American Capital Agency Corp. (AGNC), a real estate investment trust (REIT) that focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs), reported earnings of $2.50 per share during fourth quarter 2010, compared to $1.79 in the year-earlier quarter. Excluding one-time items, recurring net income for the reported quarter was $1.26 per share.
For full year 2010, the company reported net income of $7.89 per share compared to $6.78 in the previous year. Excluding the one-time items, recurring net income for fiscal 2010 was $4.50 per share.
The company generated total revenues of $101.0 million during fourth quarter 2010 compared to $41.1 million in the year-ago quarter. For full year 2010, American Capital Agency reported total revenues of $253.1 million compared to $127.9 million.
American Capital Agency’s fourth quarter results were positively affected by non-recurring net realized and unrealized gains on its derivative instruments, and net realized gains on available-for-sale securities. The derivative instruments, such as to-be-announced (TBA) mortgage short positions and payer swaptions, are primarily utilized by the company to hedge increases in interest rates.
A payer swaption is a tool to enter into an interest rate swap where the buyer pays fixed rate and receives floating, thereby benefiting from interest rate rises. The initial cost of the swaption comes in the form of a premium, and this is the maximum amount the buyer can lose.
The participants in the swaption market are primarily large corporations, banks, financial institutions and hedge funds, who typically utilize swaptions to manage interest rate risk arising from their financing arrangements.
Agency lenders such as American Capital, which holds a mortgage portfolio, purchases payer swaptions to protect against lower interest rates that might lead to early prepayment of the mortgages. This measure ultimately facilitates the company to continue making money by collecting premium.
American Capital Agency recorded an annualized return on equity of 42% for the quarter. As of December 31, 2010, the company’s investment portfolio comprised $13.5 billion worth of agency securities at fair value, including $9.1 billion of fixed-rate securities, $3.9 billion of adjustable-rate securities and $0.5 billion of CMOs.
About 29% of the investment portfolio comprised adjustable-rate securities, 40% of 15-year fixed-rate securities, 22% of 30-year fixed-rate securities, 6% of 20-year fixed-rate securities and 3% of CMOs backed by fixed and adjustable-rate securities.
The investment portfolio of American Capital Agency was financed with $11.7 billion of repurchase agreements, $1.6 billion of equity capital and $0.1 billion of variable debt resulting in a leverage ratio of 7.5x. The leverage ratio adjusted for the net equity proceeds raised was 7.8x, which was lower than the quarterly average of 8.4x.
During the quarter, American Capital Agency raised $354 million of net proceeds from its equity offering. Subsequent to the quarter end, the company raised an additional $719 million from a follow-on equity offering.
American Capital Agency declared a fourth quarter dividend of $1.40 per share, which equates to a total of $364.0 million in dividends or $13.26 per share since its initial public offering. American Capital Agency is one of only a few companies to have increased its dividend even during the recession.
American Capital Agency’s annualized weighted average net interest spread was 2.58% during the quarter. As of December 31, 2010, the company’s book value per share was $24.24 compared to $22.48 at year-end 2009. At quarter-end, American Capital Agency had cash and cash equivalents of $173.3 million.
We maintain our Outperform recommendation on American Capital Agency, which currently has a Zacks #2 Rank translating into a short-term Buy rating. We presently have a Neutral recommendation and a Zacks #3 Rank (short-term Hold) for Anworth Mortgage Asset Corporation (ANH), a competitor of American Capital Agency.
AMER CAP AGENCY (AGNC): Free Stock Analysis Report
ANWORTH MTGE (ANH): Free Stock Analysis Report
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