AGNC Investment Corp. — Q3 2020 Form 10-Q
Reporting period: Quarter ended September 30, 2020; filed November 5, 2020. AGNC is an internally managed REIT that primarily invests in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements. It also uses TBA securities and interest-rate derivatives.
Financial performance and position
| Metric | Q3 2020 / Sept. 30, 2020 | Comparable period / prior balance |
|---|---|---|
| Interest income | $364 million | $676 million in Q3 2019 |
| Net interest income | $302 million | $119 million in Q3 2019 |
| Net income (loss) | $662 million; $1.15 diluted EPS | $(4) million; $(0.03) diluted EPS in Q3 2019 |
| Net income (loss) available to common stockholders | $637 million | $(17) million in Q3 2019 |
| Nine-month net loss | $(1.041) billion; $(2.01) per diluted share | $(183) million; $(0.41) per diluted share in 2019 |
| Operating cash flow | $1.337 billion for nine months | $807 million for nine months in 2019 |
| Cash, cash equivalents and restricted cash | $2.414 billion at Sept. 30 | $1.282 billion at Dec. 31, 2019 |
| Total assets / stockholders’ equity | $79.968 billion / $10.720 billion | $113.082 billion / $11.041 billion at Dec. 31, 2019 |
| Repurchase agreements | $54.566 billion | $89.182 billion at Dec. 31, 2019 |
| Common dividend declared | $0.36 per share in Q3 | $0.48 in Q3 2019 |
Q3 GAAP results included a $346 million net gain on investment sales, a $365 million unrealized loss on securities measured through earnings, and $400 million of gains on derivatives and other securities. Nine-month derivative and other securities losses totaled $3.139 billion, including $146 million of losses associated with terminating repo agreements.
Management’s non-GAAP net spread and dollar roll income, excluding catch-up premium amortization, was $0.81 per diluted share in Q3, versus $0.59 in Q3 2019 and $0.58 in Q2 2020. The related net interest spread was 2.15%, versus 1.31% a year earlier and 1.68% in Q2. These measures include TBA dollar-roll income and swap settlements and are not GAAP measures.
Changes and management commentary
- The investment portfolio, including TBAs, was $97.6 billion at quarter-end, broadly unchanged from $97.7 billion at June 30. Cash investment securities fell to $68.0 billion from $100.4 billion at year-end 2019, while net TBA securities rose to $29.5 billion from $7.4 billion.
- Tangible net book value per common share increased to $15.88 from $14.92 in Q2; quarter economic return on tangible common equity was 8.8%, including the $0.36 dividend. Tangible net book value was $17.66 at year-end 2019.
- At-risk leverage was 8.8x at quarter-end, down from 9.2x in Q2 and 9.4x at year-end 2019. Repo funding’s weighted-average rate was 0.40% for Q3; aggregate cost of funds, including TBA and swap effects, was 0.15%.
- Management cited low funding rates, Fed Agency RMBS purchases and favorable TBA dollar-roll financing as supports to Q3 results. It expected low funding costs to persist, but said net interest margin was biased modestly lower as TBA financing advantages may narrow and reinvestment yields decline. No numerical earnings or book-value guidance was provided.
- Management described itself as optimistic about generating positive risk-adjusted returns near term, while identifying COVID-19 uncertainty, prepayments, market spreads, financing access and policy changes as risks. The weighted-average projected CPR was 15.9% at quarter-end, up from 10.8% at year-end 2019; actual Q3 portfolio CPR was 24.3%.
Liquidity, risks and other items
- Management reported $5.2 billion of cash and unencumbered Agency RMBS liquidity, excluding unencumbered credit securities and assets held at its broker-dealer subsidiary. Unencumbered assets were 60% of tangible net equity; the weighted-average repo haircut was approximately 4.4%. AGNC said it met all margin requirements at quarter-end.
- Repo financing is short-term and may not be renewed; falling collateral values, higher haircuts or margin calls could constrain liquidity or force asset sales. TBA dollar rolls provide financing flexibility but could require cash or other funding if rolling becomes uneconomic.
- Modeled, static-portfolio sensitivities estimated that a 100-basis-point rate increase would reduce tangible net book value per share by 12.6%; a 25-basis-point spread widening would reduce it by 12.7%. Estimates rely on models and assumptions and actual effects may differ materially.
- COVID-19-related risks include market dislocation, weaker asset liquidity, elevated or unpredictable prepayments, credit deterioration, less reliable forecasting models, less effective hedging and operational or cybersecurity disruption. The workforce was working remotely.
- AGNC issued $575 million of Series F preferred stock in February and raised $439 million net from common-stock issuance during the first nine months; it also repurchased $301 million of common stock in that period. A new plan announced after quarter-end authorizes up to $1 billion of repurchases through December 31, 2021, subject to management’s assessment of tangible book value.
- The board declared a $0.12-per-share monthly common dividend payable November 11, 2020. AGNC reported no material litigation expected to adversely affect it, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile GAAP earnings and book-value changes with derivative, security-sale and fair-value gains or losses; review the definitions and limitations of management’s non-GAAP spread and dollar-roll measures.
- Assess whether repo and TBA funding remain available on acceptable terms, and monitor margin requirements, collateral haircuts, counterparty concentration and liquidity.
- Track prepayment speeds, premium amortization, reinvestment yields and the impact of changing mortgage spreads and interest rates on tangible book value.
- Evaluate dividend sustainability against taxable income and cash generation; estimated nine-month taxable income available to common holders was $1.11 per diluted share, subject to adjustment.
- Compare subsequent repurchases and dividends with tangible net book value and review the assumptions underlying management’s modeled market-risk sensitivities.