AGNC Investment Corp. (formerly American Capital Agency Corp.) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated financial statements; comparative results are for Q1 2010 unless otherwise noted. AGNC is an externally managed mortgage REIT investing primarily in government-agency mortgage securities, financed largely with short-term repurchase agreements.
Financial and operating metrics
| Metric | Q1 2011 / March 31, 2011 | Comparison |
|---|---|---|
| Interest income | $164.5 million | $38.8 million in Q1 2010 |
| Net interest income | $128.8 million | $23.3 million |
| Net income | $133.5 million; $1.48 per diluted share | $53.2 million; $2.13 per share |
| Net interest spread, quarterly average | 2.58% | 2.16% (2.55% excluding prior-year terminated-swap amortization) |
| Average asset yield / cost of funds | 3.39% / 0.81% | 3.78% / 1.62% (1.23% excluding terminated-swap amortization) |
| Dividends declared | $1.40 per share | $1.40 per share |
| Total assets / stockholders’ equity | $29.15 billion / $3.34 billion | $14.48 billion / $1.57 billion at Dec. 31, 2010 |
| Agency securities, fair value | $28.19 billion | $13.51 billion at Dec. 31, 2010 |
| Repurchase agreements / other debt | $21.99 billion / $67.8 million | $11.68 billion / $72.9 million at Dec. 31, 2010 |
| Period-end NAV per share | $25.96 | $24.24 at Dec. 31, 2010 |
| Cash and cash equivalents | $300.6 million | $173.3 million at Dec. 31, 2010 |
Cash flow for the quarter was $375.5 million provided by operating activities, $12.22 billion used in investing activities, and $11.97 billion provided by financing activities; cash increased by $127.3 million. Financing included $10.31 billion net proceeds from repurchase agreements and $1.75 billion net common-stock issuance proceeds.
Average leverage was 7.4:1; reported period-end leverage was 6.6:1, or 7.6:1 including net unsettled securities trades. The average repo borrowing rate was 0.28%. The portfolio’s period-end weighted average yield was 3.47%, with a 4.56% weighted average coupon. No OTTI charges were recorded in either comparison quarter.
Material changes versus comparable periods
- Portfolio fair value more than doubled from year-end, and total assets rose to $29.15 billion, supported by substantial equity issuance and increased repo financing.
- Net interest income and net income increased substantially as the average portfolio expanded. However, diluted EPS declined from $2.13 to $1.48, while weighted-average shares rose from 25.0 million to 90.3 million.
- Average asset yield fell to 3.39% from 3.78%, while average cost of funds declined to 0.81% from 1.62% (or 1.23% excluding prior-year terminated-swap amortization); the average spread widened to 2.58%.
- Net gains on agency-security sales declined to $4.2 million from $27.4 million. Net gains on derivatives and trading securities rose to $11.5 million from $5.9 million.
- NAV per share increased from $24.24 at year-end to $25.96. Annualized net return on average equity fell to 22.5% from 37.2%; annualized economic return rose to 52.2% from 33.0%.
Outlook, risks, and notable disclosures
- The filing provides no specific earnings or dividend guidance. Management said it believed liquidity and capital resources were sufficient for investment purchases, borrowing repayments, margin requirements, and dividends, and expected to distribute all taxable income.
- Management’s objective is to preserve net asset value while generating risk-adjusted returns and regular quarterly dividends. The REIT must distribute at least 90% of taxable income annually.
- Key exposures include interest-rate, prepayment, spread, liquidity, extension, and inflation risks. Short-term repo financing of longer-term assets creates rollover, haircut, collateral, and margin-call risk. AGNC reported meeting all margin requirements at quarter-end and no counterparty exposure above 10% of equity.
- Interest-rate sensitivity modeling estimated that a 100-basis-point increase would reduce projected net interest income by 5.1% and portfolio value, including derivatives, by 1.1%; a 100-basis-point decrease was estimated to reduce net interest income by 16.7% and portfolio value by 0.3%. Management cautioned that model assumptions and actual results may differ materially.
- Unrealized losses on available-for-sale securities were attributed to interest-rate and prepayment-expectation changes, not credit losses; management did not expect to be required to sell the securities before cost recovery. The Federal Reserve’s possible asset sales and policy actions were identified as potential market risks.
- The company completed two follow-on offerings, raising $1.61 billion net, and sold shares through its at-the-market program and dividend reinvestment plan. These issuances materially increased the share count.
- No legal proceedings were reported. Management concluded disclosure controls were effective, with no material change in internal control over financial reporting during the quarter. Adoption of a new repo-accounting standard was not expected to have a material impact.
Important facts for investors to verify
- Reconcile reported EPS decline with rapid share-count growth and assess per-share returns, NAV development, and dilution from equity offerings.
- Review leverage definitions: reported period-end leverage was 6.6:1, while leverage including unsettled trades was 7.6:1.
- Clarify available unpledged securities: the filing cites $1.5 billion in one liquidity discussion and $4.9 billion in the market-risk discussion, apparently using different bases; the text does not clearly reconcile the figures.
- Assess the sensitivity of earnings and book value to rate movements, prepayment assumptions, premium amortization, repo renewals, and collateral haircuts.
- Monitor dividend coverage and taxable income: the filing reports $1.40 per share declared for the quarter and approximately $55 million of estimated undistributed 2011 taxable income after the March dividend payable.