Thursday, September 22, 2011

MTGE: the first dividend

American Capital Mortgage Investment Corp. (MTGE) recently announced that for the less-than-a-quarter period from August 9 through September 30 (about 54 days), it is declaring a $0.20 dividend payable October 27, 2011. (As after AGNC's first stub quarter, nitwits are already proclaiming MTGE to have a single-digit yield based on a quarterly dividend of $0.20. Yawn.) As with the 31¢ stub-period dividend initially paid by AGNC, this isn't a full quarter of revenue and doesn't reflect what the company will ultimately do over the duration of a fully-invested quarter.

And it's fair to conclude that MTGE is now fully invested:
During the course of the stub period MTGE's investment team has invested these proceeds, along with proceeds from borrowings under the Company's repurchase agreements, to purchase a portfolio of approximately $1.5 billion of agency, non-agency and other mortgage-related investments.
from MTGE's Press Release
Not only is its equity fully invested, but it's used $200m of equity to invest in approximately $1.5b worth of investments. One concludes that with investment approximating 7.5x equity, the investment is one part equity and 6.5 parts borrowings. Leverage of 6.5:1 may have been a result of the recent marketplace uncertainty – MTGE was first issued during the first day of a marketplace bloodbath, after all. If MTGE's rate spread is like AGNC's was last quarter – above 2% – then MTGE should be making something above 15% on its equity of more than $19/share. ACAS has managed AGNC with leverage that varies with market conditions, and using leverage less than 7:1 is conservative in comparison to the 8x leverage with which AGNC launched.

Interpreting the 20¢ stub-quarter dividend in light of that math suggests that MTGE wasn't fully invested on IPO Day but took some time to ramp to full investment. In light of the market turmoil, this isn't hard to believe. AGNC's first stub quarter was 27 days, and it paid $0.31 – but there was no panic underway at the time. The real question facing investors seeking to read the tea leaves of the stub-quarter dividend is the fraction of the quarter in which MTGE was actually invested. The Jaded Consumer strongly suspects that becoming fully invested involved multiple parties and agreements and was slowed by the fact that everyone in the financial industry was distracted by the apparent meltdown underway in the marketplace.

As I previously wrote, I hoped to buy under $19 – and now I have bought under $17. Deutche Bank's target price of $22 doesn't impress me as much as the fact that MTGE is AGNC with an option to buy non-agency securities (thus improving the possibility of occasionally buying a more feared/hated, and thus potentially irrationally mispriced, mortgage bundle). Since AGNC has performed well and trades at a premium to NAV, the prospects of a similarly-managed MTGE for trading above its $19+ NAV appear favorable over the intermediate term.

At the moment, I expect MTGE's price represents a discount of over $2 to NAV. At today's price of about $16.75, this represents over 12% upside just retracing to NAV – and AGNC's experience suggests normalcy will represent trading at a premium to NAV. Now that the misinformation and uncertainty about MTGE is high, investment is much more interesting than immediately following the IPO.

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