AGNC AGNC Investment Corporation

American Capital Agency Corp. (AGNC) -- a real estate investment trust (REIT) -- reported disappointing first-quarter 2013 results with its net spread income per share of 78 cents significantly lagging the Zacks Consensus Estimate of $1.08.

Moreover, it compared unfavorably with the prior-quarter figure of $1.42 cents per share. Hurt by lower pricing on its mortgage-backed securities (MBS) portfolio, American Capital Agency’s book value suffered a considerable downfall during the quarter.

Net interest income came in at $407 million in the reported quarter, which was above the Zacks Consensus Estimate of $380 million and marginally below $408 million recorded in the prior quarter.

Behind the Headline Numbers

American Capital Agency reported an economic loss on common equity for the quarter of 4.6%, or 18.7% annualized. As of Mar 31, 2013, the company's investment portfolio comprised $76.3 billion of agency securities and $27.3 billion of net TBA (to-be-announced) mortgage positions, at fair value.

As of that date, the company's agency securities included $74.8 billion of fixed-rate securities, $0.8 billion of adjustable-rate securities and $0.7 billion of collateralized mortgage obligations (CMOs).

American Capital Agency’s fixed-rate investment portfolio consisted of $22.6 billion less than or equal to 15-year fixed-rate securities, $0.4 billion 20-year fixed-rate securities and $51.8 billion 30-year fixed-rate securities. Net TBA mortgage portfolio included $12.5 billion 15-year net TBA securities and $14.8 billion 30-year net TBA securities, at fair value.

The investment portfolio of American Capital Agency was financed with $67.1 billion of repurchase agreements and other debt, resulting in a leverage ratio of 5.7x, including the net payable for agency securities not yet settled, or 8.1x inclusive of off-balance sheet TBA financing.

During the reported quarter, the company’s average asset yield on its agency security portfolio was 2.80% (down 2 basis points sequentially) and its average cost of funds was 1.28% (up 9 bps sequentially), resulting in a net interest rate spread of 1.52% (a decline of 11 bps sequentially).

As of Mar 31, 2013, the company's net book value per common share was $28.93, down from $31.64 as of Dec 31, 2012. This was due to lower pricing on the company's MBS portfolio and lower "pay-ups" (or price premiums) on specified pools of securities with favorable prepayment attributes.

As of Mar 31, 2013, American Capital Agency had cash and cash equivalents of $2.8 billion compared with $2.4 billion at year-end 2012.

Dividend Update

On Mar 7, 2013, the company declared a first quarter dividend on its common stock of $1.25 per share. This was paid on Apr 26, 2013 to common stockholders of record as of Mar 20, 2013. As a matter of fact, the company has paid a total of $3.3 billion in common dividends, or $25.11 per common share, since its May 2008 initial public offering.

In Conclusion

Though the lower-than-expected results during the first quarter at American Capital Agency came as a disappointment, we note that the company’s exclusive focus on fixed-rate agency securities guaranteed by the U.S. government limits its credit risks.

However, increased volatility and deterioration in the broader residential mortgage and RMBS markets may restrict the upside potential of the company going forward. The company is externally managed and advised by American Capital AGNC Management, LLC, an affiliate of American Capital, Ltd. (ACAS).

American Capital Agency currently has a Zacks Rank #3 (Hold). However, the other REIT stocks which are performing well and worth a look include iStar Financial Inc. (SFI) and Western Asset Mortgage Capital Corp. (WMC), both carrying a Zacks Rank #1 (Strong Buy).

 
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