American Capital Agency Corp. (AGNC)

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American Capital Agency Corp. (AGNC)

Barclays Global Financial Services Conference

September 12, 2012 10:30 am ET


Gary Kain - President and Chief Investment Officer, American Capital Agency Corp. President, American Capital AGNC Management, LLC



Unidentified Analyst

Good morning. I am pleased to introduce our next speaker, Gary Kain, American Capital Agency. Gary is the President and CIO of the company. I am sure many of you know him well. American Agency has evolved the mortgage REIT, has generated pretty dramatic alpha with average total returns in excess of 30% plus for the last several years.

With that I will hand it up to Gary. We look forward to your comments.

Gary Kain

Well, thank you and really thanks for the opportunity to present at the conference and also for that kind introduction. First off, I really want to thank everyone for your interest in AGNC, both, here, in the auditorium and people that are listening via the webcast.

Now, probably what you are expecting from what we usually do at these conferences, which is in some way or another a rehash of our last earnings presentation and kind of highlight a few things from that, but I think you are in luck if I am not going to do that this time. I mean, the bottom line is the biggest story in the markets right now, and this is true of the equity markets or the bond market, is QE3 and whether it's going to happen, whether Fed is going to embark on more quantitative using, and one of the implications for the mortgage market since interestingly while other markets are talking so much about it, I think it's kind of widely expected that if the Fed executes QE3, it's going to involve a large amount of purchases of agency MBS, and that's our market, it's clearly a big picture issue for us and for the space, so I figure I would kind of focus today's discussion on that topic.

The other thing is, I want to be clear. I don't want to sit here and guess about whether are going to do it or not, or I am not going to sit here and talk about try to opine on whether or not they should do it. Honestly, I don't think Chairman Bernanke, really cares about my opinion nor should on whether he should go down that.

I think I think really what I'll leave it at is, I think clearly if you'll listen to the minutes or a few or look at the minutes, I think most people agree that it this point it's a very real possibility. Let's call it maybe likely they are not, but no other darn deal, so it's a real risk. It's a real possibility and how do we think about it, how would it affect our business.

Before we go right into that, let me start on slide three, and just quickly talk for a second for those of you who are new to AGNC about the company. Agency is an agency mortgage REIT, and as we only invest in securities backed by Freddie Mac, Fannie Mae or Ginnie Mae. Since all of those entities obviously received substantial backing from the federal government, we are really not taking a lot of credit risk.

We do or we are exposed to other risks such as prepayment risk, interest rate risk, liquidity risk and a host of other things which are outlined in our Qs and Ks, and in our earnings presentations that are available through the website, but just quickly I want to focus a little bit on the history of AGNC on the left side of the slide.

Agency went public went public in May of 2008 at a dollar price of $20. Probably the most shocking statistic is that and though it's not a misprint, since its inception less than five years ago, 4.5 years ago, it's paid $21.36 of dividends. Most importantly, while paying those dividends, we've also grown our book value from $20 per share to $29.41 as of June 30th. Again, in the end when you look at returns, dividends are great. You don't dividends to be coming out of book value, and I think what we feel really good about is the ability to produce both, to have produced significant book value gains, which I think has lead to share price performance in addition to producing great returns on the dividend front.

With that let's jump into the "meat of the presentation", which again relates to QE3. The first question that we are really going to like try to answer is, why do we care? We supposed to just say, well, look we can't control what the Fed does, we are a long-term investor. Should we even care about QE3? The bottom line is that, we have a responsibility to our shareholders to position the portfolio for a range of different scenarios.

The key risk that we are concerned about are prepayments and interest rate risk and QE3, certainly is designed to some degree to affect those, so realistically since QE3 could have a very significant impact on both, mortgage prices, valuations return, and can have a significant impact on our cash flow, right? How fast mortgage is prepay, it doesn't make any sense for us not to focus on this issue especially given that it's obviously a real possibility Agency mortgage purchases would be most likely a very large part of the picture, and those purchases have those ramifications. Again, both on pricing and valuation, but importantly also on our cash flows so from our perspective not an option not to pay attention here.

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