AGNC Investment Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. AGNC is an internally managed mortgage REIT that invests primarily in leveraged Agency residential mortgage-backed securities (RMBS), funded mainly through repurchase agreements. Its objective is to deliver returns through monthly dividends and tangible book value accretion.
Financial performance and position
| Metric | Q3 / September 30, 2019 | Comparable period / prior date |
|---|---|---|
| Interest income | $676 million | $500 million in Q3 2018 |
| Interest expense | $557 million | $312 million in Q3 2018 |
| Net interest income | $119 million | $188 million in Q3 2018 |
| Net income (loss) | $(4) million; $(17) million available to common stockholders | $216 million; $207 million available to common stockholders in Q3 2018 |
| Diluted GAAP earnings per common share | $(0.03) | $0.45 in Q3 2018 |
| Comprehensive income | $242 million | $23 million in Q3 2018 |
| Common dividend declared per share | $0.48 | $0.54 in Q3 2018 |
| Net interest spread, excluding catch-up amortization | 1.31% | 1.30% in Q3 2018 |
| Net spread and dollar roll income, excluding catch-up amortization | $0.59 per diluted share | $0.61 in Q3 2018 |
For the nine months, AGNC reported a net loss of $183 million, versus net income of $933 million in 2018; net loss available to common stockholders was $219 million, versus income of $906 million. Comprehensive income was $842 million, compared with a $26 million loss. Nine-month dividends declared were $1.52 per common share, versus $1.62.
Q3 results reflected volatile fair-value and hedge accounting: investment securities generated $690 million in net gains, while derivatives and other securities produced a $548 million net loss. The quarter’s positive other comprehensive income of $246 million also contributed to comprehensive income. These items help explain why GAAP earnings differed from management’s spread-income measure.
Balance sheet, debt and liquidity
- Total assets were $109.8 billion, including $100.7 billion of investment securities at fair value, compared with $109.2 billion and $84.3 billion, respectively, at December 31, 2018.
- Repurchase agreements were $90.6 billion, up from $75.7 billion; their weighted-average rate was 2.48%, down from 2.79%, and weighted-average remaining maturity was 64 days. Total liabilities were $99.5 billion.
- Stockholders’ equity was $10.2 billion. Tangible net book value per common share was $16.55, nearly unchanged from $16.56 at year-end 2018; net book value per common share was $17.52.
- Tangible net book value “at risk” leverage was 9.8x, versus 9.0x at year-end; management stated its general expected range is 6x to 12x.
- Cash and cash equivalents were $906 million and restricted cash was $734 million. Management also reported approximately $3.6 billion of unpledged securities available for liquidity needs and said all margin requirements were met at quarter-end.
- For the first nine months, operating cash flow was $807 million, investing cash flow was $(15.0) billion, and financing cash flow was $14.3 billion. Cash, cash equivalents and restricted cash ended at $1.64 billion.
Changes and management commentary
- Average portfolio size and funding increased materially year over year. Higher asset balances lifted interest income, but the increase in borrowing costs and premium amortization reduced net interest income.
- Interest rates fell sharply during 2019, and projected portfolio prepayment rates rose to 13.4% from 7.9% at year-end 2018. Actual CPR averaged 13.5% in Q3. Faster prepayments increased premium amortization and can pressure future asset yields.
- Management reported quarterly economic returns on tangible common equity of 7.3%, negative 0.9%, and 2.7% for Q1, Q2, and Q3, respectively, or 9.1% year to date. It attributed Q3 improvement in spread income, excluding catch-up amortization, largely to hedge repositioning.
- The hedge portfolio was adjusted during the year: AGNC added shorter-dated swaps and payer swaptions and reduced Treasury hedges. Hedge notional was 101% of funding liabilities at September 30; duration gap was approximately zero years.
- After the mid-September repo-market disruption, Federal Reserve operations reduced funding rates toward more normalized levels. Management expected elevated repo funding costs experienced in 2019 to abate and move toward more normal levels in 2020; this is an expectation, not a guarantee.
Outlook, risks and unusual items
- Market exposure: Key risks include interest-rate, mortgage-spread, prepayment, extension, liquidity, credit and counterparty risk. A modeled parallel 100-basis-point rate increase implied a 9.8% decline in tangible book value per common share; a 25-basis-point spread widening implied a 13.2% decline. These are static-portfolio estimates and actual results could differ materially.
- Funding and collateral: Short-term repo financing creates rollover, haircut and margin-call risk. Approximately 39% of repo funding came through FICC; management reported about 11% of tangible equity at risk with FICC. A loss of financing access or collateral value could force asset sales or impair liquidity.
- REIT distributions: AGNC intends to distribute 100% of taxable income and is required to distribute at least 90% to maintain REIT status, limiting retained capital. Estimated nine-month taxable income available to common stockholders was $523 million, or $0.97 per diluted share; this differs from GAAP results and remains subject to tax-return adjustments.
- Capital actions after quarter-end: On October 3, AGNC issued $403 million of Series E preferred stock for $390 million net proceeds. It announced redemption of all Series B preferred shares on November 26, 2019. The board declared a $0.16 common dividend payable November 12.
- Share repurchases: AGNC repurchased 6.9 million common shares for $103 million in Q3 at an average $14.90 per share. The $1 billion authorization had approximately $0.9 billion remaining at quarter-end; the company said it intended to repurchase only below its estimated tangible book value per share.
- Legal contingency: A proposed settlement in a stockholder derivative matter would provide AGNC an aggregate $35.5 million payment, less court-awarded attorneys’ fees and other costs. The court indicated approval on the proposed terms, subject to a final order and dismissal of related cases.
- Management reported no material changes to previously disclosed risk factors. Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether repo funding costs normalize as management expected, and whether refinancing, collateral haircuts or margin requirements change.
- How faster prepayments affect premium amortization, asset yields and dividend-supporting spread income.
- Whether hedge positions continue to offset rate risk without generating material derivative losses or liquidity demands.
- How GAAP earnings, non-GAAP spread income, taxable income and declared dividends compare over subsequent quarters.
- Final terms and net proceeds of the proposed $35.5 million litigation settlement, and completion of the Series B redemption and Series E issuance effects.