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American Capital Agency (AGNC), one of the most prominent operators in the mortgage REIT space, reported yet another disappointing quarter. It continues to be painful to write how much we don’t like the uncertainties regarding the broader mortgage REIT environment. Some of the more bullish research shops appear to finally be throwing in the towel. Though the yields on some of the mortgage REIT equities appear attractive, the risks of further dividend cuts continue to grow. Shares of American Capital currently yield ~13%, for example.
In the third quarter, American Capital Agency reported a comprehensive loss of $0.43 and an economic loss for the period, “defined as dividends per common share and the change in book value per common,” of -6.6% on an annualized basis. The company continues to destroy economic value at the expense of shareholders, as it pays out a lofty dividend to attract unsuspecting investors that believe the yield to be sustainable. Most of the comprehensive loss in the period came from the income statement as net unrealized gains on investments marked-to-market through other comprehensive income were positive.
We had outlined in our bold note, “The Mortgage REIT Business Doesn’t Work…” that marked-to-market gains had been bolstering book value across the industry and that some mortgage REITs would do poorly regardless of what happened to interest rates. Such a thesis has panned out, but the third quarter results at American Capital Agency spoke directly to more fundamental concerns: “Fixed income market participants continue to struggle with how to balance the cross-currents of slowing growth abroad, moderate growth in the U.S. and a Federal Reserve that appears biased to want to raise interest rates in the near term.” The REIT also announced that it has modified its investment guidelines and is now dipping its toes into non-agency mortgage backed securities, which hold credit risk relative to US government sponsored securities.
American Capital Agency is destroying economic value, a condition that supports a valuation well below book equity of $23 per share. The opaqueness of its business model coupled with sporadic cuts in its dividend significantly hurt its investment prospects, if there were any in the first place. As of September 30, the company’s at-risk leverage stood at 6.8x, far too great for a reasonable investor seeking income stability, in our view. Shares of American Capital Agency had been trading north of $24 as recently as the first half of 2013, and investors might expect a “dead cat bounce” from the ~$18 mark at present, but we’re just not seeing a compelling reason to own any mortgage REIT at this time. American Capital Agency continues to gamble on its own stock through buybacks.