In an earnings release that was moved forward a few hours due to Hurricane Sandy, American Capital Agency Corp (AGNC) reported a huge jump in book value, and a substantial share buyback. Because of the storm, the markets are closed today and tomorrow, so the market will have until Wednesday to judge the news, and until Thursday to hear how Gary Kain, President and CIO, sees the industry going forward. So with a few days to digest the news, here's what I see as the biggest takeaways.
Book value increased $3.08, or roughly 10% from the previous quarter, to $32.49, compared to $29.41 at the end of June. That jump in book value was helped by QE3, a development AGNC had been positioned for, and clearly benefited from on the book value side.
The other side of the rising book value story is lower spreads, which is a development affecting the entire mREIT industry. Average net interest rate spread for the quarter was 1.42%, down from 1.65% in the previous quarter. Excluding impacts of catch-up premium costs due to changes in CPR estimates, average net interest rate spread was 1.53%, down from 1.83%. As of September 30, 2012, average net interest rate spread was 1.50%, down from $1.62% on June 30, 2012. Clearly spreads have been trending lower, which is a cause for concern.
Average leverage during the quarter was 7.1x, down from 7.5x in the previous quarter, and 8.2x in the first quarter of 2012. CPR was 9% in the quarter, down from 10% in the previous quarter. However, weighted average projected CPR at the end of the quarter increased to 14% from 12% at the end of Q2, as a result of QE3 and the record low mortgage rates.
While Annaly Capital Management's (NLY) announcement of a stock buyback last week took some of the surprise from AGNC's announcement of a $500 million buyback, I wasn't really expecting one from AGNC, because I didn't foresee such a big jump in book value. The press release for the buyback states the company will only buy shares below book value, since purchases of the stock below book value will increase book value per share.
I've been waiting for this press release for a few weeks, in part because of the new volatility in AGNC and the other mREITs, but mostly because of the success Mr. Kain and company have had managing the business thus far. I've been concerned in recent months that the stock was ahead of itself, trading at a growing premium to book value, even as the business environment was beginning to look murky. However, with the big jump in book value, and the 13% pull back in shares off the highs, puts the stock at a $0.49 discount to book, as of the close Friday. Given that the buyback should provide downside protection as the company steps in to buy shares, I think a floor around $31.50 - $32.00 is something to look for. While the narrowing spread doesn't inspire a ton of confidence going forward, even a reduction in the dividend to $4.00 a year (which I think is unlikely) still gives you a yield of 12.5% at the current price of $32, compared to the 13.5% implied yield of a $5/year dividend when shares were up at $36.77. If you liked the shares at $36 with a book value under $30, you should still like them trading right around book at $32.
Overall, the big jump in book value, as well as the new buyback program, should provide comfort to holders of AGNC who have begun to get nervous due to the increased volatility. Prepayments have remained in the expected range, and the spread AGNC is making has narrowed, but is still holding up better than many predicted. The conference call should provide additional insights into how the industry will look in the coming months, and I strongly recommend anyone owning AGNC, or any of the mREITs, to listen to the call November 1.