I'm actually amazed that AGNC was able to do their offering, and do it so easily, yesterday morning.
AGNC owns a bunch of mortgages and interest rate swaps, and has a bunch of debt. The per share value of their financial instruments (bonds and swaps) is $29.30. The profitability of the portfolio (interest margin earned) is in decline. And they sold a BILLION dollars of that stuff which is worth only $29.30 for $34.06.
It actually decreases my confidence that institutional investors (who else has a billion dollars) know what they're doing better than a little retail guy. Those institutions could have bought CYS at 1.03x book, and gotten the same yield. Instead they paid about 1.15x book to get pretty close to the same asset pool as CYS. Why in the world do that, other than following market euphoria? ("AGNC has done great these past two years, it will continue to do great, because, uhmmmmm, just because!"). CYS's book value increase 3% in Q2 against AGNC's 1% increase, so arguable CYS's asset selection was better than AGNC is Q2. So....why are these guys with a BILLION dollars buying the not as good asset pool for a higher price? It's really confusing.
Think about it - if I had a billion dollars, I could have built my own mREIT - spend $20 million on basic infrastructure, human capital, and invest $980 million in financial intruments. You can get a lot of smart people for $20 million, and the office space-law/tax service firms necessary to set up an mREIT aren't that costly. Instead these institutions spent $120 million (12%) on price premium, and got $880 million in financial assets. How in the world could they think that $880 million in financial assets held at AGNC is preferable to $980 million in financial assets held at an mREIT WHICH THEY WOULD OWN?
Frankly, it don't make much sense, UNLESS AGNC is going to deliver some whopping improvements in book value in the future. Are they? Maybe, but I wouldn't count on it. 1% per quarter doesn't justify 1.15x book value as a fair valuation, it justifies about 1.06x-1.08x.
I wouldn't be surprised to see the run from $32.50 to $35 completely deflate out of the stock. I would think those who bought after the Q2 ex-dividend date were expecting significant improvements in book value - since it hasn't materialized, why should AGNC be over $32.50? That's still 1.1x book value, making AGNC the most expensive of all the mREITs that I follow. |
