AGNC, which now stands at 338,864 shares (a 6.27% increase). Again, do recall that Mr. Kain has a great deal of experience as a trader, investor and strategist regarding agency securities, and chose to acquire these new shares on the day that AGNC shares dropped to their lowest price since the end of June. As such, his timing may be seen as impeccable, at least so far.
American Capital Agency's quarterly report included that its average asset yield decreased 59 bps to 2.73%, from 3.32% in Q1, and that its annualized weighted average portfolio yield was 2.91%, compared to 3.14% in Q1. AGNC's average asset yield was 2.81%, a 25 basis point decline from 3.06% in Q1, and noted that the decline in average asset yield was due to a combination of the increase in forecasted prepayment speeds and a decline in the average coupon on AGNC's portfolio. American Capital Agency also reported that its cost of funds increased during the quarter, with the increase being primarily due to a higher ratio of interest rate swaps to repurchase agreements and other debt. At the end of Q2, AGNC's average net interest rate spread was 1.62%, a decrease of 45 bps from 2.07% at the end of Q1.
American Capital Agency also reported that its leverage ratio was 7.6x at the end of Q2, down from 8.4x at the end of the first quarter, and that its average leverage for the quarter was 7.5x. This is the lowest leverage rate that AGNC has reported in the last year, making it likely that AGNC will increase its leverage, or that it already has done so. The company also reported that its constant prepayment rate during the second quarter was 10%, which was unchanged from the first quarter, and noted that it "repositioned the portfolio during the quarter into lower coupon MBS and lower loan balance and HARP securities, which are less susceptible to prepayment risk, reducing the impact of the decline in long-term interest rates on the Company's prepayment forecast."
Despite reductions in average asset yield and net spreads, AGNC's overall quarterly results indicate that AGNC should be able to maintain its $1.25 dividend rate in the third quarter. Mr. Kain's decision to acquire an additional $655,000 in shares appears to support this presumption. Further, though the mREIT's lower reported leverage rate does reduce its risk profile and potential to pay its sizable dividend, it is likely that AGNC's reduced leverage was a temporary condition, and possibly one that has already passed.
Disclosure: I am long NLY.