When American Capital Agency (NASDAQ:AGNC) and American Capital Mortgage (NASDAQ: MTGE) reported earnings recently, the fact that both mortgage REITs revealed earnings-per-share losses was lost in the shuffle surrounding some astounding news.
On the agency mREIT's conference call, Chief Investment Officer Gary Kain disclosed he had been investing in the stocks of his agency-only peers, which he considered a better use of investors' money while the sector's share prices were low. This investment strategy was reiterated on the American Capital Mortgage call, as well.
At the time, Kain had declined to reveal which mREITs had caught his fancy. A recent SEC filing has put part of the mystery to rest, however. Hatteras Financial (NYSE: HTS), a trust with a market cap of less than one-quarter of that of American Capital Agency, is one recipient of Kain's investment attention. Together, both of the mREITs under Kain's control purchased 8.5% of Hatteras' stock, with the smaller American Capital Mortgage appearing to have purchased only around 1%.
A vote of confidence?
As Kain noted in both conference calls, purchasing the stock of rivals at a 20% discount just made good business sense. The news certainly hasn't hurt Hatteras' stock price, which has managed to stay well above the $18 mark this month – something it hadn't been able to manage for some time.
Though Kain has stumbled a bit in the past year, there is little doubt the man knows his business, and quickly moved to repurchase stock after the disastrous secondary offering by his agency-only trust early last year. It seems safe to say, therefore, that his purchases of Hatteras' stock may be considered a show of faith in that mREIT's ability to survive – and thrive.
Kain is taking steps to bolster his own companies in other ways, too. With analyst curiosity regarding the peer-related stock purchases somewhat sated on the American Capital Agency call, time was spent during the American Capital Mortgage earnings call discussing another new purchase: Residential Credit Solutions.
With the RCS acquisition finalized, American Capital Mortgage is set to become a real player in the mortgage servicing arena, with RCS now servicing approximately $10 billion in loans. The company came with full licensure and a working history with Fannie Mae and Freddie Mac, and Kain notes the company plans to purchase more mortgage servicing rights – which, as he commented, are a great interest rate hedge.
As far as the identities of the other mREITs whose stock Kain purchased are concerned, chances are good the information will come to light soon. Interestingly, on the very day the SEC document regarding the Hatteras stock purchases was filed, that company saw trading activity increase nine-fold – and the price has been on an upward climb ever since. For the beneficiaries of Kain's investment dollars, this new strategy certainly looks like a winner.