Seeking Alpha

Analysts question AGNC strategy

  • Addressing an analyst cadre somewhat uncomfortable with American Capital's (AGNC +1.6%) new policy of purchasing the common stock of its agency mREIT competitors (Wells' Joel Houck: Do you know their hedging strategies? What happens when one blows up?), CIO Gary Kain says the discounts to asset value are so great as to mitigate much of the risk.
  • Kain does acknowledge some risks though, and reminds that the purchase program is but a small slice of AGNC's overall portfolio ($400M of others' stock bought so far vs. nearly $600M of AGNC buybacks just in Q4).
  • For now, there won't be any disclosure of which names American Capital is buying - a position also not sitting well with those on the call. Should the positions get large enough though, regulatory filings might be required.
  • Kain also reminds that AGNC isn't just boosting risk with these purchases - instead it's selling MBS at 100 cents on the dollar to buy them back (via other mREITs) at somewhere in the area of 80 cents on the dollar.
  • Most of the mREIT sector (REM +0.7%) is ahead again today - Armour (ARR +0.9%), CYS (CYS +2.8%), Hatteras (HTS +1.6%), American Capital Mortgage (MTGE +0.6%), PennyMac (PMT +1.2%) - but Annaly (NLY -0.6%) lags, perhaps as investors feel it was far more conservatively positioned going into 2014 than AGNC was.
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Comments (28)
  • smurf
    , contributor
    Comments (4587) | Send Message
     
    The market is fickle. Folks can go from geniuses to dolts in a matter of months.
    4 Feb 2014, 12:03 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (1868) | Send Message
     
    Analysts are questioning it because its new and out of the norm. Also its supposed to be there job to say such and such is cheap and a buy. In a small way, Kain is stepping on their territory. However, I agree with Kain, if you want to buy MBS at $1, it makes more sense to buy mREITs at 80¢ on the dollar.

     

    Disclosure - not long AGNC directly but do benefit indirectly via MORL
    4 Feb 2014, 12:29 PM Reply Like
  • Racquet
    , contributor
    Comments (7) | Send Message
     
    I have read many of your comments. When you speak, I listen. Thanks.
    4 Feb 2014, 04:25 PM Reply Like
  • Javimanic
    , contributor
    Comments (256) | Send Message
     
    maybe they are following my logic and buying MORL. ;)
    4 Feb 2014, 12:31 PM Reply Like
  • DAVE22Q
    , contributor
    Comments (369) | Send Message
     
    managing a mortgage portfolio differs from managing a mutual fund. it may be small purchase but that does not justify investing management time. if the management really believes that REIT stock is a better use of funds than mortgages they should buy their own stock or better yet return the unneeded capital to the shareholders. does anybody out think this is NOT a dumb move?
    4 Feb 2014, 12:32 PM Reply Like
  • surfgeezer
    , contributor
    Comments (7756) | Send Message
     
    me. Agree with Darren. His job is to make money with yield spread on MBS. He is taking advantage of Mr. Market, again his job. If other companies are decently run and better discount, he is doing his job.

     

    i just wish I cold find out who he was buying, the man is much smarter than me.
    4 Feb 2014, 01:01 PM Reply Like
  • MRFINANCE
    , contributor
    Comments (25) | Send Message
     
    Me too. The guy is crazy like a fox!
    4 Feb 2014, 01:37 PM Reply Like
  • Cash King
    , contributor
    Comments (972) | Send Message
     
    I think it is NOT a dumb move. Only makes sense. Why buy for $1 when they can buy at $0.80. They've already been buying back their own stock hand over fist. Why not diversify a little with some great bargains. Oh like he said, it is only a very small portion of their purchases and assets as well.
    4 Feb 2014, 02:17 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2732) | Send Message
     
    My guess is CIM. Huge volume in the name for a few days in Q4, and then no news. Im not positive, but it was the only mREIT name I remember seeing unusual volume in.
    4 Feb 2014, 03:46 PM Reply Like
  • Dividends#1
    , contributor
    Comments (3157) | Send Message
     
    DAVE and others,
    Let's see the dividend is stable, the BV is back to Q3 levels $25+, AGNC bought back $934M of their own stock and INCREASED their buyback program another $1B and they bought $400M of other mREITs. I have no problem with their strategy and portfolio allocations.
    They had a portfolio of $68B as of 12/31/13. They are probably over $70B now, $400M is pocket change when Kain buys his own stock, but when he buys other mREITs you guys have an anxiety attack.
    4 Feb 2014, 12:55 PM Reply Like
  • Cash King
    , contributor
    Comments (972) | Send Message
     
    Haha. No kidding. I like it!
    4 Feb 2014, 02:18 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (1868) | Send Message
     
    Another thought is suppose you want to buy a different asset. It may be quicker, better and cheaper to buy another company which specializes in that asset, particularly if it is trading significantly below book. Mr. Market just doesn't get that they have already adjusted the price of the MBS for future expectations. Then also adjusting the price of the company which holds the MBS is double penalizing.
    4 Feb 2014, 01:11 PM Reply Like
  • murray555
    , contributor
    Comments (389) | Send Message
     
