AGNC Investment Corp. quarterly report, Q3 FY2015

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AGNC Investment Corp. (formerly American Capital Agency Corp.) — Q3 2015 Form 10-Q

Reporting period: Quarter ended September 30, 2015; filed November 6, 2015. Amounts are in millions except per-share data, unless otherwise noted.

Business context and reporting period

AGNC is an externally managed REIT investing primarily on a leveraged basis in agency mortgage-backed securities (MBS), funded mainly through repurchase agreements. Its stated objective is to generate shareholder returns through net interest income and realized investment and hedging gains while preserving net asset value (NAV). As a REIT, it generally must distribute at least 90% of taxable income.

Financial performance and position

  • Q3 results: Net interest income was $218, down from $269 in Q3 2014. GAAP net loss was $633, compared with net income of $197; loss attributable to common stockholders was $640, or $1.84 per share, versus income of $190, or $0.54 per share.
  • Primary loss item: Net loss on derivatives and other securities was $778 in Q3, including substantial unrealized losses; agency-security sale losses were $39. Other comprehensive income was $491, producing a comprehensive loss of $142.
  • Nine-month results: Net interest income was $848 versus $850 in 2014. Net loss was $373 versus net income of $89; loss attributable to common stockholders was $394, or $1.12 per share, versus income of $73, or $0.21 per share. Comprehensive loss was $308 versus comprehensive income of $1,269.
  • Spread and dollar-roll income: Management’s non-GAAP measure was $0.41 per common share in Q3, down from $0.85 a year earlier. Excluding estimated catch-up premium amortization, it was $0.51 versus $0.86. Management cited lower leverage, higher funding costs and weaker dollar-roll income.
  • Dividends: Common dividends declared were $0.60 per share in Q3 versus $0.65 a year earlier; $1.88 for the first nine months versus $1.95. A $0.20 monthly common dividend was declared in October for payment November 9, 2015.
  • Balance sheet at September 30: Total assets were $60.6 billion, including $54.8 billion of agency MBS; liabilities were $52.3 billion and stockholders’ equity was $8.3 billion. NAV was $23.00 per common share, down from $25.74 at December 31, 2014 and $24.00 at June 30, 2015.
  • Debt and leverage: Repurchase agreements were $41.0 billion and FHLB advances were $3.5 billion; consolidated VIE debt was $626 million. Period-end leverage was 5.9x excluding net TBA positions and 6.8x on management’s “at risk” basis. Agency repo’s weighted-average borrowing rate was 0.52%, versus 0.41% at year-end 2014.
  • Cash flow and liquidity: For the first nine months, operating activities provided $1.07 billion and investing activities provided $5.43 billion; financing activities used $6.71 billion. Cash and cash equivalents ended at $1.51 billion, down $215 million. Management also reported approximately $2.6 billion of unpledged securities available for liquidity and said all margin requirements had been met.

Material changes versus comparable periods

  • Q3 net interest income declined 19% year over year, while the derivative and other securities loss widened sharply from $51 million to $778 million.
  • Nine-month net interest income was nearly unchanged, but the company moved from net income to a net loss, principally reflecting derivative and other securities losses.
  • Agency MBS fair value fell to $54.8 billion from $56.7 billion at December 2014. The net long TBA position declined to $7.4 billion from $14.8 billion.
  • At-risk leverage increased to 6.8x from 6.1x at June 30, as management bought mainly 30-year MBS after spread widening. The portfolio mix shifted toward 30-year fixed-rate securities: 66% at quarter-end versus 58% at year-end 2014; securities of 15 years or less fell to 29% from 37%.
  • Common shares outstanding declined to 346.5 million from 352.8 million at year-end, following repurchases of 6.3 million shares for $124 million during the first nine months.

Outlook, management commentary and risks

  • Management described 2015 fixed-income markets as challenging, citing global economic uncertainty, interest-rate volatility and wider spreads. In Q3, agency-MBS spread widening reduced NAV by $1.00 per common share; quarterly economic return, including dividends, was negative 1.7%.
  • Management said further agency-MBS spread widening or a return of interest-rate volatility to more normal levels could prompt portfolio repositioning, potentially with higher leverage and/or a larger duration gap. The filing provides no specific earnings, dividend or NAV guidance.
  • In October 2015, the board approved investments of up to 10% of assets in AAA non-agency and commercial MBS, citing potential incremental returns with limited credit exposure. AGNC said it intended to maintain a highly liquid portfolio.
  • Interest-rate sensitivity estimates at September 30 indicated that a 100-basis-point rise could reduce NAV by 8.3%, while a 100-basis-point decline could reduce NAV by 5.9%. Separately, a 25-basis-point widening in MBS spreads was estimated to reduce NAV by 9.7%. These are model-based, static-portfolio estimates and actual results could differ materially.
  • Key risks include spread/basis risk not fully hedged by rate derivatives, mortgage prepayment and extension risk, higher short-term funding costs, repo renewal and haircut changes, margin calls, TBA settlement liquidity needs, and counterparty exposure. AGNC noted the proposed FHFA rule could affect captive insurers’ FHLB membership; loss of membership could require repayment of advances, including the $3.5 billion outstanding at quarter-end.
  • No material litigation was reported, and management said there were no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.

Important facts for investors to verify

  • Reconcile the large GAAP derivative loss with cash earnings and management’s non-GAAP spread-and-dollar-roll measure; distinguish realized from unrealized effects.
  • Review the assumptions behind NAV, interest-rate and spread-sensitivity estimates, and how actual spread changes and prepayments affect hedging effectiveness.
  • Assess whether repo funding, collateral haircuts, margin requirements and the FHLB captive-insurer membership issue could constrain liquidity or leverage.
  • Compare the common dividend with taxable income and future earnings capacity; estimated taxable income available to common holders was $0.17 per share for Q3 and $0.97 for the first nine months.
  • Track the impact of the October investment-guideline change, share repurchases, leverage and portfolio mix on future returns and NAV.