AGNC Investment Corp. quarterly report, Q1 FY2020

AGNC Investment Corp. — Q1 2020 Form 10-Q

Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. Amounts are U.S. dollars. AGNC is an internally managed mortgage REIT investing primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements. The pandemic-driven market disruption materially affected the quarter.

Financial results and key metrics

Metric	Q1 2020	Q1 2019 or prior period
Interest income	$491 million	$705 million
Interest expense / net interest income	$426 million / $65 million	$541 million / $164 million
Net loss attributable to common stockholders	$2.442 billion; $4.46 per diluted share	Net income $255 million; $0.47 per diluted share
Comprehensive loss attributable to common stockholders	$1.978 billion	Comprehensive income $655 million
Cash from operating activities	$347 million	$329 million
Common dividends declared per share	$0.48	$0.54
Tangible net book value per common share	$13.62	$17.66 at December 31, 2019

• The GAAP net loss principally reflected a $3.154 billion loss on derivatives and other securities, partly offset by $494 million of gains on security sales, $197 million of unrealized gains on securities through earnings, and $464 million of other comprehensive gains on securities.
• Derivative losses included $2.806 billion of interest-rate-swap termination fees and variation-margin settlements, net. AGNC also reported $243 million of catch-up premium amortization cost associated with revised prepayment expectations.
• Management’s non-GAAP net interest spread, excluding catch-up premium amortization and including TBA dollar-roll and swap effects, was 1.30%, versus 1.06% a year earlier. Economic interest income excluding catch-up amortization was $782 million, compared with $815 million. Net spread and dollar-roll income excluding catch-up amortization was $0.57 per diluted share, versus $0.52.
• Quarter-end total assets were $85.1 billion and stockholders’ equity was $9.8 billion. Repurchase agreements totaled $66.5 billion; debt of consolidated variable-interest entities was $214 million. Tangible net book value “at risk” leverage was 9.4x, unchanged from year-end.
• Cash, cash equivalents and restricted cash ended the quarter at $3.267 billion, versus $1.282 billion at the start. Investing activities provided $23.577 billion and financing activities used $21.939 billion. AGNC reported $5.0 billion of unencumbered assets, equal to 54% of tangible equity.

Material changes and management commentary

• AGNC reported a 22.9% quarterly decline in tangible book value per common share and a negative 20.2% economic return on tangible common equity. Management attributed the pressure to extreme market volatility, wider spreads, weak valuations for specified pools and funding/liquidity disruption.
• The investment portfolio, including TBAs, declined to approximately $93.0 billion from $107.9 billion. Management said it sold about $25 billion of lower-coupon, generic Agency MBS, received about $4 billion of principal paydowns, and added about $14 billion of current-production-coupon TBA securities.
• AGNC reduced its interest-rate hedge position to 70% of funding liabilities, including net TBAs, from 102% at year-end; the quarter-end duration gap was near zero. Management anticipated a flat or potentially negative duration gap in the low-rate environment, reflecting extension risk and the low cost of longer-dated hedges.
• Management said near-term mortgage origination and refinancing disruptions could temper prepayments despite low rates, supporting spreads alongside low funding costs. It also expected prepayments could rise as conditions ease, while noting uncertainty about the timing and extent.
• AGNC issued $575 million of Series F preferred stock for $557 million net proceeds and sold 26.7 million common shares for $439 million net proceeds during the quarter. Subsequent to quarter-end, it repurchased 10.1 million common shares for $121 million, at an average $12.04 per share. The board declared a $0.12 per-share monthly dividend payable in May.

Outlook, risks and contingencies

The filing provides no numerical earnings or book-value guidance. Management said it believed the portfolio was favorably positioned, with limited credit exposure in its primarily Agency holdings, and that Agency MBS offered attractive risk-adjusted returns. These views are subject to substantial uncertainty from COVID-19 and market conditions.

• Key risks include renewed spread widening or illiquidity, reduced or prematurely withdrawn Federal Reserve support, higher financing haircuts and margin calls, inability to renew repo funding, and losses or forced asset sales if liquidity is insufficient.
• Very low or potentially negative rates, rapid rate increases, extension risk, and faster-than-expected mortgage prepayments could impair book value, hedging effectiveness and net interest income. Management cautioned that pandemic conditions make historical models and forecasts less reliable.
• Credit-sensitive CRT and non-Agency securities face potential deterioration; extended borrower forbearance could also lead to GSE buyouts of delinquent loans from mortgage pools. The filing notes that hedge strategies do not eliminate spread risk.
• AGNC said it had met all margin requirements at March 31 and believed liquidity and capital resources were sufficient. It also disclosed that market turmoil could continue to affect operations, funding, valuation, and remote-work and cybersecurity risks.
• No material litigation was reported, and management concluded disclosure controls and procedures were effective as of March 31.

Important facts for investors to verify

• Reconcile reported GAAP losses with derivative settlements and termination costs, and distinguish realized cash effects from fair-value movements.
• Track tangible book value, leverage, repo maturities, haircuts, collateral calls and unencumbered liquidity as market conditions change.
• Review actual prepayment speeds, premium amortization and the assumptions underlying management’s pandemic-era mortgage and valuation models.
• Monitor the size and composition of the portfolio, TBA exposure, hedge coverage and sensitivity to spread changes and interest-rate scenarios.
• Assess the effect of the common and preferred equity issuance, subsequent share repurchases and dividend payments on per-share value and liquidity.