"Get used to it," is what American Capital Agency (AGNC) CIO Gary Kain hears from many about the significant discount to book value his stock (and the entire agency mREIT sector) sell for. If things like banks and closed-end funds can trade at discounts, why not agency REITs? It's all about collateral, responds Kain. The fixed agency MBS market is the world's 2nd most liquid, totally transparent, and offers negligible bid/ask spreads. There is complete certainty with respect to book value, not always true with other sectors selling at discounts.
Off the purchase of a 7.5% stake (8.5% if MTGE is included) in Hatteras (HTS) - the only of AGNC's mREIT purchases made public so far - Kain said he wanted to get exposure to hybrid ARMs, but they're not easy to buy in size. A sizable American Capital buy could have moved the market by half a point or more. The better way to get a decent stake was by buying Hatteras at around a 20% discount to book.
Clearly feeling his oats after a tough 2013 (he notes book value fell just 5.5% while the stock declined 14.3%), a confident Kain says buyers of agency mREITs are not only purchasing a portfolio of MBS selling for significant discounts to where they trade in the open market, but those MBS - having already priced in a stronger economy and a Fed QE exit - have room for sizable upside.