As he's doing with American Capital Agency (AGNC -0.6%), CIO Gary Kain is supplementing share repurchases at American Capital Mortgage (MTGE) with outright buys of the common stock of agency mortgage REITs.
MTGE purchased $39M of other mREIT stock in Q4, a number lifted to $54M by the end of January. Buybacks of MTGE stock in Q$ were about 1.5M shares, or roughly 3% of the float. For all 2013, the company bought back about 13% of the outstanding stock.
Kain on the earnings call: "Given the sizable price to book discounts in the mortgage REIT space, we believed it made sense to sell some agency MBS and buy similar MBS assets in REIT equity form at around 80% of book value. At that discount, it is equivalent to buying agency MBS 2.5 points lower in price than where you can sell them ... To us, the choice was pretty straight-forward."
Having had their fill of questioning Kain on the stock purchases during the AGNC call on Tuesday, analysts today spent most of their time asking about the mortgage servicer acquisition - Residential Credit Solutions. While the yield on the interest-only component of MSRs is just 5-10%, the return is higher, says Kain, because owning MSRs - which act as natural interest rate hedges - allows MTGE to pull off other hedges which cost the company money.