American Capital Agency Disappoints Again; Armour Residential Follows
publication date: Oct 29, 2013
author/source: Brian Nelson, CFA
We’re still getting praises from our call on the mREIT industry that shocked the investment world and literally put our research firm on the map (click here for that). We outlined how other research firms were so wrong in this piece (link), and interestingly, we’re adding BAML today to the list of investment shops that led their advisor communities astray. Frankly, we’re honored to serve you, and we’re proud to have delivered on the correct research perspective. We’re not here to point out the pitfalls of others, but by pointing out this well-documented example, our goal is to continue to build your trust in us as a firm. Let’s take a look at the ongoing troubles the mREIT industry continues to face below.
American Capital Agency Stops Bleeding; 3Q Performance Still Poor
American Capital Agency (AGNC) posted a net loss of $1.80 per share in its third-quarter report, released Tuesday. Though American Capital Agency has suffered as other comprehensive losses (“OCL”) piled up in the past few quarters, this quarter was a bit different. The mREIT posted $2.25 per share in other comprehensive income (“OCI”), as it recorded net unrealized gains on investments marked-to-market. American Capital Agency’s book value still fell to $25.27 per share (down $0.24) sequentially, and the entity’s 2.2% economic gain on common equity (8.7% annualized) is still below the hurdle rate we set for underlying equities (generally 10%). Though the quarterly results were certainly poor, they’re much better than the terrible performance the firm posted during the past few quarters.
As a result of the dislocation between its stock price and its book value per share, management scooped up 11.9 million shares in the quarter. We outline why share repurchases aren’t always good investments here, and we think management is fixated on the current relationship between its stock price and book value per share, not on the forward trajectory of the latter, which continues to decline. Interest rates and mortgage spreads continue to exhibit substantial volatility, and we reiterate our opinion that the fundamental characteristics of the mortgage business are not appealing. Management is positioning the portfolio into shorter maturity securities and has lowered its leverage; less risk = less potential return. American Capital Agency has stopped the book-value bleed a bit, but third-quarter performance was still poor. We’re just not interested in shares.
Armour Residential's 3Q Speaks of Risks in the mREIT Business
Armour Residential (ARR) also posted poor third-quarter results Thursday. The mREIT recorded a third-quarter 2013 GAAP net loss of approximately $230 million, or $0.63 per share. Book value was relatively flat at $2.2 billion compared to the sequential period. Armour Residential also acknowledged that the “third quarter of 2013 represented a period of disruptive volatility in the bond and mortgage markets.” Management was so shaken by the developments that they sold $6 billion of agency securities and locked in a $301 million loss. Though we think prudence is always a good decision in the face of uncertainty, the commentary and actions do speak to the tremendous risks inherent to mREIT business. We’re steering clear of shares.
In this piece's take, we wanted to share the feedback we received from an advisor member recently. Again, we’re honored to be working with you!
“I am the advisor you referenced in the July newsletter who sold AGNC. Your timely article made me re-look at all of the mReits we owned, and we sold off nearly all of them over the following month after your article. I just calculated where we sold (because of your article) compared to where the mReits are today. Your article, which influenced the selling saved our clients over $1.1 million in equity price drops. That translates into $11,000 per year of fee income to the firm. You can bet that we will be re-subscribing when the time comes. Thank you for your hard work, and bringing additional value that was not owed or expected."