    Well said Darren. I had the same thought. Mr. Market is irrational to the point of insanity at times.
    4 Feb 2014, 02:42 PM Reply Like
  • jollyc
    , contributor
    Comments (21) | Send Message
     
    This is the same management team that in 2013 sold 57.5MM shares at $31.33/share and bought back 40.3MM shares at $21.25/share. I would let them do a little mREIT trading with a small portion of the portfolio. =)
    4 Feb 2014, 02:48 PM Reply Like
  • Dave McKay1
    , contributor
    Comments (81) | Send Message
     
    Good point. If mgmt. is smart enough to ostensibly short their own stock when the time is right, then I have to give them kudos and follow their company closer.
    5 Feb 2014, 08:18 AM Reply Like
  • heisenberg.hedge
    , contributor
    Comments (5) | Send Message
     
    It's a massive oversimplification to assert that the trade is simply buying MBS at an "attractive" discount (relative to the pure play transaction of buying MBS securities or whole loans in market transaction). Sir, you are buying another entity at a discount to its theoretical GAAP book value but that trade comes with an associated basket of optionality/risks including, but not limited to, the following as it relates to the entity you are purchasing: liquidity risk, operating risk, hedging risk, financing risk, management team risk, and operating risk -- all of which will impact the valuation of the entity and your hypothesis of purchasing MBS at attractive discounts. Very surprising the Board approved this strategy in light of the fact that your '33 Act filings do not have adequate disclosure regarding this strategy and risk. Good luck because I know very few people who have the talent to both run a very large Mortgage REIT and generate alpha purchasing stocks.
    4 Feb 2014, 03:48 PM Reply Like
  • searcher
    , contributor
    Comments (1674) | Send Message
     
    It is novel and, therefore, suspect. I'd sit with current holding but not buy until have a better grasp of what is being bought. If being coy as to what has been purchased, then clearly it is ongoing.
    4 Feb 2014, 04:12 PM Reply Like
  • sinedo
    , contributor
    Comments (383) | Send Message
     
    I'm not concerned if they try new ideas, as long as they don't go overboard. Their charter probably allows some discretion along these lines, and I assume their are Regulators looking over their shoulder. What I like is them buying back stock; I think they understand the interest rate risk better than I do, and my opinion is that stability is in everyone's interest, including the Fed's.
    Regards,
    4 Feb 2014, 04:24 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (3111) | Send Message
     
    What if they are buying ARR... :^ 0

     

    There are some rotten apples out there.

     

    they aren't disclosing what they buy right?
    4 Feb 2014, 05:24 PM Reply Like
  • Racquet
    , contributor
    Comments (7) | Send Message
     
    I am sure they know the difference between a rotten apple and a juicy peach. Sure glad they don't take advise from people commenting here.
    4 Feb 2014, 11:23 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (3111) | Send Message
     
    LOL, lets hope so
    5 Feb 2014, 03:42 AM Reply Like
  • Racquet
    , contributor
    Comments (7) | Send Message
     
    LOL to you and your family..
    5 Feb 2014, 01:59 PM Reply Like
  • Brian Grosso
    , contributor
    Comments (586) | Send Message
     
    I trust Kain and his strategy makes sense to me. It's wishful thinking but if AGNC reaches .7x book I'm a buyer.
    4 Feb 2014, 06:56 PM Reply Like
  • tstreet
    , contributor
    Comments (942) | Send Message
     
    Obviously, everything they do is based on future expectations. If one believes the market for MBS is stable or on the upside, then it makes sense. In any event, this is such a small part of their portfolio that I am not worried about the downside. If MBS values go up some more and discounts to book of bought stocks goes down, then they do better than just holding MBS. If one is that worried about the downside, you have no business buying the stock anyway.
    4 Feb 2014, 09:28 PM Reply Like
  • freed0m
    , contributor
    Comments (994) | Send Message
     
    So he thinks the leverage of the company is too low, thus leverages up by buying other highly-leveraged mREITs?
    A great way to go bust faster than before.
    4 Feb 2014, 09:28 PM Reply Like
  • tstreet
    , contributor
    Comments (942) | Send Message
     
    To be honest, this does not seem like leveraging in the sense that they are borrowing to buy these stocks. Other than the fact that these are leverage stocks, I do not understand what you are getting at. Some of these stocks may be less leveraged than AGNC.
    5 Feb 2014, 12:01 PM Reply Like
  • freed0m
    , contributor
    Comments (994) | Send Message
     
    So tell me, you use $100 cash to buy $100 worth of stock which uses 10 times leverage. is it still the same $100 on your balance sheet? On consolidation, yes; actually, no.
    5 Feb 2014, 09:03 PM Reply Like
  • Dave McKay1
    , contributor
    Comments (81) | Send Message
     
    Too bad CMO isn't selling way below book. That mReit stock looks to be holding up the best. I'm looking at their preferreds.
    5 Feb 2014, 08:22 AM Reply Like
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