American Capital Agency Corp. (AGNC), a real estate investment trust (REIT) that focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs), reported strong third quarter results despite challenging market conditions.

The company reported earnings of $1.82 per share during the quarter compared to $1.26 in the year-earlier quarter, with an annualized return on equity of 32.9%. As of Sept. 30, 2009, American Capital’s investment portfolio comprised of $3.4 billion agency securities at fair value Incorporatedluding $1.3 billion fixed-rate securities and $1.9 billion adjustable-rate securities. About 32% of the investment portfolio comprised of 30-year fixed-rate securities, 3% of 40-year fixed rate securities, 2% of 15-year fixed-rate securities, and 55% of adjustable-rate securities.

The investment portfolio of the company was financed with $2.9 billion in repurchase agreements and $0.4 billion in equity capital, resulting in a leverage ratio of 6.9x. During the quarter, American Capital reduced its exposure to higher coupon securities, which had a relatively high risk of prepayments related to GSE buyouts, by selling a significant amount of them. At the same time, the company increased its portfolio of hybrid ARM securities with coupons less than 5%, and decreased its portfolio of hybrid ARM securities with coupons greater than 6%.

During the quarter, American Capital completed its first common equity offering since its initial public offering in May 2008. The company issued 4.3 million common shares at $23.30 each, raising net proceeds of approximately $95 million. The company also declared a third quarter dividend of $1.40 per share, which equates to a total of $100 million in dividends or $6.26 per share since its initial public offering. American Capital is one of only a few companies to have increased its dividend during the economic downturn.

American Capital’s weighted average net interest spread was 2.68% during the quarter, up from 1.19% in 4Q08. At quarter end, the company had cash and cash equivalents of $103.6 million compared to $17.0 million in the year-ago period. As of Sept. 30, 2009, the book value of the company was $22.23 per share.

We maintain our Outperform recommendation of the stock.

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