American Capital Agency Corp. (AGNC)

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American Capital Agency Corp. (AGNC)

Citi US Financial Services Conference

March 06, 2013 02:10 PM ET


Gary Kain - President and CIO



Unidentified Analyst

Thanks for coming to the presentation and for your interest in AGNC.

So, first if we look at just a quick overview on page five of AGNC, what you’ll notice is that agency IPO in May of 2008 which was a great time for an IPO, great year forward 2008. At a price of $20 per share, since then we’ve paid total dividends of $23.86 per share in just under five years that we’ve been public. And as importantly and this is really the key issue is in addition to paying those cash dividends we’ve grown book value over that same period and so book value per share our last disclosed book value is $31.64 per share at the end of 2012.

And so really it is and what we’ve stress with investors it is the combination of dividends, yes we’re high dividends stock or read and people focused on dividends for what space it is the combination of dividends and book value overtime that lead to total returns and we are focused on both components and investor should as well.

And the market capitalizations today is also grown from 300 million at IPO to over 12 billion as we speak and so, the stock is considerably more liquid and what we’re proud of is been the growth is great but the growth in it of itself has helped to not inhibit our actual performance. And, I think, this slide really goes to kind of the way we would, we ask investors to think about performance both with AGNC and kind of throughout the space and if you look at 2012, AGNC was able to produce 32% economic returns. And what we call economic returns is the combination of dividends and growth in book value or change in book value.

And importantly if you go back over the last four years, AGNC has been able to produce above that a 30% total economic return for each of those years and as importantly, if you compare, and again, these are mark-to-market numbers are in our portfolio is Agency Mortgage Securities, when you look at the comparisons versus our peers we’ve been able to significantly outperform our peers really over all four years again and so look a good quarter ends quarterly and performance matters but what’s really important is continued performance over the long run and I think we are proud of this history and we continue to focus and trying to optimize our ability to extract value from the mortgage market. And one key driver is really your ability to navigate the prepayment landscape and if you look at the graph on the bottom of this page in the bottom you can see that the line green line on top is the prepayments of the mortgage universe and way below that the bars represents AGNG’s monthly prepayments fees and for anyone who is newer to this space controlling prepayments fee the key to yield and key to return and you know by selecting the appropriate mortgage you can absolutely produce very different prepayment outcomes which can product very different total returns.

I am not going to go – I would at this point I’m going to turn to a slide eight and just quickly review a couple of things about the portfolio at the end of 2012. First of the portfolio was up to 85 billion in assets of which we also had forward purchase commitments in net TBAs of 13 billion, so all in you can think of our risk exposure as being 98 billion or kind of total portfolio size.

If you look at that total including the forward purchase commitments leverage was 8.2 times on balance sheet leverage was only seven times at the end of the quarter but again the at risk with leverage was 8.2. Our CPRs for the quarter averaged 10 and in the last month in the month of January they were 11% and then in the most recent month the February release they were backed down to 10%, so prepayments remain contained.

Importantly when you look at net spreads at the end of the quarter if you only looked beyond balance sheet portfolio you will be looking at the second bullet from the bottom 139 basis points when you include the income off of the TBA positions you would be estimating that at a 161 basis points. So, realistically when we think about the market going forward, we see an environment where obviously the FED has been a very active player in the mortgage market and the prepayments in the universe as a whole have picked up substantially but again our portfolio remains largely resistant to those forces and because of that we feel like we can continue to generate attractive returns.

If you turn to page ten, this shows you what’s happen to mortgage prices, kind of between from QE3’s announcement on September ’12 through the end of this month 2/28. And what’s interesting and this is one of the reasons why we were very comfortable with agency mortgage securities right now is kind of contrary to public opinion so to speak the prices of agency mortgage securities have not done that well, I mean they have improved in the lower coupons their lower in some of high or mid coupons. So, if you look at, the 73% coupon mortgages they have gone from 103 in the quarter to a little over 103.5 for 33 basis point improvement. The 3.5 are close to unchanged, they are up a little bit; the 4% coupons are actually down a quarter of point in price and the 4.5 so down the little less than that.

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