American Capital Raises $1.6 Billion as Fed Watches REITs GrowthJody Shenn
American Capital Agency Corp., the second-largest real estate investment trust that buys mortgage debt, raised $1.58 billion in a stock sale, as wider relative yields on government-backed bonds revive growth in an industry whose expansion has drawn Federal Reserve officials’ attention.
The company, which sold 50 million shares today, has also granted underwriters the option to purchase an additional 7.5 million for 30 days, the Bethesda, Maryland-based firm said today in a statement distributed by PR Newswire.
REITs’ holdings of agency home-loan securities rose to about $350 billion last year, from about $90 billion in 2008, Nomura Securities International estimated last month. After the growth ground to a halt last quarter following a slump in mortgage-bond spreads created by the start of the Fed’s monthly purchases of $40 billion, mortgage REIT stock sales are accelerating amid a rise this year in the relative yields fueled by doubts about the length of the central bank’s program.
American Capital Agency’s offering, which will give it an additional $12 billion to $15 billion of “purchasing power” based on its recent use of borrowed money, “should be a positive” for the market, Credit Suisse Group AG analysts led by Mahesh Swaminathan wrote today in a report.
The company began this year with $100.5 billion of assets, according to data compiled by Bloomberg. When including $13 billion of mortgage-bond bets not displayed on its balance sheet, its “true effective leverage was 8.2 times,” President Gary Kain said on a Feb. 8 earnings call.
Fed Governor Jeremy Stein mentioned the growth of mortgage REITs in a Feb. 7 speech on some credit markets showing signs of potentially excessive risk-taking. The Fed’s efforts to hold short-term interest rates near zero since 2008 have made it cheaper for the firms to borrow money and engage in what Stein called “maturity transformation.”
Fed Chairman Ben S. Bernanke minimized concerns that the central bank’s easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month at which mortgage REITs were mentioned, three people with knowledge of the discussions said.
Mortgage REITs, including ones that invest mainly in commercial-mortgage debt or products such as mortgage servicing rights, have sold $3.5 billion of shares this year through yesterday, up from $1.7 billion last quarter, according to data compiled by Bloomberg. Such firms sold $16.3 billion of stock in 2012, down from a record $16.9 billion in 2011.
Mortgage REITs that raised capital this quarter include Invesco Mortgage Capital Inc., Armour Residential REIT Inc. and American Capital Mortgage Investment Corp., which is overseen by the same manager as American Capital Agency. Annaly Capital Management Inc. is the biggest, with $133.5 billion of assets on Dec. 31, Bloomberg data show.
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value rose to 1.23 percentage point higher than an average of five- and 10-year Treasury rates on Feb. 26, the widest spread since August. The gap, which reached a record low 0.55 percentage point in September, narrowed about 0.01 percentage point today to 1.21 percentage point as of 12:05 p.m. in New York.
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