AGNC Investment Corp. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. AGNC is a mortgage REIT investing primarily in Agency residential mortgage-backed securities (RMBS), financed mainly through repurchase agreements. Figures are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior period |
|---|---|---|
| Interest income; interest expense | $557; $29 | Q1 2020: $491; $426 |
| Net interest income | $528 | Q1 2020: $65 |
| Net income (loss) available to common | $950; $1.78 diluted EPS | Q1 2020: $(2,442); $(4.46) diluted EPS |
| Common dividends declared per share | $0.36 | Q1 2020: $0.48 |
| Tangible book value per common share | $17.72 | $16.71 at December 31, 2020 |
| Investment portfolio, including TBAs | $90.3 billion fair value | $97.9 billion at December 31, 2020 |
| Repurchase agreements | $55.1 billion; weighted average rate 0.15% | $52.4 billion; 0.24% at December 31, 2020 |
| At-risk leverage | 7.7x tangible equity | 8.5x at December 31, 2020 |
| Unencumbered cash, Agency RMBS and U.S. Treasuries | $5.2 billion, or 48% of tangible equity | $5.4 billion, or 51% at December 31, 2020 |
AGNC reported GAAP net income of $975 million, versus a $2.421 billion loss in Q1 2020. Results included $1.439 billion of gains on derivatives and other securities, partly offset by $955 million of unrealized losses on securities measured through net income. An additional $237 million unrealized securities loss was recorded in other comprehensive income. The large year-over-year swing should therefore be read alongside fair-value movements and hedge results, not as a simple change in recurring earnings.
Operating cash flow was $428 million; investing activities used $3.196 billion and financing activities provided $2.220 billion. Cash, cash equivalents and restricted cash ended the quarter at $1.776 billion. Management’s non-GAAP net spread and dollar roll income, excluding catch-up premium amortization, was $0.76 per diluted share, compared with $0.57 in Q1 2020. This measure is not GAAP earnings.
Material changes and management commentary
- The 10-year Treasury yield rose 82 basis points during the quarter to 1.74%, and the yield curve steepened. Agency RMBS performed well relative to interest-rate hedges, while residential credit valuations were mixed.
- Management reported an 8.2% quarterly economic return, comprising a $1.01 increase in tangible book value per common share and $0.36 of dividends. The last-twelve-month cumulative economic return was 40.7%.
- AGNC increased its interest-rate hedge portfolio; hedges were 98% of funding liabilities at quarter-end, versus 80% at year-end. The duration gap moved to 0.6 years from negative 0.5 years.
- Average Agency RMBS prepayments were 24.6% during the quarter. The projected remaining-life CPR at quarter-end declined to 11.3% from 17.6% at year-end, reflecting higher mortgage rates.
- Management said near-zero short-term rates were likely to persist through at least 2023 and expected Fed tapering of Agency RMBS purchases not to begin before 2022. These are management expectations, not formal earnings guidance. Management may operate at lower leverage to limit exposure to reduced Fed purchases and spread widening.
Liquidity, risks and unusual items
- Repo financing is short-term and collateralized. Lenders are not obligated to renew borrowings, and falling collateral values or higher haircuts can trigger margin calls, reduce borrowing capacity or force asset sales. AGNC said it met all margin requirements at quarter-end.
- Management reported unencumbered assets equal to 62% of tangible equity. The separately reported $5.2 billion liquidity measure excludes unencumbered credit assets and assets held at its broker-dealer subsidiary.
- AGNC’s interest-rate sensitivity estimates indicate a 12.0% decline in tangible book value per common share under an instantaneous +100-basis-point parallel rate shock at March 31, 2021. A 50-basis-point widening in mortgage spreads was estimated to reduce it by 27.0%. These are model-based static-portfolio scenarios, not forecasts.
- Estimated taxable loss attributable to common stockholders was $164 million, or $0.31 per diluted share; taxable income differs from GAAP results and remains subject to adjustment. The filing states the REIT distribution requirement is at least 90% of taxable income.
- AGNC repurchased 15.0 million shares for $239 million during the quarter at an average $16.00 per share; $0.7 billion remained authorized for repurchases through December 31, 2021.
- No material litigation was reported, and the filing disclosed no material changes to previously reported risk factors. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Reconcile GAAP income and book-value movements with derivative gains, securities marks, OCI and the company’s non-GAAP spread-and-dollar-roll measure.
- Review the sensitivity assumptions and the potential combined effects of rate moves, mortgage-spread widening, prepayment changes and hedge performance.
- Assess repo rollover, collateral and margin-call exposure, including dependence on short-term funding and the concentration of funding through clearing channels.
- Confirm taxable income, dividend requirements and the sustainability of common dividends; GAAP earnings alone do not determine REIT distribution needs.
- Track leverage, liquidity, portfolio composition and the pace and price of share repurchases against tangible book value.