AGNC Investment Corp. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), financed mainly through repurchase agreements. Its objective is to generate returns through monthly dividends and tangible book-value growth.
Financial performance and position
- Income: Interest income was $705 million, up from $431 million in Q1 2018; interest expense rose to $541 million from $206 million, leaving net interest income of $164 million versus $225 million. Net income was $265 million ($0.47 diluted per common share), compared with $424 million ($1.06) a year earlier. Net income available to common stockholders was $255 million.
- Fair-value results: Net investment-security gains were $1.52 billion, including $1.06 billion of unrealized gains through earnings and $400 million of other comprehensive income. Derivatives and other securities produced a $1.00 billion net loss. Comprehensive income available to common stockholders was $655 million, or $1.22 per share, versus a $206 million loss in Q1 2018.
- Spread and dividends: Management’s non-GAAP net spread and dollar-roll income, excluding catch-up premium amortization, was $0.52 per diluted share, down from $0.60. The net interest spread on the same adjusted basis was 1.06%, versus 1.26% in Q1 2018 and 1.17% in Q4 2018. Common dividends declared were $0.54 per share for the quarter.
- Book value and returns: Net book value per common share was $18.21, compared with $17.54 at year-end; tangible net book value was $17.23, versus $16.56. Management reported a 7.3% unannualized economic return on tangible common equity, including the $0.67 increase in tangible book value per share and $0.54 in declared dividends.
- Assets, leverage and debt: Total assets were $118.8 billion and total liabilities $108.3 billion. Investment securities at fair value were $95.3 billion; the portfolio including TBAs was $102.2 billion, up from $91.6 billion at year-end. Repurchase agreements were $86.7 billion; total mortgage borrowings, including net TBA exposure and VIE debt, were $93.5 billion. Period-end tangible “at risk” leverage rose to 9.4x from 9.0x.
- Funding and liquidity: Q1 average repo and other debt cost was 2.64%; total cost of funds, including TBA and swap effects, was 2.27%, up from 2.09% in Q4 2018. Cash and cash equivalents were $929 million, restricted cash $517 million, and management reported about $4.5 billion of unpledged securities available for liquidity needs. AGNC said it had met all margin requirements at quarter-end.
- Cash flows: Operating activities provided $329 million, investing activities used $11.3 billion, and financing activities provided $10.9 billion. Cash, cash equivalents and restricted cash ended at $1.446 billion, down $74 million during the quarter.
Material changes and management commentary
- Management attributed stronger portfolio valuations to falling interest rates, lower rate volatility and outperformance of specified Agency securities. The 10-year Treasury yield fell 28 basis points in Q1 to 2.41%.
- Lower rates increased projected lifetime prepayments: estimated CPR rose to 10.5% from 7.9% at year-end. Higher prepayment expectations increased premium amortization, while elevated funding costs and a less favorable repo-versus-LIBOR dynamic compressed the spread.
- The interest-rate hedge portfolio declined to 77% of funding liabilities from 94% at year-end, in line with lower asset duration and a more benign short-term rate outlook. Series D preferred stock issuance generated $227 million of proceeds during the quarter.
- Management said it anticipated reducing the monthly common dividend to $0.16 beginning with the dividend to be declared in May 2019, subject to Board approval. Separately, the filing reports that the Board declared a $0.18-per-share dividend on April 10, payable May 9. Investors should verify the intended effective date and subsequent declarations.
Outlook, risks and contingencies
- AGNC generally expects leverage within 6x–12x tangible stockholders’ equity, but says it may operate outside that range. It stated that available liquidity and capital were sufficient for its strategy, margin requirements and dividends, while cautioning that repo financing may not be renewable on favorable terms or at all.
- Principal risks include interest-rate and mortgage-spread movements, prepayment and extension risk, liquidity and margin calls, credit exposure in CRT and non-Agency securities, and counterparty or financing failures. Model-based sensitivity estimates at March 31 indicated tangible book value per common share could decline 12.4% under a 100-basis-point rate increase, 10.6% under a 100-basis-point decrease, or 13.5% if spreads widened 25 basis points; actual outcomes may differ materially.
- Three stockholder derivative lawsuits concern prior management-agreement renewals and the 2016 internalization. AGNC said it did not believe the claims had merit or would result in material liability and recorded no contingency. The filing reported no material changes to previously disclosed risk factors or legal proceedings.
- Management cautioned that results are sensitive to market conditions and that interim results are not necessarily indicative of full-year performance. Estimated taxable income is subject to adjustment.
Most important facts to verify
- Reconcile the stated planned reduction to a $0.16 monthly dividend with the separately disclosed $0.18 dividend declared April 10, including the relevant declaration and payment dates.
- Assess whether 9.4x period-end leverage, short-dated repo funding and collateral requirements leave adequate resilience under adverse market and margin-call conditions.
- Review the assumptions behind CPR, asset-yield and interest-rate/spread sensitivity estimates, particularly given the increase in projected CPR and premium amortization.
- Distinguish GAAP earnings and volatile fair-value changes from management’s non-GAAP spread and dollar-roll measures when evaluating recurring earnings and dividend coverage.
- Monitor the status of the stockholder lawsuits and any changes to the company’s assessment of potential liability.