American Capital Agency Corp (AGNC)
Company Conference Presentation
March 7, 2012 09:40 a.m. ET
Gary Kain – President & CIO
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We feel good about obviously all those results at a high level. Agency invest only in Agency mortgage securities, those backed by Freddie and Fannie mostly and a few by Ginnie Mae. But really what differentiates AGNC from peers is our willingness to play throughout the agency mortgage market both fixed grade and arms and even some structured agency securities, and our asset management which relates to the fact, let’s face it, this is a changing market, interest rate changed, government policies changed, the housing market changes, a position that makes sense a year ago may not make sense today, and our mindset is in order to produce the best risk adjusted returns we’ve got to have a portfolio that makes referring to current environment.
With that let’s turn to the next slide. Here we highlight our 2011 results. I am not going to go walk through all these numbers, I don’t want to focus on something we focused on really for the last couple of years in talking to investors, which is the table in the top right here, where what we show – the bar chart is, we show our economic returns versus those of our peers over the last two years. The way we defined economic returns or the dividends or the cap we paid, plus the mark-to-market of our balance sheet at the end of each quarter and the same for our peers. So this isn’t an accounting number, it’s not affected by – did you tape realized gains or did you leave unrealized gains in your portfolio, this is just a change in your net asset value and cash that you’ve paid out. Also it’s very similar to the way other professionally managed financial vehicles are evaluated and therefore very comparable in the space. And so we feel very good about the aggregate returns, continuously growing book value despite paying a very healthy divided, and we feel good about our outperformance versus the other agency mortgage REITs.
I think what is sort of surprising here to a lot of people is the fact that, okay, all you guys invest in government guaranteed securities, why – I’m surprised of such a big difference in performance, and the reality is, well, from a credit risk perspective these securities are very, very big, the challenges around prepayments and refinancing activity and hedging, those are complicated issues and there are very significant differences on how some mortgage securities perform versus others and we’ll take a quick look at that.
One example on that front is the graph on the bottom which shows kind of the aggregate mortgage prepayments which – and you can see AGNC’s prepayment fees have remained very low despite a drop to record low mortgage rates that we’ve seen, it has been a key driver of that success.
Just quickly, the business economics how does AGNC generates returns. If you look at the far left – the left column what you’ll see is that as of 12/31 our asset yield was 3.07%, so that’s the yield and our advertised cost assuming a prepayment projection on our portfolio going forward of 14 CPR. Then our cost of funds is right below that at 113, it leaves you a net spread of 194 basis points which interestingly is the same as what the net spread was as of 9/30.
And so a lot of concern in the market place about spread compression, and yet if you look back historically or over the last couple of years spreads are tighter than where they had been before. On the other hand, at least with AGNC you’re seeing the quarter end spreads actually still in line with where they were in the prior quarter, and that’s despite the fact that our REPO cost were elevated in Q4 due to the fact that the year-end and, the combination of yearend and the European debt crisis, REPO rates have since moderated some. If you took that out actually you would see higher spreads.
The other thing to keep in mind is we use our yield as calculated using a projected CPR of 14%, our actual CPR was 9. If we used our actual CPRs like many others in the industry, our yield and therefore our spreads would’ve been materially higher. You should keep that in mind as well from a comparability perspective. When you go through this you add leverage, you add the yield on an equity, you’re getting gross ROEs in the mid 18s or net ROEs in the 16.5% to 17% area again that doesn’t give any value to any trading activity or realized gains or it doesn’t put any value on previous undistributed taxable income or anything. Just looking at those numbers, you can build up to a pretty good ROE.