AGNC Investment Corp. — 2018 Form 10-K Summary
Business context and reporting period
AGNC is an internally managed mortgage REIT. This filing covers the year ended December 31, 2018; quarterly figures include the three months ended December 31, 2018. AGNC primarily invests, using leverage, in Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements. It also holds smaller positions in credit risk transfer, non-Agency RMBS and commercial mortgage-backed securities.
Key financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $1.949 billion | $1.293 billion |
| Interest expense | $1.173 billion | $524 million |
| Net interest income | $776 million | $769 million |
| Other gain (loss), net | $(547) million | $75 million |
| Net income | $129 million | $771 million |
| Net income available to common stockholders | $93 million | $733 million |
| Net income per common share | $0.21 | $2.04 |
| Comprehensive income (loss) | $(469) million | $823 million |
| Common dividends declared per share | $2.16 | $2.16 |
Fourth-quarter 2018 net loss was $804 million, or $1.61 per common share; net interest income was $186 million. Full-year operating cash flow was $1.113 billion. Investing activities used $27.936 billion and financing activities provided $26.980 billion; these flows reflect substantial portfolio purchases, sales, and repo funding activity.
At year-end, total assets were $109.241 billion, total liabilities $99.335 billion and stockholders’ equity $9.906 billion. Repurchase agreements totaled $75.717 billion; total mortgage borrowings including the net TBA position were $83.244 billion. Tangible net book value per common share was $16.56, down from $19.69, and year-end tangible net book value “at risk” leverage rose to 9.0x from 8.1x.
AGNC reported an average asset yield of 3.11% and average aggregate cost of funds of 1.84%, producing a 1.27% net interest spread, excluding catch-up premium amortization. Its non-GAAP net spread and dollar roll income excluding catch-up amortization was $2.35 per diluted common share, versus $2.56 in 2017. The company raised approximately $2.6 billion of common equity during 2018.
Available liquidity at December 31 included $921 million of unrestricted cash and cash equivalents and approximately $3.9 billion of unpledged securities. Repurchase agreements had a 2.79% weighted-average interest rate and 49-day weighted-average remaining maturity, compared with 1.57% and 116 days a year earlier. The company said it had met margin requirements and believed liquidity was sufficient for its needs.
Material changes versus the prior period
- Higher rates and sharply wider Agency RMBS spreads contributed to a $3.13 per-share, or 15.9%, decline in tangible net book value during 2018. Economic return, including dividends, was negative 4.9%.
- Interest income rose with a larger portfolio and higher asset yields, but interest expense increased substantially as funding costs and borrowings rose. Average repurchase funding cost was 2.11%, versus 1.25% in 2017.
- Net investment securities at fair value increased to $84.3 billion from $57.1 billion; the portfolio including TBAs increased to $91.6 billion from $72.8 billion. Thirty-year fixed-rate Agency RMBS and TBAs represented 84% of the portfolio, versus 77%.
- Net income fell to $129 million from $771 million, while comprehensive income shifted to a $469 million loss from $823 million of income. Investment-security losses and fair-value movements were significant contributors.
- The common dividend remained $0.18 monthly, or $2.16 for the year. 2018 common dividends included approximately $1.03 per share characterized as non-dividend distributions for tax purposes; the filing reports all estimated 2018 taxable income as distributed.
Outlook, commentary, risks and unusual items
Management expected inflation to remain near the Fed’s 2% target and U.S. growth to slow, potentially leading the Fed to pause or materially slow further rate increases. With Agency RMBS spreads wider and expected levered returns improved, AGNC anticipated operating with moderately higher leverage. This is management’s outlook, not a quantified earnings or dividend forecast.
Key exposures include spread widening, interest-rate and yield-curve changes, prepayment and extension behavior, short-term repo renewal and margin-call risk, counterparty performance, and changes in collateral values. Hedges covered 94% of funding liabilities at year-end, but were not designed to protect book value from spread risk. Management’s interest-rate and spread sensitivity estimates assume a static portfolio and no spread change in the rate scenarios; actual results may differ materially. The filing also identifies uncertainty from the planned LIBOR transition and from REIT and Investment Company Act qualification requirements.
Unusual items included a $42 million management-agreement termination fee received following MTGE’s sale, offset in part by a $23 million write-off of the related intangible asset and other termination expenses. AGNC reported three stockholder derivative lawsuits concerning prior management-agreement renewals and management internalization; it believed the claims lacked merit and recorded no loss contingency at year-end. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether the stated moderately higher leverage strategy remains consistent with risk tolerance, particularly given 9.0x year-end tangible net book value “at risk” leverage.
- How changes in mortgage spreads, rates, prepayments and funding costs affect book value and earnings; review the assumptions behind sensitivity estimates.
- Whether repo financing remains available on acceptable terms and whether liquidity can withstand margin calls or forced TBA settlement.
- How GAAP earnings, non-GAAP spread and dollar roll income, taxable income and dividend classifications reconcile; these measures differ materially.
- Developments in the derivative lawsuits, LIBOR replacement arrangements, and continued compliance with REIT and Investment Company Act requirements.