AGNC Investment Corp. — Q1 2017 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2017. AGNC is an internally managed REIT that primarily invests in Agency residential mortgage-backed securities (RMBS) using leverage and repurchase-agreement financing. Its stated objective is to generate returns through monthly dividends and net asset value growth. Financial figures below are in U.S. dollars; amounts are in millions unless otherwise noted.
Financial results and condition
- Income and earnings: Interest income was $296, versus $295 in Q1 2016; interest expense was $98, versus $99, producing net interest income of $198, versus $196. GAAP net income was $76, compared with a $772 net loss; income available to common shareholders was $69, or $0.21 per diluted share, versus a $779 loss, or $2.33 per share.
- Other results: Net other loss was $105, compared with $935 in Q1 2016. It included an $84 net loss on investment-security sales and a $40 net loss on derivatives and other securities. The prior-year derivative loss was $944. Comprehensive income available to common shareholders was $115, versus $5.
- Margins and expenses: Average asset yield rose to 2.68% from 2.32%; average cost of funds improved to 1.48% from 1.64%, and average net interest spread increased to 1.20% from 0.68%. Including TBA dollar-roll income, average spread was 1.44%, versus 0.94%. Non-GAAP net spread and dollar-roll income, excluding catch-up premium amortization, was $0.64 per share, versus $0.52. Operating expenses were $17, down from $33, reflecting the move to internal management; the prior-year quarter included $27 of management fees.
- Cash flow: Operating activities provided $390, investing activities provided $1,168, and financing activities used $1,693. Cash and cash equivalents decreased $135 to $1,073; restricted cash was $219.
- Portfolio and balance sheet: Investment securities at fair value totaled $45.0 billion, down from $46.5 billion at year-end; net long TBA position was $14.4 billion, up from $11.2 billion. Total assets were $56.8 billion and stockholders’ equity was $7.3 billion. Repurchase agreements were $39.4 billion, with $434 of consolidated VIE debt; FHLB advances had been repaid, versus $3.0 billion outstanding at year-end.
- Capital, leverage and distributions: GAAP NAV per common share was $20.98, down from $21.17 at year-end; tangible NAV was $19.31, down from $19.50. Tangible at-risk leverage increased to 8.0x from 7.7x. The company declared $0.54 per common share for the quarter, versus $0.60 in Q1 2016.
Material changes, outlook and risks
- Management reported relatively stable fixed-income markets but slight Agency RMBS underperformance against hedges, contributing to the decline in tangible NAV. It attributed market pressure in part to expectations that the Federal Reserve could begin reducing its balance sheet in late 2017 or early 2018.
- Including quarterly dividends, management reported a 1.8% economic return on tangible common equity. Funding costs rose during the quarter as markets anticipated the March Fed rate increase, but management said higher swap receipts and improved TBA dollar-roll funding largely offset the increase. At-risk leverage was 8.0x tangible equity; interest-rate hedges equaled 90% of funding liabilities and net TBA position. Net duration gap was 1.1 years, versus 1.3 years at year-end.
- Management generally expects leverage within six to eleven times tangible equity, while noting it may operate outside that range. It expects to maintain a high hedge ratio in the near to intermediate term and intends to distribute 100% of taxable income, subject to REIT rules. The filing gives no specific earnings or dividend forecast.
- Liquidity included $1.1 billion of unrestricted cash and approximately $2.3 billion of unpledged securities; all margin requirements had been met at quarter-end. Risks include repo renewal and haircut changes, margin calls, TBA settlement liquidity, interest-rate and prepayment changes, spread widening, extension risk, credit exposure and hedge ineffectiveness. Management’s modeled +100-basis-point rate shock implied a 13.9% NAV decline; a 25-basis-point spread widening implied an 11.5% NAV decline. These are estimates based on stated assumptions, not forecasts.
- CRT securities, which carry credit risk, increased to $383 from $164 at year-end; most were rated B. Available-for-sale securities had $557 of gross unrealized losses, which management attributed to rates and prepayment expectations rather than credit losses; no OTTI charges were recorded. Two shareholder derivative suits remain pending, but the company said it did not expect material liability and recorded no contingency accrual.
- Subsequent to quarter-end, AGNC declared a $0.18 monthly common dividend and completed a May 5, 2017 offering of 24.5 million shares for net proceeds of $503 million. Its $750 million ATM authorization remained unused during Q1. Disclosure controls were judged effective, and no material risk-factor changes were reported.
Important facts for investors to verify
- Reconcile GAAP earnings with non-GAAP spread and dollar-roll income, including TBA income and catch-up premium amortization.
- Track tangible NAV, at-risk leverage, hedge coverage and duration gap alongside repo funding costs and counterparty concentrations.
- Assess sensitivity to Agency spread widening, Federal Reserve balance-sheet policy, mortgage prepayments and TBA settlement or margin requirements.
- Review the impact of the post-quarter share offering on per-share NAV and the dividend, and confirm future taxable income and REIT distribution requirements.