AGNC’s Book Value per Share Rose despite the Brexit Vote



American Capital Agency’s book value per share rose in 2Q16

American Capital Agency’s (AGNC) book value per share rose from $22.09 in 1Q16 to $22.22 in 2Q16. This was the first increase in the book value per share in six quarters.

The ten-year bond yield fell from 177 basis points to 147 basis points over the quarter. This helped American Capital Agency’s portfolio. However, the surprise Brexit vote late in the quarter pushed out MBS (mortgage-backed securities) spreads for a difficult mark-to-market. When interest rates fell dramatically at the end of June, MBS lagged the move. This meant that the money American Capital Agency was losing on its hedges was larger than what it was making on its MBS portfolio. As spreads recovered in July, that phenomenon was reversed.

Note that LIBOR has been increasing despite a drop in the ten-year bond yield. This will increase American Capital Agency’s cost of funding—this hurts profits. As a general rule, financials that borrow short and lend long will see contracting net interest margins as the yield curve flattens.

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Book value per share

Since REITs are financials, they tend to trade off of two important metrics—dividend yield and book value per share. The dividend yield is typically why investors buy REITs in the first place. REITs tend to have much higher dividend yields than a typical S&P 500 stock. This is because they must distribute 90% of their earnings as dividends.

Investors interested in trading the mortgage REIT sector as a whole should look at the iShares Mortgage Real Estate Capped ETF (REM).

That being said, investors often think of book value per share as a floor level for the stock. In other words, if dividends are high, the stock may trade in excess of book value. However, REITs tend to trade at or just under book value. In theory, book value represents what a stockholder would expect to receive if the company wound down.

American Capital Agency is more sensitive to interest rates

American Capital Agency and Annaly Capital Management (NLY) are REITs that mainly invest in 30-year fixed-rate mortgages. They experienced declines in book value per share in late 2013 and early 2014 when interest rates ticked up.

These REITs have a higher interest rate risk than MFA Financial (MFA), Hatteras Financial (HTS), and Capstead Mortgage (CMO). If you’re interested in making directional bets on interest rates, you should look at the iShares Barclays 20+ Year Treasury Bond ETF (TLT). It invests mainly in adjustable-rate MBS. The interest rates on these mortgages increase as rates increase. This reduces the negative effect of rising rates.


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