Agency mortgage REITs are real estate investment trusts that seek to invest in mortgage backed securities for which any of the government Agencies, like Fannie Mae, Freddie Mac and Ginnie Mae, guarantee interest and principal payments. Therefore, Agency paper is considered to have no default risk. In contrast, non-Agency mortgage REITs invest exclusively in non-Agency MBS. Non-Agency securities are considered to offer considerably higher yields compared to Agency securities. Hybrid mortgage REITs combine the investment strategies of Agency and non-Agency mortgage REITs to provide a diversified investment portfolio. One such hybrid mortgage REIT is American Capital Mortgage Investment Crp (NASDAQ:MTGE), which delivered 41% economic return over the prior year. This comprised $3.60 dividends and a $4.87 per share hike in book value.
Company Description & Investment Mix
American Mortgage Investment was incorporated in 2011 and is being managed by the same team that manages American Capital Agency Corp. (NASDAQ:AGNC). The following graphs show the company’s investments as of Dec. 31, 2012.
It is evident from the above graph that American Mortgage Capital had a large concentration of Agency mortgage backed securities in its entire assets/investment portfolio at the end of the fourth quarter. The company has $6.4 billion worth of Agency residential mortgage backed securities, which is 90% of the entire quarter portfolio. Non-Agency RMBS are only 10% of the portfolio. Out of the $6.4 billion Agency RMBS, it is evident that 30-year fixed rate securities are 63%, while 15-year fixed rate securities are 35%. A small investment in 20-year fixed rate securities can also be viewed in the above graph. The company’s Agency MBS are comprised of 83% HARP or lower balance securities. These are highly prepayment protected as prepayment speed increases on lower loan balance, and higher LTV HARP loans should be significantly less than generic coupons
MTGE vs. AGNC
During the most recent quarter, MTGE increased its book value by $0.53 per share, while AGNC’s book value decreased $0.85 per share. Since MTGE’s Agency portfolio is composed of 83% HARP or lower loan balance securities, it beat AGNC with an average Agency CPR of 7%, compared to AGNC’s 10%. This MBS composition is also said to be the reason why MTGE beat AGNC on net interest rate spread during the fourth quarter too with a spread of 1.72% against AGNC’s 1.63%. MTGE did maintain higher leverage during the quarter at 8.3 times versus AGNC’s 7.8 times. However, one cannot call MTGE’s Agency portfolio substantially riskier.
Analyst Sentiments
Analysts have a consensus recommendation of outperform for American Capital Mortgage. 40% of the analysts covering the stock recommend their investors buy the stock, while 50% rate the stock outperform. Only one analyst has a hold rating for the stock.
Competition
AG Mortgage Investment Trust Inc (NYSE:MITT) is a relatively new mortgage REIT. At the end of the third quarter around 80% of the company’s portfolio was invested in Agency securities, followed by non-Agency at 15%. Besides, the company has invested in commercial MBS (3% of portfolio) and asset backed securities. The company reported a surge in its net interest margin during the third quarter over the prior quarter due to an increase in non-Agency debt. 30-year fixed rate securities are 50% of the entire Agency MBS portfolio, followed by 15-year fixed rate at 35%. The company reported a CPR of 6.2% at the end of the third quarter. The stock offers a dividend yield of 12.5% and is trading at a 24% premium to its book value.
MFA Financial, Inc. (NYSE:MFA) has been in business since 1998 and seeks to invest in both Agency and non-Agency MBS. Around 60% of the company’s asset portfolio is invested in Agency MBS, while the rest is non-Agency. Most of the non-Agency MBS are purchased at discounts to their par values and are considered very high quality. Within the Agency MBS, the company has a large concentration in 15-year fixed rate securities, which increases the prepayment protection, however a majority of it is not eligible for HARP. The company reported CPR of 21.6% for the third quarter, up from 20.4% at the end of the second quarter. MFA is currently yielding 8.9% and is trading at a 28% premium to its book value.
Invesco Mortgage Capital Inc (NYSE:IVR) was formed to operate as a debt REIT that invests in residential and commercial mortgage backed securities besides investing in mortgage loans. The residential mortgage backed securities that Invesco is primarily interested in are MBS for which any of the government sponsored Agencies guarantee the interest and principal payment. The company also has non-Agency MBS in its portfolio, which provide the advantage of diversification to Invesco under the prevailing challenging macroeconomic environment. At the end of the fourth quarter, Agency MBS are 69%, while non-Agency MBS constitute 17%. Within the Agency MBS holdings, the company has a large concentration in 30-year fixed rate, followed by 15-year fixed rate securities. The stock is yielding 12.3% and trading in line with its book value.
Conclusion
I am bullish on American Capital Mortgage. It is currently offering 13.8% dividend yield and is trading at 3% premium to its book value. I believe the stock is attractively valued and its highly prepayment protected and diversified MBS portfolio presents an excellent investment opportunity.
The article Your Best Hybrid REIT originally appeared on Fool.com and is written by Adnan Khan.
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