American Capital Agency Corp. (NASDAQ:AGNC) commenced operations in 2008 as a mortgage real estate investment trust (REIT) with an objective of providing its investors with elevated returns primarily through higher dividends. For this purpose, the company invests in long-term term residential mortgage-backed securities for which principal and interest payments are guaranteed by any government Agency. The company finances its investments in residential MBS using short term borrowings (repurchase agreements) and earns a spread between its interest yielding assets and interest bearing liabilities.
American Capital Agency reported its performance for the fourth quarter of 2012. The company reported interest income of $570 million, up 9.6% from the prior quarter. The surge in interest income was the result of a 27 basis point sequential hike in asset yields, supported by an increase in the interest yielding assets. The company posted an average net interest rate spread for the fourth quarter was 1.63%, an increase of 21 bps from the third quarter of 1.42%.
Interest expense during the fourth quarter surged 6% to $147 million over the prior quarter. The surge in interest expense was a result of a hike in the cost of funds from 1.13% in the third quarter to 1.19% during the fourth quarter.
The company earned $353 million during the quarter from gain on sale of agency securities. This is an increase of 68% over the prior quarter. From gain on derivative instruments, the company produced $89 million, compared to a loss of $460 million during the linked quarter.
Total operating expenses during the quarter remained flat at $40 million. This is against a 36% sequential decline in the recent quarter’s expense for Annaly Capital Management, Inc. (NYSE:NLY). Management fees were a major contributor in the fourth quarters’ overall expenses for American Capital Agency.
As a result, American Capital Agency posted a bottom line of $810 million, compared to $86 million at the end of the third quarter. During the fourth quarter the percentage of repos swapped was 63% unchanged from last quarter. This is against 40% swapped by Annaly Capital during the fourth quarter. The duration of the American Capital Agency’s swaps was flattish at 4.4 years.
Prepayments
The company experienced a CPR of 10% during the fourth quarter for its investment portfolio, compared to 9% for the third quarter. In comparison, Annaly Capital reported 19% CPR for its investment portfolio at the end of the fourth quarter, down from 20% at the end of the prior quarter. The weighted average projected CPR for the remaining life of all of the company’s agency securities held at the end of fourth quarter end was 11%, a decrease from 14% at the end of the third quarter, primarily due to the combination of an increase in long-term interest rates, higher concentration of lower loan balance and HARP security holdings and a decline in the weighted average coupon rate on the company’s portfolio during the quarter.
Book Value
The company’s book value decreased by 2.6% during the quarter to $31.64. In comparison, Annaly’s book value per share decreased by 4.5% in the fourth quarter to $15.85. During the quarter American Capital Agency repurchased 2.7 million shares of common stock for $77 million (at an average price of $29 per share) from the $500 million share authorization program. Annaly Capital is trading at a 4% discount to its book value and yielding 16% on its current dividend.
This is compared to 27.8 million shares of common stock repurchased by Annaly Capital for $397 million (at an average price of $14.28 per share). Annaly is currently trading at a 5% discount to first quarter book value and is yielding 12.1% on the current dividend.
Conclusion
Among the Agency-only mortgage REITs, and particularly in comparison to Annaly Capital, I continue to have the most confidence in American Capital Agency’s ability to deliver economic return through its active portfolio management. The company continues to expand its asset yield and the net interest spread despite the challenging macroeconomic environment under QE3.
The article Is American Capital Agency Still Better Than Annaly Capital? originally appeared on Fool.com and is written by Adnan Khan.
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