Research

American Capital Mortgage Investment: 14% Yield, Lower Prepayments Than American Capital Agency

During the summer, we were waiting for the perfect pitch in order to enter into American Capital Agency (AGNC), which is the mREIT industry’s most recognized and respected mREIT with regards to financial and investment performance. We were disappointed that even in the wake of a secondary offering and a rating downgrade from a sell-side analyst, AGNC was trading at a 12%-17% premium during the summer. We had no need to fear though, since AGNC’s little brother American Capital Mortgage Investment (MTGE) was trading at a 5% premium in the middle of August and we found that to be a more tolerable price premium to pay. We took a 1% stake in MTGE during the middle of August and it has held up well for us in spite of the mREIT massacre that took place in early October. We were especially pleased that it has not yet cut its $.90/share dividend and it has a lower CPR prepayment rate than its big brother AGNC.

American Capital Mortgage is our favorite mREIT because it is run by the same leadership team that runs its big brother affiliate AGNC. MTGE and AGNC are both led by CEO Malon Wilkus and CIO Gary Kain and this leadership team has taken AGNC from a newly organized mREIT in 2008 to the 2nd largest and most respected mREIT in the industry with $102B in assets and $11.3B in book value. We believe that Wilkus and Kain will do an even better job with MTGE since it has the flexibility to invest in non-agency MBS and we believe that the high credit quality of MTGE’s holdings will ensure that it isn’t losing money in subprime MBS bonds like Chimera (CIM). We were disappointed that we missed out on its rally from June to August and we thought it was serendipitous that MTGE pulled back in August in the wake of its Q2 2012 results. Not long after it pulled back in August, we entered into a 1% position in MTGE for our own account because its premium to book value had been cut in half and we felt that was a more tolerable premium to book to pay for the managerial services of Gary Kain and Company.

Continue Reading