AGNC Investment Corp. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), financed mainly through repurchase agreements.
Financial performance and position
- GAAP results: Interest income was $351 million and interest expense was $449 million, producing negative net interest income of $98 million. Net loss was $151 million; loss attributable to common stockholders was $181 million, or $0.31 per diluted share. Comprehensive loss attributable to common stockholders was $39 million.
- Supplemental earnings measure: Management’s non-GAAP net spread and dollar roll income, excluding catch-up premium amortization, was $408 million, or $0.70 per diluted share. This measure excludes investment and hedge mark-to-market results and is not a substitute for GAAP results.
- Dividends and returns: Common dividend declared was $0.36 per share, unchanged from Q1 2022. Economic return on tangible common equity was negative 0.7% for the quarter.
- Portfolio and balance sheet: Total investment portfolio, including net TBAs, was $56.7 billion, versus $59.5 billion at year-end 2022. Total assets were $66.1 billion; total liabilities were $58.3 billion; stockholders’ equity was $7.8 billion. Tangible net book value per common share was $9.41, down from $9.84 at year-end.
- Funding and leverage: Repurchase agreements totaled $48.4 billion, up from $36.3 billion at year-end; weighted-average repo rate was 4.82%, versus 4.31%. Tangible net book value “at risk” leverage was 7.2x, compared with 7.4x at year-end. Management reported a 3.6% weighted-average repo haircut.
- Liquidity and cash flow: Unencumbered assets were approximately $4.2 billion, or 58% of tangible equity, compared with $4.4 billion and 60% at year-end. Operating cash flow was $26 million; investing cash flow was negative $11.6 billion and financing cash flow was positive $12.1 billion. Cash, cash equivalents and restricted cash increased by $505 million to $2.8 billion.
Changes versus comparable periods
- Compared with Q1 2022, GAAP net loss improved to $151 million from $651 million, and loss per common share narrowed to $0.31 from $1.29. The prior-year quarter included much larger investment-security fair-value losses, while current-quarter results still reflected substantial volatility in securities and hedges.
- Q1 2023 net spread and dollar roll income excluding catch-up amortization was $0.70 per diluted share, down from $0.72 in Q1 2022 and $0.74 in Q4 2022. Management attributed the sequential decline mainly to higher funding costs and longer-dated pay-fixed swaps, which more than offset higher asset yields.
- Compared with year-end 2022, the portfolio’s weighted-average coupon rose to 4.29% from 4.18%; fixed-rate Agency RMBS and TBA coupon increased to 4.24% from 4.13%. Projected portfolio CPR rose to 10.0% from 7.4%, while actual Q1 CPR averaged 5.2%.
- During the quarter, AGNC reduced mortgage holdings by $2.7 billion, lowered its hedge position to 114% of mortgage funding liabilities from 124%, and shifted more hedges farther out the yield curve. It issued 17.1 million common shares through its at-the-market program for $171 million net proceeds.
Outlook, commentary and risks
- Management described Agency RMBS as attractively valued and expressed a positive longer-term outlook, citing the potential for spreads to remain wider than historical averages. It also emphasized continuing uncertainty about supply and demand and elevated interest-rate volatility. The filing gives no specific earnings or dividend guidance.
- Management said the quarter’s economic loss was primarily driven by Agency RMBS underperformance relative to hedges amid banking-sector turmoil, potential bank bond sales and volatile rates. It reported meeting all margin requirements and stated that liquidity and capital resources were sufficient for its strategy.
- Key exposures include interest-rate, mortgage-spread, prepayment/extension, liquidity and counterparty risks. Repo funding is short-term and lenders are not obligated to renew it; falling collateral values or higher haircuts can prompt margin calls or asset sales. TBA financing may become less economical, potentially requiring cash or other funding.
- As modeled at March 31, a 50-basis-point rate increase would reduce tangible book value per common share by an estimated 2.3%; a 25-basis-point widening in MBS spreads would reduce it by an estimated 12.5%. These are static-portfolio estimates based on assumptions, not forecasts; actual results could differ materially.
- The company reported no material changes to previously disclosed risk factors, no material litigation expected to adversely affect results, and effective disclosure controls.
Investor verification priorities
- Track tangible book value per share and the drivers of economic returns, distinguishing GAAP mark-to-market results from management’s non-GAAP spread and dollar roll measure.
- Verify the sustainability of the $0.36 monthly common dividend against taxable income, funding costs and portfolio earnings; the filing does not establish future dividend levels.
- Monitor repo renewals, borrowing rates, haircuts, margin requirements and unencumbered liquidity, particularly given the short average repo maturity and elevated market volatility.
- Assess mortgage-spread exposure, hedge effectiveness, prepayment assumptions and the impact of changes in rates and bank or Federal Reserve MBS supply.
- Review dilution from the ATM share issuance and the potential effect of preferred-stock dividend resets, including Series C’s move to a floating rate in July 2023.