SAB Capital’s Stake in American Capital Mortgage Now Above 10%

Today, SAB Capital Management, managed by Brian Jackelow, announced in a Form 3 filing with the SEC that it had increased its stake of American Capital Mortgage Investment Corp (NASDAQ:MTGE) above 10%. This transaction increases SAB Capital’s holdings of American Capital Mortgage from 3.3 million shares to a little over 4.7 million shares.

American Capital Mortgage Investment Crp (NASDAQ:MTGE)

In early June of this year, the hedge fund reported that it had taken a 7.4% passive stake in the mortgage REIT, before reporting that it held $79.3 million worth of its stock in its most recent 13F filings. With its most recent purchase, SAB Capital now owns more than $122 million worth of American Capital Mortgage, which would make it the fund’s second largest holding.

Jackelow’s fund has a bit of a history with American Capital Mortgage, as it first reported a $2.8 million position in the mREIT in third quarter of 2011. Considering the fact that SAB Capital has increased its holdings of the stock by nearly thirtyfold in a little under a year’s time, it’s definitely worth taking a closer look.

Since SAB reported its initial position in American Capital Mortgage, its shares have returned 53.8%, outpacing the diversified REIT industry’s average (14.8%), and the real estate sector (18.9%) as a whole. Moreover, the mREIT has also generated a more impressive return than peers like Annaly Capital Management, Inc. (NYSE:NLY) at 6.1%, Two Harbors Investment Corp. (NYSE:TWO) at 35.1%, Hatteras Financial Corp. (NYSE:HTS) at 15.6%, Invesco Mortgage Capital Inc. (NYSE:IVR) at 43.3%, and CYS Investments Inc. (NYSE:CYS) at 20.0%.

Despite these gains, American Capital Mortgage still trades at a modest Forward Price-to-Earnings ratio of 6.2X, below Annaly Capital (10.8X), Two Harbors (9.9X), Hatteras Financial (7.5X), and Invesco Mortgage Capital (6.9X).

As is with the case of most mREITs though, it’s more useful to look at Funds from Operations (FFO), which is a measure of net income excluding property value fluctuations and depreciation. Essentially, FFOs indicate how easily an mREIT can maintain its dividend payments into the future.

American Capital Mortgage has grown its FFO by 301.2% per quarter over the past 12 months, easily outperforming the likes of Annaly Capital (-8.7%), Two Harbors (20.4%), Hatteras Financial (2.9%), Invesco Mortgage Capital (-6.9%), and CYS Investments (0.5%).

From a dividend standpoint, the mREIT looks even more attractive, as it offers a yield of 11.0%, with a projected yield of 14.1%. This forward-looking estimate is above many of American Capital Mortgage’s competitors, including Annaly Capital (12.5%), Two Harbors (13.5%), Hatteras Financial (12.3%), Invesco Mortgage Capital (12.4%), and CYS Investments (13.7%).

Consequently, it appears that SAB Capital is bullish on American Capital Mortgage because of the mREIT’s attractive valuation at current price levels, its superb FFO growth over the past four quarters, and its advantageous dividend yield. In fact, it can be deduced that American Capital Mortagage’s yield forecast is exceptionally upbeat, as strong FFO growth can drive more dividends into investors’ pockets going forward.

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