Is a 14% Yield Sustainable for This mREIT?
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
American Mortgage Capital Investment (NASDAQ: MTGE) started operations as a sister company of American Capital Agency (NASDAQ: AGNC) in 2011. American Mortgage Capital invests and manages a leveraged portfolio of mortgage backed securities. The portfolio includes Agency and non-Agency residential MBS, while some proportion of the portfolio is also invested in commercial mortgage backed securities. Therefore, the company has a diversified mix of MBS in its investment portfolio. In contrast, American Capital Agency is exclusively invested in Agency residential mortgage backed securities.
At the end of the fourth quarter, the company’s investment portfolio totaled $7 billion at fair value, 92% of which were fixed rate Agency MBS, while the remaining were non-Agency MBS. The company has a large concentration in 30-year fixed rate Agency MBS as they account for 57% of the entire quarter end portfolio, followed by 15-year Agency MBS at 31%.
Recent Quarter’s Performance
The company generated income of $49.8 million during the fourth quarter, up three-fold from a year ago and 12% sequentially. Much of the surge in the top line was a result of a two-foldssurge in interest income accruing from Agency securities. During the quarter, the company’s interest yielding assets generated 2.91%, up 11 basis points from the linked quarter of the prior year. The surge in interest income was also supported by a 2.3% sequential surge in interest yielding assets.
The company reported $8.3 million interest expense during the quarter. This is up five times from the prior year and 12.3% quarter over quarter. During the most recent quarter, the company reported 1.03% in weighted average cost of funds, up 13 basis points from the linked quarter.
As a result the company reported a 2 basis point sequential decline in its net interest spread of 1.88%. The reported net interest income of $41.5 million for the quarter ended Dec. 31, 2012. The net interest income surged almost three times compared to the net interest income of the same quarter of the prior year and 12.16% quarter over quarter.
Significant gains of $26.9 million on Agency securities were realized during the quarter, as opposed to just $1.1 million during the same quarter of the prior year. Unrealized loss on Agency securities were 41.5 million, against $11.8 million unrealized gains on Agency securities. Fourth quarter expenses of $4.5 million were up 150% year over year on a significant surge in management fees.
As a result, the bottom line of $50.4 million doubled from a year ago. However, EPS was $0.9 per share, up from $0.8 per share at the end of the same quarter of the prior year.
Leverage & Hedge
At the end of the fourth quarter, American Mortgage reported that 80% of its repurchase agreements are hedged through interest rate swaps. In comparison, American Capital Agency hedged 63%, which is unchanged from last quarter. CYS decrease its hedges from 54% at the end of the linked quarter to 50% at the end of the fourth quarter.
Prepayments
The prepayment speeds for American Mortgage Capital decreased during the fourth quarter. The company reported prepayment speeds of 6.5% for its investment portfolio, compared to 6.7% at the end of the third quarter of 2012. It amortized premiums on its Agency securities of $9.1 million during the quarter.
In comparison, American Capital Agency reported 10% CPR for its investment portfolio, while the CPR for CYS Investments (NYSE: CYS) at the end of the most recent quarter was 17.6%. American Capital’s CPR increased from 9%, while CYS Investment’s CPR increased from 17.3% in the linked quarter. Like American Mortgage Capital, CYS Investment has a large concentration of 15-year fixed rate Agency securities in its investment portfolio, which is why CYS is being used to compare the CPRs.
Book Value
At the end of the fourth quarter, American Mortgage Capital reported a book value of $25.75 per share, up $0.53 per share from the linked quarter. In comparison, American Capital Agency’s book value decreased 2.6%, while CYS Investment reported 8% decline in its book value on lower asset prices.
Dividends
American Mortgage Capital offers a dividend yield of 13.55% well backed by a cash dividend coverage ratio of 1.5 times. Since the company is invested in non-Agency MBS besides Agency MBS and since the company reported a rise in asset yield during the most recent quarter, I believe the company has sufficient ability to continue its current dividend distribution.
Conclusion
Hybrid mortgage REITs remain my favored investment among the universe of debt REITs. American Mortgage Capital has been able to maintain its dividends prior year and continues to show strength in continuing the elevated distribution. Therefore, I recommend income oriented investors buy the stock.
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