Thursday, October 27, 2011

MTGE Announces First Quarter Results (3Q2011)

MTGE, which announced a stub-quarter dividend of $0.20 for 3Q2011, has now revealed that it earned $0.25 in net income during its inaugural partial-quarter, and taxable income of $0.17. The other big-ticket news is that NAV at the close of the quarter was $19.96, which is up from the net MTGE would have received from its $20 IPO, after issuance-related fees were deducted.

MTGE used 4.7x average leverage during the stub period, but closed the period with 7.8x leverage (compared to 7.7x leverage at AGNC on the same date). Net interest spread in the stub quarter was 2.13%, but at quarter-close it was 2.41%. Increasing leverage and increasing spreads should mean dramatic increases in income. That is, up from 10.01% to 18.80%. MTGE hasn't got the fat investment sizes with which AGNC can manage transaction costs, but (with leverage) has $1.7B to work with.

Crazy risks?
"With book calue preservation in mind, and given the volatility and liquidity conditions in the credit markets, we have been cautious on non-agency investments. We expect to patiently develop this portfolio as compelling opportunities arise."
- Jeff Winkler, S.V.P. & Co-Chief Investment Officer
This is exactly what I was hoping for in MTGE: a portfolio that mirrors AGNC's successful formula, but keeps its eyes peeled for material mispricing in assets more susceptible to fear-based avoidance (as opposed to fundamentals-based avoidance) than the agency-backed instruments whose principal and interest, being guaranteed by the federal government, tend to assuage terror regardless the fundamentals of the asset bundle. The non-agency opportunities are thus a nice place to get capital appreciation: a mispriced asset will, in time, end up valued at its worth. (As Buffett has said, markets may be a popularity contest in the short run but in the long run they are a weighing machine.) Carefully scrutinizing opportunity rather than rushing in is exactly how I'd like to see non-agency assets approached.

The price for this opportunity in MTGE is a 0.25% increase in management fee over the fee paid by AGNC. It's described here. ACAS, which had hoped to issue a lot more shares of MTGE than actually changed hands on IPO day, may want to raise some more money in order to support big deals in really mispriced non-agency bundles – but for my money, ACAS just wants to be ready to capitalize on opportunity and hasn't got a deal it's dying to do or it'd have done it.

1 comment:

Anonymous said...

Any thoughts on MTGE now that the first full dividend has been announced? I thought, perhaps, that the yield might be slightly higher than AGNC given the non-agency investing that MTGE has available for fantastic deals, but such was not the case, even though MTGE's price is at a discount to NAV while AGNC is at a premium. On a NAV basis, MTGE is a ways behind AGNC...or have I read things wrong?