American Capital Agency Corp. (AGNC), a leading real estate investment trust (REIT), has recently announced plans to offer 11.5 million common shares at $26.00 each to raise cash. The company will also grant the underwriters an option to purchase an additional 1.7 million shares to cover any over-allotments.
 
BofA Merrill Lynch, the investment banking and wealth management division of Bank of America Corporation (BAC); Citigroup Inc. (C); Deutsche Bank Securities Inc., the investment banking division of Deutsche Bank AG (DB); and UBS Investment Bank, a part of UBS AG (UBS) are acting as joint book-running managers for the public offering.
 
American Capital Agency expects to raise total net proceeds of approximately $285 million, excluding the over-allotment options. The company intends to utilize the proceeds to acquire additional agency securities and for general corporate purposes. The shares of American Capital Agency fell $1.52 or 5.4% on the impact of the news to $26.47 in midday trading on Tuesday, as investors speculated that additional shares outstanding will dilute the value of their investment.
 
American Capital Agency invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities such as Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. Specifically, American Capital Agency invests in Freddie Mac Gold certificates, and certificates of Fannie Mae and Ginnie Mae. We like the company’s focused investment approach, which is not distracted by originations, servicing, or credit risk from investments in mortgages that do not have the backing of the U.S. government.
 
Agency’s residential lenders such as American Capital Agency are the only residential mortgage REITs left with a viable business model, more specifically, with access to capital to fund growth during recession and still having liquid assets. With the government’s takeover of Fannie Mae and Freddie Mac, American Capital Agency’s securities are now guaranteed by U.S. government, which makes agency REITs a safer prospect for investors. Additionally, the company’s portfolio of government-backed assets is relatively liquid and credit risk is limited.
 
We maintain our Neutral recommendation on American Capital Agency, which currently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating and indicates that the stock is expected to perform in line with the overall U.S. equity market for the next 1-3 months.

 
AMER CAP AGENCY (AGNC): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
DEUTSCHE BK AG (DB): Free Stock Analysis Report
 
UBS AG (UBS): Free Stock Analysis Report
 
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