Gary Kain, Mortgage REIT Superstar

Investors who gravitate toward the mortgage REIT sector naturally love the great dividends, aided by the tax law that requires 90% of these companies' profits to be dispersed to shareholders. But that same favorable tax status also limits the trusts, which must rely on leverage to make their money. This situation makes for a special type of business, and a particular kind of risk -- which is why the management of a mREIT is so very important to its success.

As fellow Fool Rich Duprey has pointed out, discipline and a long-term view are essential for a mREIT manager, as well as the ability to judge correctly and react appropriately to both the current and future economic environment.

Who are these managers who are able to successfully steer their REITs through all manner of circumstances? I think it's safe to say that the late Mike Farrell, of Annaly Capital (NYSE: NLY  ) was one of those leaders. I would also opine that Gary Kain, president and CEO of agency mREIT American Capital Agency (NASDAQ: AGNC  ) and its hybrid cousin American Capital Mortgage (NASDAQ: MTGE  ) , should also be up for nomination.

A background in the mortgage business
It's possible that Kain understands the mortgage investment business better than most. Before his time at American Capital Agency, he worked at Freddie Mac, serving in various capacities from 1988 to 2009. He started work at AGNC in 2009, when the company was only a year old.

Kain has brought a special prescience to each of the mREITs he serves, but it is especially apparent at AGNC. When faced with a probable QE3 program last year, he began preparing early, noting that the Fed would likely scarf up the lower-coupon mortgage-backed securities, and that a mREIT holding those would enjoy a boost to book value. He jacked up leverage to bulk up, unlike Annaly.

That plan has helped AGNC immensely, as the REIT gobbled up loans that would cut its prepayment risk: loans with low balances, and those that had been previously refinanced. American Capital Agency's prepayment rate is a cool 11%, compared to Annaly's 19%.

Financing alternatives keep the spread wider than most
Both AGNC and MTGE have been taking advantage of the to-be-announced dollar roll market for financing, and it's been a winner.

As Kain notes, the Fed's involvement actually makes that type of financing more attractive, since the scarcity of comparable agency MBSes in any given month bids up prices and is apt to prompt a "roll" into the next month, causing a larger price difference, or drop, for the new settlement date. Buyers of MBSes win because they can receive the principal and interest from the securities they hold, in addition to having the flexibility of returning nearly identical MBSes at the settlement date. Rolling their positions has helped increase the spreads for both of the mREITs managed by Kain, which turns QE3 from a hindrance into an advantage.

Is Gary Kain comparable to Mike Farrell? While Farrell had a different outlook and management style than Kain, both have been able to create a profitable, stable enterprise out of the business of borrowing short and lending long. When it comes to mREIT guidance, I think Kain is Farrell's equal any day. 

Annaly Capital Management has a history of paying huge dividends to shareholders, but these payouts have been a little anemic lately Will Annaly bounce back, and give other mREITs a run for their money? Check out some of the crucial issues investors have to understand about Annaly's business model before buying the stock. In this brand-new premium research report on the company, our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of the company's strategy. Click here now to claim your copy.

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  • Report this Comment On February 27, 2013, at 4:32 PM, Gabefabe wrote:

    AGNC announced a secondary offering today (27 Feb); anyone care to guess what the stock will drop to as a I intend to buy some more. All opinions (wise, foolish, respectful or otherwise) welcomed!

  • Report this Comment On March 15, 2013, at 4:48 PM, Sunchaser101 wrote:

    I first bought AGNC in 2008 shortly after it's birth. Memory fades with age but I think I paid around $19/share and the DY was around 22%. I will abbreviate this story, over time I have bought and sold the stock several times, mainly to try to increase my profits when it increased by 10%+ and buy it back when it dropped after a div payout. I have read and re-read their business plan several times. I have checked out the managemant a few times. The bottom line is this. I have great faith and respect for the management and the business plan. They have made me nervous on several occassions when they issue more shares, but time has proven they are very astute managers. My portfolio is made up of a significant % of AGNC, I won't even consider trading it to enhance earnings, I am not fast enough. I keep a wary eye on them and smile when I have to pay my taxes. Someday that will change, but with present conditions, management and execution I believe it is a good investment for the forseeable future.


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